Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Business
Veritas Farms, Inc. (Formerly Known As
SanSal Wellness Holdings Inc.) (the “Company”), was incorporated as Armeau Brands Inc. in the State of Nevada on March
15, 2011. On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation with the Nevada Secretary of State
changing the name from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.” The Company’s business
objectives are to produce natural rich-hemp products, using strict natural protocols and materials yielding broad spectrum phytocannabinoid
rich hemp oils, distillates and isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial
hemp pursuant to Federal law on its farm.
Effective September 27, 2017, the Company
acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal
Wellness (“271 Lake Davis”) in exchange for 11,700,000 (46,800,000 prior to reverse split) restricted shares of the
Company’s common stock, which represented 100% of 271 Lake Davis’s total membership interests outstanding immediately
following the closing of the transaction. The transaction has been accounted for as a reverse merger, whereby 271 Lake Davis is
the accounting survivor and the historical financial statements presented are those of 271 Lake Davis.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities
and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring
accruals) to present the financial position of the Company as of September 30, 2019, and the results of operations and cash flows
for the periods presented. The results of operations for the three and nine months ended September 30, 2019, are not necessarily
indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and related notes thereto included in the Form 10-K for the year ended
December 31, 2018, filed with the SEC on April 16, 2019.
Principles of Consolidation
The accompanying consolidated financial
statements reflect the accounts of Veritas Farms, Inc. and 271 Lake Davis Holdings and its wholly owned subsidiary, SanSal, LLC.
All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Fair Value Measurement
The Company has adopted the provisions
of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of
the Company’s short and long-term credit obligations approximate fair value because the effective yields on these obligations,
which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded
conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted
prices in active markets for identical assets or liabilities
Level 2 – quoted prices
for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that
are unobservable (for example cash flow modeling inputs based on assumptions)
The Company does not have any assets or
liabilities measured at fair value on a recurring basis.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. At times, cash and cash equivalents may be
in excess of FDIC insurance limits.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Revenue Recognition
On January 1, 2018, the Company adopted
Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and all the related
amendments, which are also codified into ASC 606. The Company elected to adopt this guidance using the modified retrospective method.
The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or
cash flows. Under the new standard, the Company recognizes a sale as follows:
Hemp Cultivation and Production
The Company recognizes revenue from manufacturing
and distribution product sales when our customers obtain control of our products. Revenue from our online store is recorded at
the time customers take possession of the product. Revenue is recognized net of discounts, promotional adjustments and returns.
We collect taxes on certain revenue transactions to be remitted to governmental authorities, which may include sales, excise and
local taxes. These taxes are not included in the transaction price and are, therefore, excluded from revenue. Upon purchase, the
Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.
Revenue related to distribution customers
is recorded when the customer is determined to have taken control of the product. This determination is based on the customer specific
terms of the arrangement and gives consideration to factors including, but not limited to, whether the customer has an unconditional
obligation to pay, whether a time period or event is specified in the arrangement and whether the Company can mandate the return
or transfer of the products. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities
with collected taxes recorded as current liabilities until remitted to the relevant government authority.
Cost of Goods Sold
Hemp Cultivation and Production
Cost of goods sold includes the costs directly
attributable to production of inventory such as cultivation costs, extraction costs, packaging costs, security, and allocated overhead.
Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.
Inventories
Inventories consist of growing and processed
plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower
of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell such inventories
and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value
of specific inventory items has been impaired.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Property, Plant and Equipment
Purchase of property, plant and equipment
are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that
do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the Consolidated
Statements of Operations. Depreciation is provided over the estimated economic useful lives of each class of assets and is
computed using the straight-line method.
Impairment of Long-Lived Assets
The carrying value of long-lived assets
are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be
changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments,
industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company
over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to
the fair market value. The Company has determined that no impairment exists at September 30, 2019 and December 31, 2018.
Compensation and Benefits
The Company records compensation and benefits
expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits
expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed
by the Company’s employees.
Stock-Based Compensation
The Company accounts for share-based payments
in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of
the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company
estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share- based payments.
The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over
time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders.
The simplified method is used to determine
compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation
cost is recognized ratably using the straight-line method over the expected vesting period.
The Company accounts for stock-based compensation
to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the
earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized
as expense over the service period.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Income Taxes
The Company accounts for income taxes under
ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment
occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company
will not realize tax assets through future operations.
In accordance with Financial
Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax positions and concluded that
the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for
any tax periods in progress.
Income tax benefits are recognized for
income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will
more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings
with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions
will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the
Company’s financial condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves,
or related accruals for interest and penalties for uncertain income tax positions at September 30, 2019 and December 31, 2018.
Leases
The Company has one leased buildings in
Fort Lauderdale, Florida that is classified as operating lease right-of use (“ROU”) assets and operating lease liabilities
in the Company’s consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of
the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments
include only the fixed lease component of the agreement. Operating lease expense is recognized on a straight-line basis over the
lease term and is included in cost of Selling, General and Administrative expenses.
The standard was effective for us beginning
January 1, 2019. The Company elected the available practical expedients on adoption. The adoption had a material impact on our
consolidated balance sheets, but did not have a material impact on our consolidated income statements. The most significant impact
was the recognition of ROU assets and lease liabilities for operating leases. Finance leases are not material to the Company and
were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding assets were already recorded in
the balance sheet under the previous guidance, ASC 840.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Related Party Transactions
The Company follows FASB ASC subtopic 850-10,
Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. Pursuant to
ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company;
f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of related party transactions, other than compensation arrangements, expense allowances, and other similar
items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated
or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for
which statements of operations are presented and the effects of any change in the method of establishing the terms from that used
in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not
otherwise apparent, the terms and manner of settlement.
Subsequent Events
The Company has evaluated subsequent events
through the date which the financial statements were available to be issued.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Inventory consists of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
4,324,504
|
|
|
$
|
2,241,554
|
|
Finished Goods
|
|
|
584,564
|
|
|
|
72,604
|
|
Other
|
|
|
734,707
|
|
|
|
194,796
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
5,643,775
|
|
|
$
|
2,508,954
|
|
During the periods ending September 30,
2019 and December 31, 2018 the Company realized a loss from destruction of plants in the amounts of $77,387 and $0, respectively.
|
NOTE 3:
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Life
|
|
|
2019
|
|
|
2018
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
|
-
|
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building and Improvements
|
|
|
39
|
|
|
|
1,510,176
|
|
|
|
1,465,245
|
|
Greenhouse
|
|
|
39
|
|
|
|
893,987
|
|
|
|
693,987
|
|
Fencing and Irrigation
|
|
|
15
|
|
|
|
203,793
|
|
|
|
203,793
|
|
Machinery and Equipment
|
|
|
7
|
|
|
|
2,448,555
|
|
|
|
1,475,644
|
|
Furniture and Fixtures
|
|
|
7
|
|
|
|
236,344
|
|
|
|
224,682
|
|
Computer Equipment
|
|
|
5
|
|
|
|
22,665
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
71,058
|
|
|
|
31,161
|
|
|
|
|
|
|
|
$
|
5,784,704
|
|
|
$
|
4,512,691
|
|
Less Accumulated Depreciation
|
|
|
|
|
|
|
(851,723
|
)
|
|
|
(580,232
|
)
|
Property and Equipment
|
|
|
|
|
|
$
|
4,932,981
|
|
|
|
3,932,459
|
|
Total depreciation expense was $101,174
and $67,367 for the three month period and $280,340 and $194,095 for the nine month periods ending September 30, 2019 and 2018,
respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Long-term debt consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $1,618 including interest at 6.00% per annum until February 1, 2020 when the balance is due in full. The note is secured by specific assets of the Company.
|
|
$
|
-
|
|
|
$
|
99,902
|
|
|
|
|
|
|
|
|
|
|
Notes Payable which require monthly payments of $3,690, $669, and $1,691, including interest at 5.16% per annum until December 1, 2022, May 1, 2023, and August 1, 2024, when the balance is due in full. The note is secured by specific assets of the Company.
|
|
|
227,035
|
|
|
|
146,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,035
|
|
|
|
246,693
|
|
Less Current Portion
|
|
|
(60,333
|
)
|
|
|
(50,432
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
166,702
|
|
|
$
|
196,261
|
|
Future principal payments for the next
5 years are as follows for the years ended December 31:
2019
|
|
$
|
15,083
|
|
2020
|
|
|
60,333
|
|
2021
|
|
|
60,333
|
|
2022
|
|
|
60,333
|
|
2023
|
|
|
19,750
|
|
Thereafter
|
|
|
11,203
|
|
|
|
$
|
227,035
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 5:
|
STOCK-BASED COMPENSATION
|
The Company approved their 2017 Incentive
Stock Plan on September 27, 2017 (the “Incentive Plan”) which authorizes the Company to grant or issue non-qualified
stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards
up to a total of 45 million shares. Under the terms of the Incentive Plan, awards may be granted to our employees, directors
or consultants. Awards issued under the Incentive Plan vest as determined by the Board of Directors or any of the Committees appointed
under the Incentive Plan at the time of grant.
The Company’s outstanding stock options
have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant vest on a case by case basis.
Outstanding incentive stock options issued to employees vest over a three-year period. The incentive stock options granted vest
based solely upon continued employment (“time-based”). The Company’s time-based share awards that vest in their
entirety at the end of three-year periods, time-based share awards where 33.3% of the award vests on each of the three anniversary
dates. Outstanding incentive stock options issued to executives vest partially upon grant date, with the residual vesting over
the subsequent 6 or 12 months.
Stock-based compensation expense was as follows:
|
|
Three Months Ended
Sep 30:
|
|
|
Nine Months Ended
Sep 30:
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
-
|
|
|
$
|
2,887
|
|
|
$
|
-
|
|
|
$
|
8,662
|
|
Incentive Stock Options - Time Bases
|
|
|
820,881
|
|
|
|
-
|
|
|
|
1,658,677
|
|
|
|
-
|
|
Total Stock-based Compensation Expense
|
|
$
|
820,881
|
|
|
$
|
2,887
|
|
|
$
|
1,658,677
|
|
|
$
|
8,662
|
|
Stock option activity was as
follows in the periods ended Sep 30, 2019 (Post Reverse Split) and December 31, 2018:
|
|
Stock
|
|
|
Weighted- Average Exercise Price
|
|
|
Weighted- Average Remaining
|
|
|
|
Options
|
|
|
per Share
|
|
|
Contractual
|
|
Outstanding at December 31, 2018
|
|
|
2,275,000
|
|
|
$
|
1.06
|
|
|
|
9.30
|
|
Granted
|
|
|
1,868,750
|
|
|
$
|
5.02
|
|
|
|
9.77
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at Sep 30, 2019
|
|
|
4,143,750
|
|
|
$
|
2.84
|
|
|
|
9.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at Sep 30, 2019
|
|
|
2,232,292
|
|
|
$
|
2.84
|
|
|
|
8.08
|
|
Exercisable at Sep 30, 2019
|
|
|
2,232,292
|
|
|
$
|
2.84
|
|
|
|
8.08
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 5:
|
STOCK BASED COMPENSATION (CONTINUED)
|
The Company estimated the fair value of
each stock option on the date of grant using the Black Scholes valuation model with the following assumptions:
Valuation Assumptions
|
|
|
Risk-free interest rate
|
|
2.14% - 2.94%
|
Expected dividend yield
|
|
0%
|
Expected stock price volatility
|
|
105% to 180%
|
Expected life of stock options (in years)
|
|
10
|
We adopted ASC 842 using the modified retrospective
approach, electing the practical expedient that allows us not to restate our comparative periods prior to the adoption of the standard
on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption.
The Company recognized the following related
to leases in its Unaudited Consolidated Balance Sheet:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
Current portion
|
|
$
|
80,263
|
|
|
$
|
-
|
|
Long-term portion
|
|
|
72,958
|
|
|
|
-
|
|
|
|
$
|
153,221
|
|
|
$
|
-
|
|
On January 15, 2017, the Company entered
an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s cultivation process. The agreement went
into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026, with an option to extend the lease upon
expiration for 10 additional years. This agreement replaced previously entered agreements with Pueblo, CO Board of Water Works.
The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge of $1,063 per acre for 30 acres. The
minimum service fees and usage charges are subject to escalators for each year based upon percentage increases of Pueblo, CO Board
of Water Works rates from the previous calendar year. Total water lease expense was $6,346 and $11,724 for the three month periods
and $22,663 and $35,172 for the nine month periods ended September 30, 2019 and 2018, respectively.
On June 22, 2018, the Company entered into
a sublease agreement with ESDA Inc., a Florida Corporation. The Agreement went into effect as of July 1, 2018 with a term
of three years expiring August 31, 2021. The lease contains annual escalators and charges Florida sales tax. Total
depreciation expense related to the lease was $20,152 and $60,456 for the three and nine months ended September 30, 2019. Prior
to 2019 the lease was treated as an operating lease and right of use asset guidance was not applicable.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 6:
|
LEASES (CONTINUED)
|
As of September 30, 2019 and December 31,
2018, operating leases have no minimum rental commitments.
In 2018 the Company issued 12,596,208 shares
of common stock for proceeds of $5,532,852, net of $409,495 issuance costs, and 306,250 shares of common stock for marketing services
valued at $388,000.
In 2019, 3,808,165 stock warrants were
exercised for $1,510,625. The Company also issued 1,290,570 shares of common stock in accordance with a cashless exercise
of warrants.
In 2019, the Company issued 9,643,854 shares
of common stock for proceeds of $13,360,377, net of $2,069,603 issuance costs, and 15,625 shares of common stock for marketing
services valued at $16,875.
In September of 2019, the board of directors
approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a 1-for-4 reverse stock split
on the issued and outstanding common. All relevant information relating to numbers of shares and warrants and per share information
have been retrospectively adjusted to reflect the reverse stock split for all periods presented. The reverse split was effective
on September 19, 2019.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
The reconciliation of income tax computed at the Federal statutory
rate to the provision for income taxes from continuing operations is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(790,000
|
)
|
|
$
|
(219,000
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(170,000
|
)
|
|
|
(46,000
|
)
|
Change in valuation allowance
|
|
|
960,000
|
|
|
|
265,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(1,490,000
|
)
|
|
$
|
(494,000
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(334,000
|
)
|
|
|
(77,000
|
)
|
Change in valuation allowance
|
|
|
1,824,000
|
|
|
|
571,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Components of deferred tax assets are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
3,130,000
|
|
|
$
|
1,242,000
|
|
Stock Compensation
|
|
|
493,000
|
|
|
|
273,000
|
|
Accrued Related Party Expenses
|
|
|
20,000
|
|
|
|
5,000
|
|
Total Deferred Tax Assets
|
|
|
3,643,000
|
|
|
|
1,520,000
|
|
Valuation Allowance
|
|
|
(3,128,000
|
)
|
|
|
(1,304,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
515,000
|
|
|
$
|
216,000
|
|
Depreciation and Amortization
|
|
|
315,000
|
|
|
|
200,000
|
|
Prepaid Expense
|
|
|
200,000
|
|
|
|
16,000
|
|
Total Deferred Tax Liabilities
|
|
|
515,000
|
|
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately $13,130,000
net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in 2038. In assessing
the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the
assessment, management has established a full valuation allowance against all of the deferred tax assets for every period because
it is more likely than not that all of the deferred tax assets will not be realized.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 8:
|
INCOME TAX (CONTINUED)
|
The Company’s deferred tax liability
associated with timing differences related to depreciation and amortization includes $69,000 of liability resulting from tax depreciation
deducted in excess of GAAP depreciation prior to the Company becoming taxed as a C-Corporation.
The Company files income tax returns in
the U.S. federal jurisdiction, and the state of Colorado.
The Company adopted the provisions of FASB
ASC 740, Accounting for Uncertainty in Income Taxes. Management evaluated the Company’s tax positions and concluded
that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company has no significant adjustments as a result of the implementation of FASB ASC 740.
The Company had three customers in the
nine months ended September 30, 2019 accounting for 21%, 21% and 11% of sales. For the nine months ended September 30, 2018, two
customers accounted for 41% and 12% of sales.
The Company had one customers in the three
months ended September 30, 2019 accounting for 10% of sales. For the three months ended September 30, 2018, one customer accounted
for 33% of sales.
The Company had two customers at September
30, 2019 accounting for 34% and 30% of accounts receivable. At December 31, 2018, the Company had two customers accounting for
30% ad 24% of accounts receivable.
The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation
of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception. As
of and for the period ended September 30, 2019, the Company had an accumulated deficit of $14,682,058, and a net loss of $6,755,058.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Continuation
as a going concern is dependent on the ability to raise additional capital and financing, though there is no assurance of success.
The Company’s rebranded line of hemp
oil and extract product allowed market penetration into large retail chains vastly increasing brand exposure and awareness. The
initial rollouts have been successful creating opportunities for thousands of new retail outlets across the country. The shift
from smaller order fulfillment to larger “big box store” orders creates an economy of scale and increased profitability.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 10:
|
GOING CONCERN (CONTINUED)
|
Currently, the Company incorporates an
aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the market, the Company will use
three primary departments to market its products including: web-based marketing, traditional marketing, and medical marketing departments.
The Company incurred $57,500 and $78,025
of related party legal expenses during the three month periods ended September 30, 2019 and 2018, and $132,500 and $179,245 of
related party legal expenses during the nine month periods ended September 30, 2019 and 2018, respectively.
The Company entered into various note payables
with stockholders of the company between June 2017 and March 2019. The notes bear interest between 2.00% and 3.00% per annum. The
principal balance due on these notes was $0 and $262,924 as of September 30, 2019 and December 31, 2018. Interest accrued was $18,828
and $17,949 as of September 30, 2019 and December 31, 2018, respectively. The principal balance has been paid in full as of June
30, 2019.
The Company issued stock incentives to
various directors and employees. Refer to Note 5 for additional details.
|
NOTE 12:
|
SUBSEQUENT EVENTS
|
The Company has evaluated subsequent events through the date
the financial statements were available to be issued. The Company had no subsequent events that required disclosure.