Item 1. Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
242,296
|
|
|
$
|
107,693
|
|
Inventories
|
|
|
5,803,240
|
|
|
|
5,891,983
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
527,924
|
|
|
|
386,379
|
|
Prepaid expenses
|
|
|
657,905
|
|
|
|
270,557
|
|
Total current assets
|
|
|
7,231,365
|
|
|
|
6,656,612
|
|
Property and equipment, net of accumulated depreciation
|
|
|
4,067,261
|
|
|
|
4,494,370
|
|
Intangible assets, net of accumulated amortization
|
|
|
55,000
|
|
|
|
55,000
|
|
Right of use assets, net of accumulated amortization
|
|
|
137,998
|
|
|
|
930,826
|
|
Other assets
|
|
|
116,321
|
|
|
|
271,213
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,607,945
|
|
|
$
|
12,408,021
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,761,300
|
|
|
$
|
2,020,605
|
|
Accrued expenses
|
|
|
157,191
|
|
|
|
414,777
|
|
Accrued interest
|
|
|
15,176
|
|
|
|
13,677
|
|
Dividends payable
|
|
|
95,008
|
|
|
|
-
|
|
Convertible notes payable, net of discount
|
|
|
-
|
|
|
|
176,250
|
|
Deferred revenue
|
|
|
5,048
|
|
|
|
16,256
|
|
Operating lease liability
|
|
|
55,419
|
|
|
|
240,324
|
|
Paycheck Protection Program loan
|
|
|
-
|
|
|
|
803,994
|
|
Notes payable, current portion
|
|
|
60,497
|
|
|
|
66,080
|
|
Total current liabilities
|
|
|
2,149,639
|
|
|
|
3,751,963
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Notes payable, long term, net of current portion, net of discount
|
|
|
202,530
|
|
|
|
278,527
|
|
Convertible notes payable, long term, net of discount
|
|
|
200,000
|
|
|
|
-
|
|
Paycheck Protection Program loan
|
|
|
803,994
|
|
|
|
-
|
|
Operating lease liability, net of current portion
|
|
|
82,579
|
|
|
|
730,164
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
3,438,742
|
|
|
|
4,760,654
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized at $0.001 par value
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, 4,000,000 shares authorized, 4,000,000 and -0- issued and outstanding, respectively at $0.001 par value
|
|
|
4,000
|
|
|
|
-
|
|
Series B convertible preferred stock, 1,000,000 shares authorized, 1,000,000 and -0- issued and outstanding, respectively at $0.001 par value
|
|
|
1,000
|
|
|
|
-
|
|
Common stock, 200,000,000 shares authorized, 41,624,977 and 45,784,977 issued and outstanding, respectively, at $0.001 par value
|
|
|
41,625
|
|
|
|
45,785
|
|
Additional paid in capital
|
|
|
38,171,646
|
|
|
|
34,268,729
|
|
Accumulated (deficit)
|
|
|
(30,049,068
|
)
|
|
|
(26,667,147
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
8,169,203
|
|
|
|
7,647,367
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
11,607,945
|
|
|
$
|
12,408,021
|
|
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues
|
|
$
|
2,004,071
|
|
|
$
|
4,830,523
|
|
|
$
|
555,870
|
|
|
$
|
1,466,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,287,505
|
|
|
|
2,252,016
|
|
|
|
282,117
|
|
|
|
574,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
716,566
|
|
|
|
2,578,507
|
|
|
|
273,753
|
|
|
|
892,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
4,360,129
|
|
|
|
7,613,994
|
|
|
|
1,558,524
|
|
|
|
2,429,989
|
|
Total operating expenses
|
|
|
4,360,129
|
|
|
|
7,613,994
|
|
|
|
1,558,524
|
|
|
|
2,429,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
(3,643,563
|
)
|
|
|
(5,035,487
|
)
|
|
|
(1,284,771
|
)
|
|
|
(1,537,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, related parties
|
|
|
(21,754
|
)
|
|
|
(1,644
|
)
|
|
|
(20,093
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(75,357
|
)
|
|
|
(96,079
|
)
|
|
|
(14,708
|
)
|
|
|
(42,464
|
)
|
Derivative gain/(loss)
|
|
|
(14,500
|
)
|
|
|
-
|
|
|
|
(7,000
|
)
|
|
|
-
|
|
Gain on loan/debt forgiveness
|
|
|
932,462
|
|
|
|
-
|
|
|
|
109,625
|
|
|
|
-
|
|
Loss on disposal
|
|
|
(219,361
|
)
|
|
|
-
|
|
|
|
(219,361
|
)
|
|
|
-
|
|
Loss on lease termination
|
|
|
(244,840
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Loss) before income taxes
|
|
|
(3,286,913
|
)
|
|
|
(5,133,210
|
)
|
|
|
(1,436,308
|
)
|
|
|
(1,579,906
|
)
|
Income tax (expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss)
|
|
|
(3,286,913
|
)
|
|
|
(5,133,210
|
)
|
|
|
(1,436,308
|
)
|
|
|
(1,579,906
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends in arrears
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock
|
|
|
(64,104
|
)
|
|
|
-
|
|
|
|
(42,625
|
)
|
|
|
-
|
|
Series B preferred stock
|
|
|
(30,904
|
)
|
|
|
-
|
|
|
|
(20,164
|
)
|
|
|
-
|
|
Total preferred stock dividends
|
|
|
(95,008
|
)
|
|
|
-
|
|
|
|
(62,789
|
)
|
|
|
-
|
|
Net (loss) attributable to common shareholders
|
|
$
|
(3,381,921
|
)
|
|
$
|
(5,133,210
|
)
|
|
$
|
(1,499,097
|
)
|
|
$
|
(1,579,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,968,420
|
|
|
|
41,606,299
|
|
|
|
41,974,977
|
|
|
|
41,646,716
|
|
Diluted
|
|
|
43,968,420
|
|
|
|
41,606,299
|
|
|
|
41,974,977
|
|
|
|
41,646,716
|
|
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER
30, 2021 AND SEPTEMBER 30, 2020
(unaudited)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2021
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred
|
|
|
Series
B Preferred
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
$0.001
|
|
|
Number
|
|
|
$0.001
|
|
|
Number
|
|
|
$0.001
|
|
|
paid in
|
|
|
Accumulated
|
|
|
shareholders’
|
|
|
|
of shares
|
|
|
Par value
|
|
|
of shares
|
|
|
Par value
|
|
|
of shares
|
|
|
Par value
|
|
|
capital
|
|
|
(deficit)
|
|
|
equity
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
45,784,977
|
|
|
$
|
45,785
|
|
|
$
|
34,268,729
|
|
|
$
|
(26,667,147
|
)
|
|
$
|
7,647,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,412
|
|
|
|
|
|
|
|
53,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
400
|
|
|
|
86,495
|
|
|
|
|
|
|
|
86,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,154,659
|
)
|
|
|
(1,154,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,184,977
|
|
|
|
46,185
|
|
|
|
34,408,636
|
|
|
|
(27,821,806
|
)
|
|
|
6,633,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A preferred stock
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
(4,000,000
|
)
|
|
|
(4,000
|
)
|
|
|
904,720
|
|
|
|
|
|
|
|
902,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B preferred stock
for cash
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
901,720
|
|
|
|
|
|
|
|
902,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,219
|
)
|
|
|
(32,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(695,946
|
)
|
|
|
(695,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
42,184,977
|
|
|
|
42,185
|
|
|
|
36,215,677
|
|
|
|
(28,549,971
|
)
|
|
|
7,710,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,409
|
|
|
|
|
|
|
|
97,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A preferred stock
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
(560,000
|
)
|
|
|
(560
|
)
|
|
|
1,858,560
|
|
|
|
|
|
|
|
1,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,789
|
)
|
|
|
(62,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,436,308
|
)
|
|
|
(1,436,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
4,000,000
|
|
|
$
|
4,000
|
|
|
|
1,000,000
|
|
|
$
|
1,000
|
|
|
|
41,624,977
|
|
|
$
|
41,625
|
|
|
$
|
38,171,646
|
|
|
$
|
(30,049,068
|
)
|
|
$
|
8,169,203
|
|
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2020
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred
|
|
|
Series
B Preferred
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
$0.001
|
|
|
Number
|
|
|
$0.001
|
|
|
Number
|
|
|
$0.001
|
|
|
paid in
|
|
|
Accumulated
|
|
|
shareholders’
|
|
|
|
of shares
|
|
|
Par value
|
|
|
of shares
|
|
|
Par value
|
|
|
of shares
|
|
|
Par value
|
|
|
capital
|
|
|
(deficit)
|
|
|
equity
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
41,421,698
|
|
|
$
|
41,422
|
|
|
$
|
31,228,397
|
|
|
$
|
(19,074,608
|
)
|
|
$
|
12,195,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472,726
|
|
|
|
|
|
|
|
472,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless issuance of common
stock, warrant exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,279
|
|
|
|
153
|
|
|
|
(153
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,325,269
|
)
|
|
|
(2,325,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,574,977
|
|
|
|
41,575
|
|
|
|
31,700,970
|
|
|
|
(21,399,877
|
)
|
|
|
10,342,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,042
|
|
|
|
|
|
|
|
407,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
36,950
|
|
|
|
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,000
|
|
|
|
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,228,035
|
)
|
|
|
(1,228,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,624,977
|
|
|
|
41,625
|
|
|
|
32,239,962
|
|
|
|
(22,627,912
|
)
|
|
|
9,653,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
567,153
|
|
|
|
|
|
|
|
567,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
429,895
|
|
|
|
|
|
|
|
431,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,579,906
|
)
|
|
|
(1,579,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
43,624,977
|
|
|
$
|
43,625
|
|
|
$
|
33,237,010
|
|
|
$
|
(24,207,818
|
)
|
|
$
|
9,072,818
|
|
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net (loss) attributable to common shareholders
|
|
$
|
(3,381,921
|
)
|
|
$
|
(5,133,210
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
373,491
|
|
|
|
386,542
|
|
Stock-based compensation
|
|
|
151,422
|
|
|
|
1,446,922
|
|
Gain on loan/debt forgiveness
|
|
|
(822,837
|
)
|
|
|
-
|
|
Loss on disposal of property and equipment
|
|
|
107,516
|
|
|
|
47,500
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
88,743
|
|
|
|
150,499
|
|
Prepaid expenses
|
|
|
(387,348
|
)
|
|
|
310,172
|
|
Accounts receivable
|
|
|
(141,545
|
)
|
|
|
(194,450
|
)
|
Other assets
|
|
|
154,892
|
|
|
|
10,984
|
|
Deferred revenue
|
|
|
(11,208
|
)
|
|
|
116,012
|
|
Accrued interest
|
|
|
20,342
|
|
|
|
13,677
|
|
Net change in operating lease assets and liabilities
|
|
|
(39,662
|
)
|
|
|
71,916
|
|
Accrued expenses
|
|
|
(257,586
|
)
|
|
|
120,711
|
|
Dividends payable
|
|
|
95,008
|
|
|
|
-
|
|
Accounts payable
|
|
|
(259,305
|
)
|
|
|
181,884
|
|
Net cash (used in) operating activities
|
|
|
(4,309,998
|
)
|
|
|
(2,470,841
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(53,898
|
)
|
|
|
(77,423
|
)
|
Net cash (used in) investing activities
|
|
|
(53,898
|
)
|
|
|
(77,423
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(81,580
|
)
|
|
|
(60,317
|
)
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
159,900
|
|
Proceeds from Paycheck Protection Program loan
|
|
|
827,744
|
|
|
|
803,994
|
|
Proceeds from issuance of common stock
|
|
|
86,895
|
|
|
|
431,895
|
|
Proceeds from issuance of preferred stock, net of transaction fees
|
|
|
3,665,440
|
|
|
|
-
|
|
Proceeds from convertible notes payable
|
|
|
-
|
|
|
|
200,000
|
|
Net cash provided by financing activities
|
|
|
4,498,499
|
|
|
|
1,535,472
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
134,603
|
|
|
|
(1,012,792
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
107,693
|
|
|
|
1,076,543
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
242,296
|
|
|
$
|
63,751
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest
|
|
$
|
48,822
|
|
|
$
|
13,677
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Operating lease right of use asset obtained in exchange for lease obligations
|
|
$
|
160,476
|
|
|
$
|
928,302
|
|
Issuance of preferred stock in exchange for common stock
|
|
$
|
971,930
|
|
|
$
|
-
|
|
Issuance of preferred stock in exchange for notes payable
|
|
$
|
1,600,000
|
|
|
$
|
-
|
|
See Accompanying Notes to Unaudited Condensed Consolidated
Financial Statements
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Veritas Farms, Inc. (“Company,” “Veritas
FarmsTM,” “we,” “us” and “our”), 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.,” and on January 31, 2019,
the Company filed a Certificate of Amendment to the Articles of Incorporation with the Nevada Secretary of State changing the name from
“SanSal Wellness Holdings, Inc.” to “Veritas Farms, 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 on its 140-acre farm pursuant
to Federal law.
Basis of Presentation
The accompanying unaudited condensed
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 (“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, 2021 and September 30, 2020,
and the results of operations and cash flows for the periods presented. The results of operations for the nine months ending
September 30, 2021, are not necessarily indicative of the operating results for the full fiscal year or any future period. These
unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes
thereto included in the Company’s Form 10-K for the year ended December 31, 2020.
Principles of Consolidation
The accompanying unaudited condensed consolidated
financial statements reflect the accounts of Veritas Farms, Inc. and its wholly owned subsidiary 271 Lake Davis Holdings, LLC, a Delaware
limited liability company (“271 Lake Davis”). All significant inter-company accounts and transactions have been eliminated
in consolidation.
Estimates in Financial Statements
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.
Reclassifications
Certain reclassifications have been made in the
2020 financial statements to conform to the 2021 presentation. These reclassifications did not have any effect on our net income/(loss)
or shareholders’ deficit.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Fair Value Measurement
The Company has adopted the provisions of Accounting
Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), 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. The carrying amount reported in the accompanying unaudited condensed
consolidated balance sheets approximates fair value. At times, cash and cash equivalents may be in excess of FDIC insurance limits of
$250,000. The Company had no cash equivalents as of September 30, 2021 and December 31, 2020.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers
(“ASC 606”), the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount
that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the
five-step model prescribed under Accounting Standards Update (“ASU”) 2014-09: (i) identify contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when
the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer.
The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that
it would have recognized is one year or less or the amount is immaterial.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Cost of Goods Sold
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.
Property, Plant and Equipment
Purchases 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 Condensed Consolidated Statements
of Operations. Depreciation is recognized 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, 2021 and December 31, 2020.
Stock-Based Compensation
The Company accounts for share-based payments
in accordance with ASC Topic 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 non-employees in the same manner in which it accounts for stock-based compensation for employees.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Income Taxes
The Company accounts for income taxes under ASC
740, Income Taxes (“ASC 740”). 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 ASC 740, 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, 2021 and December 31, 2020.
Leases
The Company has two leased buildings that are
classified as operating lease right-of use (“ROU”) assets and operating lease liabilities in the Company’s unaudited
condensed consolidated balance sheets. 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
Selling, General and Administrative expenses.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Related Party Transactions
The Company follows ASC 850, Related Party Disclosures,
(“ASC 850”) 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.
In accordance with ASC 850, the unaudited condensed
consolidated financial statements 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 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 for 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.
Impact of New Accounting Standards
Accounting standards-setting organizations frequently
issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial
statements.
In August 2020, the FASB issued ASU 2020-06 Debt—Debt with Conversion
and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"). ASU 2020-06 reduces the number of
accounting models for convertible debt instruments and convertible preferred stock. Additionally, ASU 2020-06 removes certain settlement
conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per
share ("EPS") calculation in certain areas. The company is analyzing the effect of this standard.
NOTE 2: GOING CONCERN
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. A going concern disclosure means that there is substantial doubt that the company can continue as an ongoing business
for the next 12 months from the date the financial statements are issued. The Company has sustained substantial losses from operations
since its inception. As of and for the period ended September 30, 2021, the Company had an accumulated deficit of $30,049,068, and a net
loss of $3,381,921. 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 until we can achieve a level of
operational profitability, though there is no assurance of success.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In December 2019, a novel strain of coronavirus
(“COVID-19”) emerged. Because COVID-19 infections have been reported throughout the United States, certain federal, state
and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of
COVID-19. The rapidly changing global market and economic conditions as a result of the COVID-19 pandemic have negatively impacted, and
are expected to continue to negatively impact, our operations and business. The broader implications of the COVID-19 pandemic and related
global economic unpredictability on our business, financial condition, and results of operations remain uncertain and cannot be predicted
with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19
pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an
extended period of continued business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated
at this time, but it may have a material adverse impact on our business, financial condition and results of operations. Management expects
that its business will continue to be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
Management Plans
To become leaders in the market, the Company will
use three primary methods to market its products including: web-based marketing, traditional marketing, and health related marketing.
The Company believes that it will require additional
financing to fund its growth and achieve profitability The Company anticipates that such financing will be generated from subsequent private
offerings of its equity and/or debt securities. Outside financing, in concert with profitability from increased large retail establishments
(“Big Box”) and e-commerce retail orders allow management to conclude that the Company will continue as a going concern.
The accompanying financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3: INVENTORIES
Inventories consist of:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Work in progress
|
|
$
|
4,106,929
|
|
|
$
|
4,202,811
|
|
Finished goods
|
|
|
1,176,062
|
|
|
|
1,232,944
|
|
Other
|
|
|
520,249
|
|
|
|
456,228
|
|
Inventories
|
|
$
|
5,803,240
|
|
|
$
|
5,891,983
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 4: PROPERTY AND EQUIPMENT
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Accumulated depreciation
|
|
|
Net book value
|
|
|
Cost
|
|
|
Accumulated depreciation
|
|
|
Net book value
|
|
|
useful life (years)
|
|
Land and land improvements
|
|
$
|
398,126
|
|
|
$
|
-
|
|
|
$
|
398,126
|
|
|
$
|
398,126
|
|
|
$
|
-
|
|
|
$
|
398,126
|
|
|
|
-
|
|
Buildings and improvements
|
|
|
1,510,175
|
|
|
|
193,985
|
|
|
|
1,316,190
|
|
|
|
1,553,722
|
|
|
|
172,411
|
|
|
|
1,381,311
|
|
|
|
39
|
|
Greenhouse
|
|
|
965,388
|
|
|
|
123,902
|
|
|
|
841,486
|
|
|
|
965,388
|
|
|
|
101,613
|
|
|
|
863,775
|
|
|
|
39
|
|
Fencing and irrigation
|
|
|
203,793
|
|
|
|
92,780
|
|
|
|
111,013
|
|
|
|
203,793
|
|
|
|
77,901
|
|
|
|
125,892
|
|
|
|
15
|
|
Machinery and equipment
|
|
|
2,491,118
|
|
|
|
1,190,683
|
|
|
|
1,300,435
|
|
|
|
2,480,474
|
|
|
|
936,979
|
|
|
|
1,543,495
|
|
|
|
7
|
|
Furniture and fixtures
|
|
|
226,630
|
|
|
|
157,742
|
|
|
|
68,888
|
|
|
|
236,344
|
|
|
|
140,680
|
|
|
|
95,664
|
|
|
|
7
|
|
Computer equipment
|
|
|
20,053
|
|
|
|
19,505
|
|
|
|
548
|
|
|
|
20,053
|
|
|
|
19,139
|
|
|
|
914
|
|
|
|
5
|
|
Vehicles
|
|
|
56,058
|
|
|
|
25,483
|
|
|
|
30,575
|
|
|
|
120,206
|
|
|
|
35,013
|
|
|
|
85,193
|
|
|
|
5
|
|
Total
|
|
$
|
5,871,341
|
|
|
$
|
1,804,080
|
|
|
$
|
4,067,261
|
|
|
$
|
5,978,106
|
|
|
$
|
1,483,736
|
|
|
$
|
4,494,370
|
|
|
|
|
|
Total depreciation expense was $373,491 and $386,542
for the nine month periods ending September 30, 2021 and September 30, 2020, respectively. Total depreciation expense was $111,963 and $128,942 for the three
month periods ending September 30, 2021 and September 30, 2020, respectively.
NOTE 5: NOTES PAYABLE AND CONVERTIBLE NOTES
PAYABLE
The following table summarizes the notes payable outstanding as of
September 30, 2021.
|
|
Maturity
|
|
Interest
|
|
|
Ending
principal
September 30,
|
|
|
Non related party
|
|
Origination date
|
|
date
|
|
rate
|
|
|
2021
|
|
|
Current
|
|
|
Long term
|
|
11/29/2018
|
|
12/1/2022
|
|
|
9
|
%
|
|
$
|
46,062
|
|
|
$
|
36,444
|
|
|
$
|
9,618
|
|
5/10/2019
|
|
5/10/2023
|
|
|
9
|
%
|
|
|
12,343
|
|
|
|
7,166
|
|
|
|
5,177
|
|
8/29/2019
|
|
9/1/2024
|
|
|
7
|
%
|
|
|
54,622
|
|
|
|
16,887
|
|
|
|
37,735
|
|
3/6/2020
|
|
10/1/2022
|
|
|
10
|
%
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
6/24/2020
|
|
6/24/2050
|
|
|
4
|
%
|
|
|
150,000
|
|
|
|
-
|
|
|
|
150,000
|
|
2/16/2021
|
|
2/1/2026
|
|
|
1
|
%
|
|
|
803,994
|
|
|
|
-
|
|
|
|
803,994
|
|
Total
|
|
|
|
|
|
|
|
$
|
1,267,021
|
|
|
$
|
60,497
|
|
|
$
|
1,206,524
|
|
Future principal payments for the next five years
are as follows for the future years ended December 31:
2021
|
|
|
$
|
14,627
|
|
2022
|
|
|
|
263,433
|
|
2023
|
|
|
|
25,012
|
|
2024
|
|
|
|
18,189
|
|
2025
|
|
|
|
3,516
|
|
Thereafter
|
|
|
|
942,244
|
|
Total
|
|
|
$
|
1,267,021
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Paycheck Protection Program
In May 2020, as part of the business incentives
offered in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company received a loan in the amount
of $803,994 under U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“2020 PPP Loan”). In
June 2021, the 2020 PPP Loan principal and all accrued interest totaling $822,837 was forgiven in full.
In February 2021, as part of the business incentives
offered in the CARES Act, the Company received a second loan in the amount of $803,994 under the SBA Paycheck Protection Program (“2021
PPP Loan”). The 2021 PPP Loan accrues interest at a rate of 1% per annum and has an original maturity date of five years. The 2021
PPP Loan contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties.
Under the terms of the 2021 PPP Loan, a portion or all of the loan is forgivable to the extent the loan proceeds are used to fund qualifying
payroll, rent and utilities during a designated twenty-four week period. Payments are deferred until the SBA determines the amount to
be forgiven. The Company has utilized the proceeds of the 2021 PPP Loan in a manner which should enable qualification as a forgivable
loan. However, no assurance can be provided that all or any portion of the 2021 PPP Loan will be forgiven. The principal balance on the
2021 PPP Loan was $803,994 as of September 30, 2021.
Economic Injury Disaster Loan
In September 2020, the Company received a loan
in the amount of $150,000 from the SBA as an Economic Injury Disaster Loan (“EIDL”). The EIDL accrues interest at the rate
of 3.75% per annum and has a term of 30 years. The first payment due is deferred two years. The principal balance of the EIDL as of September
30, 2021 has been classified as a long-term liability in notes payable.
8% Secured Promissory Notes Payable
On April 19, 2021, the Company issued a secured
convertible promissory note in the principal amount of $25,000 to our Chairman of the Board, Thomas E. Vickers (“Mr. Vickers”).
The note carried an interest rate of eight percent (8%) per annum and had a maturity date of May 19, 2021. On May 19, 2021, the
Company and Mr. Vickers extended the maturity date of the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding
$25,000 in principal and $25,000 in additional cash consideration in exchange for 50,000 shares of the Company’s Series A Convertible
Preferred Stock (“Series A Preferred Shares”).
On July 22, 2021, the Company issued secured convertible
promissory notes in the aggregate principal amount of $1,075,000 in exchange for an aggregate amount of $1,075,000, which secured convertible
promissory notes were issued to the Cornelis F. Wit Revocable Living Trust, of which Cornelis F. Wit is trustee (“Wit Trust”),
a principal shareholder who holds securities of the Company that constitute a majority of the voting securities of the Company, in the
amount of $1,000,000, Stephen E. Johnson (“Mr. Johnson”), Chief Executive Officer and President of the Company, in the amount
of $50,000, and Ramon A. Pino (“Mr. Pino”), Chief Financial Officer of the Company, in the amount of $25,000. These secured
convertible promissory notes accrued interest at eight percent (8%) per annum and had a maturity date of (i) April 1, 2022, or October
1, 2021. On August 18, 2021, Mr. Pino converted the outstanding $25,000 in principal in exchange for 25,000 Series A Preferred Shares.
On September 7, 2021, Mr. Johnson converted the outstanding $50,000 in principal in exchange for 50,000 Series A Preferred Shares. On
September 30, 2021, the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series A Preferred Shares.
On August 30, 2021, the Company issued a secured
convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust. The note carried an interest rate of eight
percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the Wit Trust converted the outstanding $500,000
in principal in exchange for 500,000 Series A Preferred Shares.
10% Convertible Note Payable
In March 2020, the Company received a $200,000
loan from a single investor, evidenced by a one-year convertible promissory note (“Convertible Note”). The Convertible Note
bears interest at the rate of ten percent (10%) per annum, which accrues and is payable together with principal at maturity. Principal
and accrued interest under the Convertible Note may, at the option of the holder, be converted in its entirety into shares of our common
stock at a conversion price of $0.40 per share, subject to adjustment for stock splits, stock dividends and similar recapitalization transactions.
On May 14, 2021, the Company paid $20,000 in accrued interest to the holder, and the Company and the investor extended the maturity date
of the Convertible Note to September 6, 2021. In September 2021, the Company and the investor further extended the maturity date
of the Convertible Note to October 1, 2022.
Principal and accrued interest under the Convertible
Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.40 per
share, subject to adjustment for stock splits, stock dividends and similar recapitalization transactions. The Company determined that
there was a beneficial conversion feature of $95,000 relating to the Convertible Note which is being amortized over the life of the note,
using the effective interest method. The note is presented net of a discount of $0 as of September 30, 2021 and $23,750 as of December
31, 2020 on the accompanying balance sheet with amortization to interest expense of $23,750 for the nine month period ended September
30, 2021.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 6: STOCK-BASED COMPENSATION
The Company approved its 2017 Stock Incentive
Plan on September 27, 2017 (“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
6,867,747 shares of common stock. 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 at the time of grant by the Board of Directors or any of the Committees appointed
under the Incentive Plan.
The Company’s outstanding stock options
typically have a 10-year term. Outstanding non-qualified stock options granted to employees and consultants vest on a case by case basis.
Outstanding incentive stock options issued to employees typically 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 vest in 33.3% increments
on each of the three anniversary dates of the date of grant. Outstanding incentive stock options issued to executives typically vest partially
upon grant date, with the residual vesting over the subsequent 6 or 12 months.
On May 12, 2021, the Company granted four non-employee
directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share
exercise price of $0.16 with a term of ten (10) years, with 25% of the options vesting every ninety (90) days following the grant date
subject to the director’s continuous service to the Company. On May 12, 2021, the Company also granted (i) Mr. Johnson stock options
under the Incentive Plan to purchase 450,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years.
The stock options will vest ratably on the first three anniversaries of the grant date subject to Mr. Johnson’s continuous service
to the Company and (ii) Mr. Pino stock options under the Incentive Plan to purchase 385,000 shares of common stock, at a per share exercise
price of $0.16 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries of the grant date subject
to Mr. Pino’s continuous service to the Company.
Total stock based compensation expense was $151,422
and $1,446,922 for the nine month periods ending September 30, 2021 and September 30, 2020, respectively.
The following table summarizes the stock option activity for the Company’s
Incentive Plan:
|
|
Number of options
|
|
|
Weighted average exercise price
(per share)
|
|
|
Weighted average remaining contractual term
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
4,293,750
|
|
|
$
|
1.13
|
|
|
|
9.03
|
|
Granted
|
|
|
50,000
|
|
|
|
0.27
|
|
|
|
9.75
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
(150,000
|
)
|
|
|
1.42
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
4,193,750
|
|
|
|
1.11
|
|
|
|
8.03
|
|
Granted
|
|
|
1,235,000
|
|
|
|
0.16
|
|
|
|
9.62
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
(193,750
|
)
|
|
|
1.21
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
5,235,000
|
|
|
$
|
1.14
|
|
|
|
7.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at September 30, 2021
|
|
|
4,017,167
|
|
|
$
|
0.94
|
|
|
|
7.35
|
|
Below are the assumptions for the fair value of
share-based payments for the nine month period ended September 30, 2021 and the year ended December 31, 2020.
|
|
Stock option assumptions for the period ended
|
|
Stock option assumptions
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Risk-free interest rate
|
|
|
1.32
|
%
|
|
|
1.20
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected volatility
|
|
|
147.8
|
%
|
|
|
183.8
|
%
|
Expected life of options (in years)
|
|
|
10
|
|
|
|
10
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 7: LEASES
On June 22, 2018, the Company entered into a sublease
agreement with EDSA Inc. for the lease of principal executive offices for the Company in Fort Lauderdale, Florida. The lease went into
effect as of July 1, 2018 and expired pursuant to the terms of the lease on August 31, 2021. The lease contained annual escalators and
charged Florida sales tax.
On December 2, 2019, the Company entered into
a 61 month lease with Majestic Commercenter Phase 9, LLC. (“Majestic”), for warehousing, distribution and related administration
office in Aurora, Colorado. The lease allowed for an abated first month of rent. The lease contained annual escalators in addition to
other periodic payments pertaining to taxes, utilities, insurance and common area costs.
On February 10, 2021, the Company entered into
a conditional lease termination agreement with Majestic pursuant to which the Company terminated the lease with Majestic (“Majestic
Termination Agreement”). Pursuant to the terms of the Majestic Termination Agreement, the Company made a payment of $125,000 on
February 23, 2021 and a final payment of $125,000 on April 30, 2021, upon which both parties were released from all further obligations
to each other. The net expense on the termination of the lease was $244,840. The expense was reported as Other Income/(Expense), Loss
on lease termination.
On February 11, 2021, the Company entered into
a three year lease with Cheyenne Avenue Holdings, LLC for warehouse and distribution facilities. The lease contains annual escalators.
The Company analyzed the classification of the lease under ASC 842, and as it did not meet any of the criteria for a financing lease it
has been classified as an operating lease. The Company determined the right of use asset and lease liability values at inception calculated
at the present value of all future lease payments for the lease term, using an incremental borrowing rate of 5%. The right of use asset
value was $160,476 and the liability was $160,476. The lease liability will be expensed each month, on a straight-line basis, over the
life of the lease.
Total lease amortization expense was $109,442
and $180,841 for the nine month periods ending September 30, 2021 and September 30, 2020, respectively.
As of September 30, 2021, and December 31, 2020,
operating leases have no minimum rental commitments.
NOTE 8: SHAREHOLDERS’ (DEFICIT)
Our authorized capital stock consists of 200,000,000
shares of common stock, $0.001 par value per share and 5,000,000 shares of preferred stock, par value $0.001 per share, of which
4,000,000 shares of preferred stock have been designated as Series A Convertible Preferred Stock and 1,000,000 shares of preferred stock
have been designated as Series B Convertible Preferred Stock.
Common Stock
In September 2020, the Company commenced a $4.0
million private offering of up to 8,000,000 Units (“Units”) at a price of $0.50 per Unit, which private offering ended April
30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling the holder to purchase one share of our
common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December 31, 2020, the Company sold 2,080,000 Units
in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. From January
1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105
resulting in net proceeds of $86,895. The terms of this offering provided that, if during the one-year period from the final closing of
the offering, the Company undertakes a subsequent private offering of its equity, equity equivalent or debt securities (a “Subsequent
Offering”), the investor will be entitled to exchange their Units purchased in the offering for an equivalent dollar amount of securities
sold in the Subsequent Offering (based on the respective offering prices). The Company also entered into a registration rights agreement
with the investors which states, among other things, that the Company shall use commercially reasonable efforts to prepare and file with
the SEC a registration statement covering, among other things, the resale of all or such portion of the registrable securities that are
not then registered on an effective registration statement. As of September 30, 2021, all Unit holders converted their Units into Series
A Preferred Shares.
In March 2020, the Company issued 153,279 shares
of common stock in accordance with a cashless exercise of warrants.
Preferred Stock
On October 13, 2017, the Company filed Amended
and Restated Articles of Incorporation of the Company which authorized preferred stock consisting of 5,000,000 shares, par value $0.001
per share, issuable from time to time in one or more series. On May 10, 2021, the Company filed a Certificate of Amendment to the Articles
of Incorporation designating 4,000,000 shares of preferred stock as Series A Convertible Preferred Stock and 1,000,000 shares of preferred
stock as Series B Convertible Preferred Stock.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On May 11, 2021, the Company entered into a Securities
Purchase Agreement with the Wit Trust, pursuant to which the Company contemporaneously sold to the Wit Trust an aggregate of (a) 2,000,000
Series A Preferred Shares; and (b) 1,000,000 shares of its Series B Convertible Preferred Stock (“Series B Preferred Shares”)
in exchange for (i) the payment of $2,000,000 (including $302,500 principal plus accrued but unpaid interest in bridge financing provided
by the Wit Trust to the Company during April 2021); and (ii) the surrender by the Wit Trust to the Company of 2,000,000 units (“Units”),
each Unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock in accordance with
the terms of the subscription agreements for the purchase of the Units entered into by the Wit Trust and the Company in September and
October 2020. As a result of the transaction and the voting rights accorded the Series A Preferred Shares and Series B Preferred Shares
as set forth below, the Wit Trust then held approximately 87% of the voting power of the Company and accordingly, a “Change in Control”
occurred.
On September 30, 2021, the Company completed a
private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold
an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share (“Private Placement”) in exchange
for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by
certain investors during July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion
of an account payable); and (ii) the surrender of 280,000 units (the “Units”), each Unit consisting of two shares of common
stock and one warrant to purchase an additional share of common stock in accordance with the terms of the subscription agreements for
the purchase of the Units entered into by certain investors and the Company in February through April 2021. The investors in the Private
Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note;
Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Kuno van der Post, a member of the Board of Director of the
Company, in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible
promissory notes and $19,068.49 in accrued and unpaid interest.
Series A Preferred Stock
The Series A Preferred Shares have a stated value
of $1.00 per share. Each Series A Preferred Share is convertible into the Company’s common stock, par value $0.001 per share (“Common
Stock”) at the option of the holder thereof at a conversion rate of $0.05 per share of Common Stock. The conversion rate is subject
to adjustment in the event of stock splits, stock dividends, other recapitalizations and similar events, as well as in the event of issuance
by the Company of shares of Common Stock or securities exercisable for, convertible into or exchangeable for Common Stock at an effective
price per share less than the conversion rate then in effect (other than certain customary exceptions). In respect of rights to the payment
of dividends and the distribution of assets in the event of any liquidation, dissolution or winding-up of the Company, the Series A Preferred
Shares rank (a) junior to the Company’s Series B Shares; and (b) senior to (i) the Company’s Common Stock and any other class
or series of stock (including other series of Preferred Stock) of the Company (collectively, “Junior Stock”). From and after
the date of the issuance of Series A Preferred Shares, dividends at the rate per annum of 8%, compounded annually, accrue daily on the
stated value (“Accruing Dividends”). Accruing Dividends shall accrue from day to day, whether or not declared, and shall
be cumulative; provided, however, such Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors
and the Company shall be under no obligation to pay such Accruing Dividends except as set forth herein. The Company shall not declare,
pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on (a) shares
of Series B Preferred Shares; and (b) Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents
required elsewhere in the Articles of Incorporation) the holders of the Series A Preferred Shares then outstanding shall first receive,
or simultaneously receive, a dividend on each outstanding share of Series A Preferred Share in an amount at least equal to the sum of
(a) the amount of the aggregate Accruing Dividends then accrued on such Series A Preferred Shares and not previously paid; and (b) (i)
in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per Series A Preferred
Share as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all
shares of such class or series had been converted into Common Stock; and (B) the number of shares of Common Stock issuable upon conversion
of a Series A Preferred Share, in each case calculated on the record date for determination of holders entitled to receive such dividend;
or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per Series A Preferred
Share determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original
issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization with respect to such class or series); and (B) multiplying such fraction by an amount
equal to the stated value of the Series A Preferred Shares; provided, that if the Company declares, pays or sets aside, on the same
date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders of Series
A Preferred Shares shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest
Series A Preferred Share dividend. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company
or any Deemed Liquidation Event, (as defined) (collectively, a “Liquidation Event”), the holders of Series A Preferred Shares
shall be entitled to receive, after payment to all holders of Series B Preferred Shares of a liquidation preference equal to the aggregate
amount of one hundred fifty percent (150%) of the Stated Valued of the Series B Preferred Shares and the amount of the accrued but unpaid
dividends on the Series B Preferred Shares, but prior and in preference to any distribution of any of the assets of the Company to the
holders of Junior Stock by reason of their ownership thereof, an aggregate amount per share equal to the Stated Value of the Series A
Preferred Shares and the accrued but unpaid dividends thereon. After the payment to all holders of Series B Preferred Shares of a liquidation
preference equal to the aggregate amount of one hundred fifty percent (150%) of the Stated Valued of the Series B Preferred Shares and
the amount of the accrued but unpaid dividends on the Series B Preferred Shares and to all holders of the Series A Preferred Shares the
full liquidation preference hereunder, the remaining assets of the Company available for distribution to its shareholders shall be distributed
among the holders of the shares of Series B Preferred Shares and Junior Stock, pro rata, on an “as converted basis,” determined
immediately prior to such Liquidation Event, and the Series A Preferred Shares shall not be entitled to participate in such distribution
of the remaining assets of the Company.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Series B Preferred Stock
The Series B Preferred Shares have a stated value
of $1.00 per share. Each Series B Preferred Share is convertible into Common Stock at the option of the holder thereof at a conversion
rate of $0.20 per share of Common Stock. The conversion rate is subject to adjustment in the event of stock splits, stock dividends, other
recapitalizations and similar events, as well as in the event of issuance by the Company of shares of Common Stock or securities exercisable
for, convertible into or exchangeable for Common Stock at an effective price per share less than the conversion rate then in effect (other
than certain customary exceptions). In respect of rights to the payment of dividends and the distribution of assets in the event of any
liquidation, dissolution or winding-up of the Company, the Series B Preferred Shares rank senior to the (a) Series A Preferred Shares;
(b) the Company’s Common Stock and any other class or series of Junior Stock. From and after the date of the issuance of Series
B Preferred Shares, dividends at the rate per annum of 8%, compounded annually, accrue daily on the stated value (“Accruing Dividends”).
Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative; provided, however, such Accruing
Dividends shall be payable only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay
such Accruing Dividends except as set forth herein. The Company shall not declare, pay or set aside any dividends on shares of any other
class or series of capital stock of the Company (other than dividends on (a) shares of Series B Preferred Shares; and (b) Common Stock
payable in shares of Common Stock) unless (in addition to the obtaining of any consents required elsewhere in the Articles of Incorporation)
the holders of the Series B Preferred Shares then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding
share of Series B Preferred Share in an amount at least equal to the sum of (a) the amount of the aggregate Accruing Dividends then accrued
on such Series B Preferred Shares and not previously paid; and (b) (i) in the case of a dividend on Common Stock or any class or series
that is convertible into Common Stock, that dividend per Series B Preferred Share as would equal the product of (A) the dividend payable
on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common
Stock; and (B) the number of shares of Common Stock issuable upon conversion of a Series B Preferred Share, in each case calculated on
the record date for determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any class or series
that is not convertible into Common Stock, at a rate per Series B Preferred Share determined by (A) dividing the amount of the dividend
payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock
(subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with
respect to such class or series); and (B) multiplying such fraction by an amount equal to the stated value of the Series B Preferred Shares; provided,
that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock
of the Company, the dividend payable to the holders of Series B Preferred Shares shall be calculated based upon the dividend on the class
or series of capital stock that would result in the highest Series B Preferred Share dividend. In the event of a Liquidation Event, the
holders of Series B Preferred Shares shall be entitled to receive, prior and in preference to any distribution of any of the assets of
the Company to the holders of Junior Stock (including Series A Preferred Shares), a liquidation preference equal to the aggregate amount
of one hundred fifty percent (150%) of the Stated Valued of the Series B Preferred Shares and the amount of the accrued but unpaid dividends
on the Series B Preferred Shares. After the payment to all holders of Series B Preferred Shares of such liquidation preference and to
all holders of the Series A Preferred Shares their full liquidation preference, the remaining assets of the Company available for distribution
to its shareholders shall be distributed among the holders of the shares of Series B Preferred Shares and Junior Stock other than Series
A Preferred Shares, pro rata, on an “as converted basis,” as applicable. The Series A Preferred Shares shall vote together
with holders of Series B Preferred Shares and holders of Common Stock as a single class on all matters brought to a vote of shareholders.
Each Series B Preferred Share shall entitle the holder thereof to such number of votes as equal the number of shares of Common Stock then
issuable upon conversion of the Series B Share multiplied by 50.
Preferred Stock Dividends
The following table presents undeclared preferred
stock dividends for the nine month periods ended September 30, 2021 and September 30, 2020, respectively, and the per share effect of
the preferred stock dividends if their effect was not anti-dilutive.
|
|
Undeclared dividends
For the nine months ended
September 30,
|
|
|
Undeclared dividends
per share
For the nine months ended
September 30,
|
|
Series of preferred stock
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Series A preferred stock dividends
|
|
$
|
64,104
|
|
|
$
|
-
|
|
|
$
|
0.02
|
|
|
$
|
-
|
|
Series B preferred stock dividends
|
|
|
30,904
|
|
|
|
-
|
|
|
$
|
0.03
|
|
|
$
|
-
|
|
Total undeclared preferred stock dividends
|
|
$
|
95,008
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The following table presents the cumulative undeclared
dividends by class of preferred stock as of September 30, 2021 and September 30, 2020, respectively, and the per share amount by class
of preferred stock. These cumulative undeclared dividends are recorded in Dividends payable on our balance sheet as of September 30, 2021
and September 30, 2020.
|
|
Cumulative undeclared dividends as of
September 30,
|
|
|
Cumulative undeclared dividends
per share as of
September 30,
|
|
Series of preferred stock
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Series A preferred stock
|
|
$
|
64,104
|
|
|
$
|
-
|
|
|
$
|
0.02
|
|
|
$
|
-
|
|
Series B preferred stock
|
|
|
30,904
|
|
|
|
-
|
|
|
$
|
0.03
|
|
|
$
|
-
|
|
Cumulative undeclared preferred stock dividends
|
|
$
|
95,008
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 9: CONCENTRATIONS
The Company had one customer for the nine months
ended September 30, 2021 that accounted for 17% of sales. For the nine months ended September 30, 2020, one customer accounted for 19%
of sales.
The Company had three customers at September 30,
2021 accounting for 46%, 21% and 15% of accounts receivable. At December 31, 2020, the Company had two customers accounting for 43% and
17% of accounts receivable.
NOTE 10: RELATED PARTY
A law firm owned by the brother of Alexander M.
Salgado, our former Chief Executive Officer, renders legal services to the Company. The firm incurred expenses in aggregate of $20,020
and $141,300 for such services during the nine month periods ended September 30, 2021 and September 30, 2020, respectively.
On April 19, 2021, the Company issued a secured
convertible promissory note in the principal amount of $25,000 to Mr. Vickers. The note carried an interest rate of eight percent (8%)
per annum and had a maturity date of May 19, 2021. On May 19, 2021, the Company and Mr. Vickers extended the maturity date of
the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding $25,000 in principal and $25,000 in additional
consideration in exchange for 50,000 Series A Preferred Shares.
On July 22, 2021, the Company issued secured convertible
promissory notes in the aggregate principal amount of $1,075,000 in exchange for an aggregate amount of $1,075,000, which secured convertible
promissory notes were issued to the Wit Trust, in the amount of $1,000,000, Mr. Johnson in the amount of $50,000, and Mr. Pino in the
amount of $25,000. The secured convertible promissory notes accrued interest at eight percent (8%) per annum and had a maturity date of
(i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted the outstanding $25,000 in principal in exchange for 25,000
Series A Preferred Shares. On September 7, 2021, Mr. Johnson converted the outstanding $50,000 in principal in exchange for 50,000 Series
A Preferred Shares. On September 30, 2021 the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series
A Preferred Shares.
On August 30, 2021, the Company issued a secured
convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust. The note carried an interest rate of eight
percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the Wit Trust converted the outstanding $500,000
in principal in exchange for 500,000 Series A Preferred Shares.
On September 30, 2021, the Company completed a
private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold
an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share (“Private Placement”) in exchange
for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by
certain investors during July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion
of an account payable); and (ii) the surrender of 280,000 Units. The investors in the Private Placement included: Mr. Johnson upon the
conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000
promissory note and accounts payable; Mr. van der Post, a member of the Board of Director of the Company, in the amount of $50,000, and;
the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued
and unpaid interest. As a result of the Private Placement and the voting rights accorded the Series A Preferred Shares and Series B Preferred
Shares, the Wit Trust now holds approximately 87% of the voting power of the Company.
For the nine month period ended September 30,
2021 we incurred $1,661 in interest expense payable to related parties and $1,644 in interest expense payable to related parties
for the nine month period ended September 30, 2020.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On July 10, 2020, Carrick-Harvest, LLC d/b/a Veritas
Fine Cannabis (“Carrick”) filed an action against the Company in the U.S. District Court for the District of Colorado, alleging
trademark infringement and unfair competition under the Lanham Act, cybersquatting under federal law, and common law unfair competition
under Colorado law. Carrick alleged the Company violated these provisions through use of the alleged trademark VERITAS by providing “informational
services” through its website. The action seeks an order that Carrick is the rightful owner of and has superior trademark rights
in the marks and preventing the Company from registering their alleged infringing marks with the USPTO. On June 24, 2021, the Company
entered into a non-monetary settlement and coexistence agreement with Carrick in which both parties agree not to challenge or bring any
action against the opposing parties respective trademark ownership, use or registration in either parties respective fields.
On January 22, 2021, EMC Outdoor, LLC
(“EMC Outdoor”) filed an action against the Company in Broward County Circuit Court alleging breach of contract and
claiming damages in the amount of $304,783 which had been fully accrued in accounts payable in prior periods. On June 16, 2021, the Company entered into a conditional settlement agreement with EMC
Outdoor (“EMC Outdoor Termination Agreement”). Pursuant to the terms of the EMC Outdoor Termination Agreement, the
Company made one payment of $200,000 on July 22, 2021 which was drawn from the accrued accounts payable balance, upon which both parties were released from all further obligations to each
other.
Employment Agreements
We have employment agreements in place with the
following members of our executive management team:
Stephen E. Johnson, Chief Executive Officer
Ramon A. Pino, Chief Financial Officer
The employment agreements provide, among
other things, for participation in employee benefits available to employees and executives. Each of the agreements will renew for successive
one-year terms unless the agreement is expressly terminated by either the employee or the Company prior to the end of the then current
term as provided for in the employment agreement. Under the terms of the agreement, we may terminate the employee’s employment upon
30 or 60 days notice of a material breach and the employee may terminate the agreement under the same terms and conditions. The employment
agreements contain non-disclosure provisions, as well as non-compete clauses. The agreements for Mr. Johnson and Mr. Pino contain
severance provisions which entitles the employee to severance pay equal to one (1) year's salary and benefits in the event of
(i) the employee's termination by the Company for any reason other than for cause, as described in the employment agreement, (ii) termination
by the employee pursuant to a material breach of the agreement by the Company or for good reason in connection with a change of control,
or (iii) non-renewal of the employment agreement by the Company.
NOTE 12: SUBSEQUENT EVENTS
On September 8, 2021, the Company entered into a thirty nine month
lease with 1815 Building Company, for the lease of the Company’s new principal executive offices in Dania Beach, Florida. The lease
has a commencement date of October 12, 2021 and will expire on January 31, 2025. The lease contains annual escalators. The Company analyzed
the classification of the lease under ASC 842, and as it does not meet any of the criteria for a financing lease it will be classified
as an operating lease.
On October 12, 2021, the Company issued a secured
convertible credit line promissory note in the principal amount for up to $1,500,000 (the “Secured Convertible Promissory Note”),
which Secured Convertible Promissory Note was issued to the Wit Trust. The Secured Convertible Promissory Note is secured by the Company’s
assets and contain certain covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured
Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal
and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted in its entirety into
shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will accrue interest
on the aggregate amount loaned at a rate of 10% per annum. All unpaid principal, together with any then unpaid and accrued interest and
other amounts payable under the Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions
of the Secured Convertible Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Unless the context otherwise requires, references
in this report to “the Company,” “Veritas Farms,” “we,” “us” and “our” refer
to Veritas Farms, Inc. and its subsidiary.
All share and per share information in this report
has been adjusted to give effect to a one-for-four reverse stock split implemented by the Company on September 19, 2019.
Forward-Looking Statements
Certain statements made in this report are “forward-looking
statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included
herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on
assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe
that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations,
the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be
achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Business Overview
Veritas FarmsTM is a vertically-integrated
agribusiness focused on growing, producing, marketing, and distributing superior quality, whole plant, full spectrum hemp oils and extracts
containing naturally occurring phytocannabinoids (collectively, “CBD”). Veritas Farms owns and operates a 140-acre farm in
Pueblo, Colorado, capable of producing over 200,000 proprietary full spectrum hemp plants containing naturally occurring phytocannabinoids
which can potentially yield a minimum annual harvest of over 200,000 pounds of outdoor-grown industrial hemp. While part of the cannabis
family, hemp, which contains less than 0.3% tetrahydrocannabinol (“THC”), the psychoactive compound that produces the “high”
in marijuana, is distinguished from marijuana by its use, physical appearance and lower THC concentration (marijuana generally has a THC
level of 10% or more). The Company also operates approximately 15,000 sq. ft. of climate-controlled greenhouses to produce a consistent
supply of year-round indoor-cultivated hemp. In addition, there is a 10,000 sq. ft. onsite facility used for processing raw hemp, oil
extraction, formulation laboratories, and quality/purity testing. Veritas Farms is registered with the Colorado Department of Agriculture
to grow industrial hemp and with the Colorado Department of Public Health and Environment to process hemp and manufacture hemp products
in accordance with Colorado’s hemp program.
Veritas Farms meticulously processes its hemp
crop to produce superior quality whole-plant hemp oil, extracts and derivatives which contain the entire full spectrum of cannabinoids
extracted from the flowers and leaves of hemp plants. Veritas Farms employs the use of the cold ethanol extraction method to extract the
whole plant hemp oil from its hemp crop. Whole-plant hemp oil is known to provide the essential phytocannabinoid “entourage effect”
resulting from the synergistic absorption of the entire full spectrum of unique hemp cannabinoids by the receptors of the human endocannabinoid
system. As a result, Veritas Farms believes that its products are premier quality cannabinoids and are highly sought after by consumers
and manufacturers of premium hemp products.
Veritas Farms has developed a wide variety of
formulated phytocannabinoid-rich hemp products containing naturally occurring phytocannabinoids which are marketed and distributed by
the Company under its Veritas Farms brand name. Our products are also available in bulk, white label and private label custom formulations
for distributors and retailers. These types of products are in high demand by health food markets, wellness centers, pet suppliers, physicians
and other healthcare practitioners.
Veritas Farms products (50+ SKUs) include capsules,
gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews. All product applications come in various flavors and
strength formulations, in addition to bulk volume sales. Many of the Company’s whole-plant hemp oil products and formulations are
available for purchase online directly from the Company through its Veritas Farms website, www.theVeritasFarms.com, as well as through
numerous other online retailers and “brick and mortar” retail outlets.
The branding of the Company’s line of hemp
oil and extract product has enabled market penetration during 2020 and 2021 into large retail chains vastly increasing brand exposure
and awareness. The initial rollouts have been successful in creating distribution opportunities into thousands of new retail outlets across
the country (over 8,000 retail outlets as of the date of this report). The shift from smaller order fulfilment to larger “Big Box”
orders creates an economy of scale that offers the opportunity for the Company to achieve profitability.
As of the date of this report the Company has
secured distribution into the following chain stores:
Southern Wine
|
Rite Aid
|
Kinney Drugs
|
Niemann Supermarkets
|
Bashas
|
Giant Eagle
|
Tops
|
Harris Teeter
|
Bi Mart
|
Smiths
|
Fred Meyer
|
QFC
|
King Soopers
|
Winn Dixie
|
Bi-Lo
|
Mariano’s
|
Fruth
|
Weis
|
Bartell Drugs
|
|
Kroger
|
Save Mart
|
Publix
|
|
Recent Developments
Securities Purchase Agreement
On May 11, 2021 the Company entered into a Securities Purchase Agreement (“SPA”) with the Cornelis F. Wit Revocable Living Trust, of which
Cornelis F. Wit is trustee (“Wit Trust”), an existing shareholder, pursuant to which the Company contemporaneously sold to
the Wit Trust an aggregate of (a) 2,000,000 shares of its Series A Convertible Preferred Stock (“Series A Preferred Shares”);
and (b) 1,000,000 shares of its Series B Convertible Preferred Stock (“Series B Preferred Shares,” and together with the Series
A Preferred Shares, collectively, “Preferred Shares”) in exchange for (i) the payment of $2,000,000 (including $302,500 principal
plus accrued but unpaid interest in bridge financing provided by the Wit Trust to the Company during April 2021); and (ii) the surrender
of 2,000,000 units (“Units”), each Unit consisting of two shares of common stock and one warrant to purchase an additional
share of common stock in accordance with the terms of the subscription agreements for the purchase of the Units entered into by the Wit
Trust and the Company in September and October 2020. As a result of the transaction and the voting rights accorded the Preferred Shares,
the Wit Trust then held approximately 87% of the voting power of the Company and accordingly, a “Change in Control” occurred.
Pursuant to the SPA, the Wit Trust and the Company
agreed to fix the number of members of the board of directors of the Company at five (5), three of whom shall be designated by the Wit
Trust and two of whom shall be “independent” and acceptable to the Wit Trust. In addition, the Wit Trust has been accorded
certain registration rights under the Securities Act of 1933, as amended, with respect to the shares of Common Stock issuable upon conversion
of the Preferred Shares and ongoing financial and other information rights with respect to the Company.
On September 30, 2021, the Company completed a private offering which
commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold an aggregate of 2,000,000
Series A Preferred Shares at a purchase price of $1.00 per share (“Private Placement”) in exchange for (i) the payment of
$1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by certain investors during
July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion of an account payable);
and (ii) the surrender of 280,000 units (the “Units”), each Unit consisting of two shares of common stock and one warrant
to purchase an additional share of common stock in accordance with the terms of the subscription agreements for the purchase of the Units
entered into by certain investors and the Company in February through April 2021. The investors in the Private Placement included: Mr.
Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion
of $50,000 promissory note and accounts payable; Kuno van der Post, a member of the Board of Director of the Company, in the amount of
$50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49
in accrued and unpaid interest.
Management Changes
In connection with the consummation of the issuance
and sale of the Preferred Shares to the Wit Trust pursuant to the SPA in May 2021, Alexander M. Salgado stepped down as the Company’s
Chief Executive Officer and director, and Dr. Bao T. Doan and Marc J. Horowitz resigned as directors of the Company. In addition, Michael
Pelletier stepped down as an employee of the Company and entered into a three-month consulting agreement with the Company to continue
as the Company’s Chief Financial Officer until his successor is appointed.
Contemporaneously therewith, Stephen E. Johnson
(“Mr. Johnson”), Kuno D. van der Post (“Mr. van der Post”) and Craig J. Fabel were elected and appointed as the
Wit Trust’s designees on the board of directors. In addition, Mr. Johnson was appointed as Chief Executive Officer and President
of the Company, and Ramon A. Pino (“Mr. Pino”), was appointed as Executive Vice President of Finance, Treasurer and Secretary
of the Company.
Corporate Information
The Company was incorporated in the state of Nevada
on March 15, 2011 under the name Armeau Brands Inc. and changed its name to SanSal Wellness Holdings, Inc. on October 13, 2017. On January
31, 2019, the Company changed its name from SanSal Wellness Holdings, Inc. to Veritas Farms, Inc.
Our executive offices are located at 1815 Griffin
Road, Suite 401, Dania Beach, FL 33004 and our telephone number is (833) 691-4367. Our corporate website is www.theveritasfarms.com.
Information appearing on our website is not part of this Quarterly Report on Form 10-Q.
Results of Operations
The nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020
Revenues. Revenues for the nine months
ended September 30, 2021 decreased to $2,004,071, as compared to revenues of $4,830,523 for the nine months ended September 30, 2020.
The COVID-19 outbreak had an adverse effect on “brick and mortar” sales of our products and the timing of orders from a number
of our retail customers. Sales include bulk oils for wholesale, vegan capsules, tinctures, lotions, salves and pet chews, all in various
potency levels and flavors. In addition to the more established CBD channels, the Company expanded its product lines to include beauty
products, pet chews, pet health and sports through strategic partnerships with contract manufacturers.
Cost of Goods Sold. All expenses incurred
to grow, process, and package the finished goods are included in our cost of goods sold. Cost of goods sold for the nine months ended
September 30, 2021 decreased to $1,287,505 from $2,252,016 for the nine months ended September 30, 2020. The decrease in cost of sales
can be attributed to the decrease in sales during the nine months ended September 30, 2021 as compared to the nine months ended September
30, 2020.
Gross Margin. We had gross profit of $716,566
for the nine months ended September 30, 2021, as compared to gross profit of $2,578,507 for the nine months ended September 30, 2020.
The decrease in gross profit can be attributed to the decrease in sales during the nine months ended September 30, 2021 as compared to
the nine months ended September 30, 2020.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased to $4,360,129 for the nine months ended September 30, 2021, from $7,613,994
for the nine months ended September 30, 2020. This reduction reflects expense reductions, including a reduction in personnel and 20% pay
cuts taken by management and other senior staff in response to the COVID-19 outbreak. General and administrative expenses consist primarily
of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.
Other Income/(Expense). Interest expense
for the nine months ended September 30, 2021 was $97,111, as compared to $97,723 for the nine months ended September 30, 2020. Interest
expense decreased in the 2021 nine month period from the 2020 nine month period primarily due to the interest method amortization of a
beneficial conversion feature. We recorded an extra-ordinary loss on lease termination of $244,840 for the nine months ended September
30, 2021 compared to $-0- for the nine months ended September 30, 2020. We also recorded an extra-ordinary gain on loan forgiveness of
$932,462 for the nine months ended September 30, 2021 compared to $-0- for the nine months ended September 30, 2020 which was primarily
driven by the forgiveness of a loan in the amount of $803,994 received under the U.S. Small Business Administration (“SBA”)
Paycheck Protection Program (“2020 PPP Loan”) as part of the business incentives offered in the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) and all accrued interest.
Net Loss. As a result of all of the foregoing,
net loss for the nine months ended September 30, 2021, increased to ($3,381,921) or ($0.08) per share based on 43,968,420 weighted average
shares outstanding, from ($5,133,210) or ($0.12) per share for the nine months ended September 30, 2020, based on 41,606,299 weighted
average shares outstanding.
The three months ended September 30, 2021
compared to the three months ended September 30, 2020
Revenues. Revenues for the three months
ended September 30, 2021 decreased to $555,870, as compared to revenues of $1,466,824 for the three months ended September 30, 2020. The
COVID-19 outbreak had an adverse effect on “brick and mortar” sales of our products and the timing of orders from a number
of our retail customers. Sales include bulk oils for wholesale, vegan capsules, tinctures, lotions, salves and pet chews, all in various
potency levels and flavors. In addition to the more established CBD channels, the Company expanded its product lines to include beauty
products, pet chews, pet health and sports through strategic partnerships with contract manufacturers.
Cost of Goods Sold. All expenses incurred
to grow, process, and package the finished goods are included in our cost of goods sold. Cost of goods sold for the three months ended
September 30, 2021 decreased to $282,117 from $574,277 for the three months ended September 30, 2020. The decrease in cost of sales can
be attributed to the decrease in sales during the nine months ended September 30, 2021 as compared to the nine months ended September
30, 2020.
Gross Margin. We had gross profit of $273,753
for the three months ended September 30, 2021, as compared to gross profit of $892,547 for the three months ended September 30, 2020.
The decrease in gross profit can be attributed to the decrease in sales during the three months ended September 30, 2021 as compared to
the three months ended September 30, 2020.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses decreased to $1,558,524 for the three months ended September 30, 2021, from $2,429,989
for the three months ended September 30, 2020. This reduction reflects expense reductions, including a reduction in personnel and 20%
pay cuts taken by management and other senior staff in response to the COVID-19 outbreak. General and administrative expenses consist
primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms
brand products.
Other Income/(Expense). Interest expense
for the three months ended September 30, 2021 was $34,801, as compared to $42,464 for the three months ended September 30, 2020. Interest
expense decreased in the 2021 quarter from the 2020 quarter due to the interest method amortization of a beneficial conversion feature
ending in Q1 2021. We also recorded an extra-ordinary gain on loan/debt forgiveness of $109,625 for the three months ended September 30,
2021 compared to $-0- for the three months ended September 30, 2020 which was primarily driven by the forgiveness of accounts payable.
Net Loss. As a result of all the foregoing,
net loss for the three months ended September 30, 2021, increased to ($1,499,097) or ($0.04) per share based on 41,974,977 weighted average
shares outstanding, from ($1,579,906) or ($0.04) per share for the three months ended September 30, 2020, based on 41,646,716 weighted
average shares outstanding.
Liquidity and Capital Resources
As of September 30, 2021, total assets were $11,906,309,
as compared to $12,408,021 at December 31, 2020. The decrease in assets is primarily due to a decrease in right of use assets, net of
accumulated amortization related to the Majestic lease termination.
Total current liabilities as of September 30,
2021 were $2,243,894, as compared to $3,751,963 at December 31, 2020. The decrease was mainly due to the forgiveness of the 2020 PPP Loan
of $803,994.
Net cash used in operating activities was $4,309,998
for the nine months ended September 30, 2021, as compared to $2,470,841 for the nine months ended September 30, 2020. The increase is
largely attributable to the reduction in stock-based compensation and increase in prepaid expenses.
Net cash used in investing activities was $53,898
for the nine months ended September 30, 2021 as compared to net cash used of $77,423 for the nine months ended September 30, 2020, reflecting
reduced capital expenditures in 2021.
Net cash provided by financing activities was
$4,498,499 for the nine months ended September 30, 2021 as compared to $1,535,472 for the nine months ended September 30, 2020. Net cash
provided by financing activities for the nine months ended September 30, 2021 included net proceeds of $803,994 from a loan received under
the SBA Paycheck Protection Program as part of the business incentives offered in the CARES Act received in February 2021, and net proceeds
of $86,895 and $3,665,440 from private offerings of our equity securities. Net cash provided by financing activities for the nine months
ended September 30, 2020 included net proceeds from of a $200,000 convertible loan received in March 2020, the proceeds of $803,994 from
the 2020 PPP Loan received in May 2020, and proceeds from a loan in the amount of $150,000 from the SBA as an Economic Injury Disaster
Loan received in September 2020.
Our primary sources of capital to develop and
implement our business plan and expand our operations have been the proceeds from private offerings of our equity securities and loans
from shareholders.
In March 2020, the Company received a $200,000
loan from a single investor, evidenced by a one-year convertible promissory note (“Convertible Note”). The Convertible Note
bears interest at the rate of ten percent (10%) per annum, which accrues and is payable together with principal at maturity. Principal
and accrued interest under the Convertible Note may, at the option of the holder, be converted in its entirety into shares of our common
stock at a conversion price of $0.40 per share, subject to adjustment for stock splits, stock dividends and similar recapitalization transactions.
On May 14, 2021, the Company paid $20,000 in accrued interest to the holder, and the Company and the investor extended the maturity date
of the Convertible Note to September 6, 2021. In September 2021, the Company and the investor further extended the maturity date of the
Convertible Note to October 1, 2022.
In September 2020, the Company commenced a $4.0
million private offering of up to 8,000,000 Units (“Units”) at a price of $0.50 per Unit, which private offering ended April
30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling the holder to purchase one share of our
common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December 31, 2020, the Company sold 2,080,000 Units
in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. From January
1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105
resulting in net proceeds of $86,895. The terms of this offering provided that, if during the one-year period from the final closing of
the offering, the Company undertakes a subsequent private offering of its equity, equity equivalent or debt securities (a “Subsequent
Offering”), the investor will be entitled to exchange their Units purchased in the offering for an equivalent dollar amount of securities
sold in the Subsequent Offering (based on the respective offering prices). The Company also entered into a registration rights agreement
with these investors which states, among other things, that the Company shall use commercially reasonable efforts to prepare and file
with the United States Securities and Exchange Commission a registration statement covering, among other things, the resale of all or
such portion of the registrable securities that are not then registered on an effective registration statement. As of September 30, 2021,
all Unit holders converted their Units to Series A Preferred Shares.
On May 11, 2021, the Company consummated the issuance
and sale of the Preferred Shares to the Wit Trust described under “Recent Developments” above, which generated gross proceeds
of $2,000,000 (including certain bridge financing previously furnished by the Wit Trust to the Company in April 2021).
On September 30, 2021, the Company completed a
private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold
an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share (“Private Placement”) in exchange
for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by
certain investors during July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion
of an account payable); and (ii) the surrender of 280,000 Units. The investors in the Private Placement included: Mr. Johnson upon the
conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000
promissory note and accounts payable; Mr. van der Post, a member of the Board of Director of the Company, in the amount of $50,000, and;
the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued
and unpaid interest. As a result of the Private Placement and the voting rights accorded the Series A Preferred Shares and Series B Preferred
Shares, the Wit Trust now holds approximately 87% of the voting power of the Company.
Subsequent to September 30, 2021, on October 12,
2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 (the “Secured
Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. The Secured Convertible Promissory
Note is secured by the Company’s assets and contain certain covenants and customary events of default, the occurrence of which could
result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows:
aggregate loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted
in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will
accrue interest on the aggregate amount loaned at a rate of 10% per annum. All unpaid principal, together with any then unpaid and accrued
interest and other amounts payable under the Secured Convertible Promissory Note, is due and payable if not converted pursuant to the
terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default.
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, 2021, the Company had an accumulated deficit of ($30,049,068) and a net loss of ($3,381,921). 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 until we can achieve a level of operational profitability, though there is no
assurance of success.
The Company believes that it will require additional
financing to fund its growth and achieve profitability The Company anticipates that such financing will be generated from subsequent private
offerings of its equity and/or debt securities. While we believe additional financing will be available to us as needed, there can be
no assurance that such financing will be available on commercially reasonable terms or otherwise, when needed. Moreover, any such additional
financing may dilute the interests of existing shareholders. The absence of additional financing, when needed, could substantially harm
the Company, its business, results of operations and financial condition.
Effects of the Coronavirus (COVID-19) Pandemic on the Company
The adverse public health developments and economic
effects of the current COVID-19 pandemic in the United States, could adversely affect the Company’s customers and suppliers as a
result of quarantines, facility closures, closing of “brick and mortar” retail outlets and logistics restrictions imposed
or which otherwise occur in connection with the pandemic. More broadly, the high degree unemployment resulting from the pandemic could
potentially lead to an extended economic downturn, which would likely decrease spending, adversely affect demand for our products and
services and harm our business, results of operations and financial condition. The rapidly changing global market and economic conditions
as a result of the COVID-19 pandemic have negatively impacted, and are expected to continue to negatively impact, our operations and business.
The broader implications of the COVID-19 pandemic and related global economic unpredictability on our business, financial condition, and
results of operations remain uncertain. At this time, we cannot accurately predict the effect the COVID-19 pandemic will have on the Company.
Critical Accounting Policies
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers
(“ASC 606”), the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount
that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the
five-step model prescribed under Accounting Standards Update (“ASU”) 2014-09: (i) identify contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when
the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer.
The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that
it would have recognized is one year or less or the amount is immaterial.
Property, Plant and Equipment
Purchases 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 Statements of Operations.
Depreciation is recognized 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.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates included deferred revenue, costs incurred related to deferred revenue, the useful lives of property and equipment and the useful
lives of intangible assets.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.