Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature
of Business
Veritas Farms, Inc. f/k/a SanSal Wellness Holdings
Inc.) (the “Company”), was incorporated as Armeau Brands Inc. in the State of Nevada on March 15, 2011. On October
13, 2017, the Company filed Amended and Restated Articles of Incorporation with the Nevada Secretary of State changing the name
from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.” Effective February 5, 2019, the Company changed
its name from “SanSal Wellness Holdings, Inc.” to “Veritas Farms, Inc.” to align with the brand name of
the Company’s products and further promote brand awareness. The Company’s business objectives are to produce natural
rich-hemp products, using strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates
and isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial hemp pursuant to Federal law
on its farm.
Effective
September 27, 2017, the Company acquired 100% of the issued and outstanding limited liability company membership interests of
271 Lake Davis Holdings LLC dba SanSal Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split)
restricted shares of the Company’s common stock, which represented 100% of 271 Lake Davis’s total membership interests
outstanding immediately following the closing of the transaction. The transaction has been accounted for as a reverse merger,
whereby 271 Lake Davis is the accounting survivor and the historical financial statements presented are those of 271 Lake Davis.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. (“U.S. GAAP”).
Principles
of Consolidation
The
accompanying consolidated financial statements reflect the accounts of Veritas Farms, Inc. and 271 Lake Davis Holdings and its
wholly owned subsidiary, SanSal, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could
differ from these estimates.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Fair
Value Measurement
The
Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used
in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value
because the effective yields on these obligations, which include contractual interest rates taken together with other features
such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments
of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The
Company does not have any assets or liabilities measured at fair value on a recurring basis.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times,
cash and cash equivalents may be in excess of FDIC insurance limits.
Revenue
Recognition and Performance Obligations
During
the year ended December 31, 2017 the Company recognized revenue in accordance with ASC 605,
“Revenue Recognition”
.
Revenue was considered realized or realizable and earned when all of the following criteria were met: (1) persuasive evidence
of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products
have been shipped and the customer has taken ownership and assumed risk of loss.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Revenue
Recognition (Continued)
On
January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers” and all the related amendments, which are also codified into ASC 606. The Company elected to adopt this guidance
using the modified retrospective method. The adoption of this guidance did not have a material effect on the Company’s financial
position, results of operations or cash flows. Under the new standard, the Company recognizes a sale as follows:
Hemp
Cultivation and Production
The
Company recognizes revenue from manufacturing and distribution product sales when our customers obtain control of our products.
Revenue from our online store is recorded at the time customers take possession of the product. Revenue is recognized net of discounts,
promotional adjustments and returns. We collect taxes on certain revenue transactions to be remitted to governmental authorities,
which may include sales, excise and local taxes. These taxes are not included in the transaction price and are, therefore, excluded
from revenue. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for
at time of purchase.
Revenue
related to distribution customers is recorded when the customer is determined to have taken control of the product. This determination
is based on the customer specific terms of the arrangement and gives consideration to factors including, but not limited to, whether
the customer has an unconditional obligation to pay, whether a time period or event is specified in the arrangement and whether
the Company can mandate the return or transfer of the products. Revenue is recorded net of taxes collected from customers that
are remitted to governmental authorities with collected taxes recorded as current liabilities until remitted to the relevant government
authority.
Cost
of Goods Sold
Hemp
Cultivation and Production
Cost
of goods sold includes the costs directly attributable to production of inventory such as cultivation costs, extraction costs,
packaging costs, security, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities,
and related costs.
Inventories
Inventories
consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether
inventories are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated
time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion
of management, the value of specific inventory items has been impaired.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Property,
Plant and Equipment
Purchase
of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized.
Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred.
When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or
loss is reported in the
Consolidated Statements of Operations
. Depreciation is provided over the estimated economic useful
lives of each class of assets and is computed using the straight-line method.
Impairment
of Long-Lived Assets
The
carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that
the amortization period may need to be changed. The Company considers internal and external factors relating to each asset, including
cash flows, local market developments, industry trends and other publicly available information. If these factors and the projected
undiscounted cash flows of the Company over the remaining amortization period indicate that the asset will not be recoverable,
the carrying value will be adjusted to the fair market value. The Company has determined that no impairment exists at December
31, 2018 and December 31, 2017.
Compensation
and Benefits
The
Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as earned
by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who
perform similar services to those performed by the Company’s employees.
Stock-Based
Compensation
The
Company accounts for share-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair
Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for
valuation of the share- based payments. The Company believes this model provides the best estimate of fair value due to its ability
to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior
of option holders.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Stock-Based
Compensation (Continued)
The
simplified method is used to determine compensation expense since historical option exercise experience is limited relative to
the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting
period.
The
Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued
to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value
of the equity instruments, and is recognized as expense over the service period.
Income
Taxes
The
Company was a Limited Liability Company (“LLC”) for income tax purposes until September 27, 2017 when the transaction
referred to in Note 1 discussed in the “Nature of Business” occurred. In lieu of corporate income taxes, the owners
were taxed on their proportionate shares of the Company’s taxable income. Accordingly, no liability for federal or state
income taxes and no provision for federal or state income taxes have been included in the financial statements up to that date.
The
Company accounts for income taxes under ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is
more likely than not that the Company will not realize tax assets through future operations.
In
accordance with Financial Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax
positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements
to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there
are currently no audits for any tax periods in progress.
Effective
September 27, 2017 the Company became taxed as a C-Corporation. 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 December 31, 2018 and December 31, 2017.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
Related
Party Transactions
The
Company follows FASB ASC subtopic 850-10, Related Party Disclosures, for the identification of related parties and disclosure
of related party transactions. Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for
which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value
Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts
for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management;
d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party
controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence
the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the
dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any
change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
New
Accounting Pronouncements
In
July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The amendments
in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory
at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course
of business less reasonably predictable costs of completion, disposal, and transportation. This ASU will be effective for the
Company for fiscal years beginning after December 15, 2016. The Company has adopted ASU 2015-11 and it did not have a material
effect on its financial statements.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
|
NOTE
1:
|
NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
New
Accounting Pronouncements (Continued)
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The FASB issued ASU 2016-02 to increase transparency and
comparability among Companies by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition
and measurement of impacted leases. The new guidance is effective for fiscal years and interim periods within those years beginning
after December 15, 2018, with early adoption permitted. Management is currently evaluating the standard.
Subsequent
Events
The
Company has evaluated subsequent events through the date which the financial statements were available to be issued.
NOTE
2: INVENTORIES
Inventory consists of:
|
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Inventory
|
|
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
2,241,554
|
|
|
$
|
1,370,148
|
|
Finished Goods
|
|
|
72,604
|
|
|
|
44,802
|
|
Other
|
|
|
194,796
|
|
|
|
13,808
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
2,508,954
|
|
|
$
|
1,428,758
|
|
During
the periods ending December 31, 2018 and 2017, the Company realized a loss from destruction of plants in the amounts of $0 and
$202,920, respectively.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
NOTE 3: PROPERTY AND EQUIPMENT
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
Life
|
|
|
2018
|
|
|
2017
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and Land Improvements
|
|
|
—
|
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building
and Improvements
|
|
|
39
|
|
|
|
1,465,245
|
|
|
|
1,443,182
|
|
Greenhouse
|
|
|
39
|
|
|
|
693,987
|
|
|
|
693,987
|
|
Fencing
and Irrigation
|
|
|
15
|
|
|
|
203,793
|
|
|
|
185,895
|
|
Machinery
and Equipment
|
|
|
7
|
|
|
|
1,475,644
|
|
|
|
941,702
|
|
Furniture
and Fixtures
|
|
|
7
|
|
|
|
224,682
|
|
|
|
216,116
|
|
Computer
Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
31,161
|
|
|
|
16,161
|
|
|
|
|
|
|
|
$
|
4,512,691
|
|
|
$
|
3,915,222
|
|
Less
Accumulated Depreciation
|
|
|
|
|
|
|
(580,232
|
)
|
|
|
(306,038
|
)
|
Property
and Equipment
|
|
|
|
|
|
$
|
3,932,459
|
|
|
|
3,609,184
|
|
Total
depreciation expense was $274,195 and $232,720 for the years ended December 31, 2018 and 2017, respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4: LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
December 31,
2018
|
|
|
December
31,
2017
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $1,618 including interest at 6.00% per annum until February 1, 2020 when the balance is due in full. The note is secured by specific assets of the Company.
|
|
$
|
99,902
|
|
|
$
|
112,903
|
|
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $3,690 including interest at 5.16% per annum until December 1, 2022 when the balance is due in full. The note is secured by specific assets of the Company.
|
|
|
146,791
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Payable which requires monthly payments of $32,850 until May 2018, when the Company may purchase the equipment for $1. The Company made no payments since August 2016 and was in default with the lessor until December 2018, when the liability was formally forgiven.
|
|
|
—
|
|
|
|
538,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,693
|
|
|
|
651,157
|
|
Less Current Portion
|
|
|
(50,432
|
)
|
|
|
(551,191
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
196,261
|
|
|
$
|
99,966
|
|
Future principal payments for the next
5 years are as follows for the years ended December 31:
2019
|
|
|
$
|
50,432
|
|
2020
|
|
|
|
122,865
|
|
2020
|
|
|
|
36,698
|
|
2021
|
|
|
|
36,698
|
|
Thereafter
|
|
|
|
—
|
|
|
|
|
$
|
246,693
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5: STOCK-BASED COMPENSATION
The Company approved their 2017 Incentive
Stock Plan on September 27, 2017 (the “Incentive Plan”) which authorizes the Company to grant or issue non-qualified
stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards
up to a total of 45 million shares. Under the terms of the Incentive Plan, awards may be granted to our employees, directors
or consultants. Awards issued under the Incentive Plan vest as determined by the Board of Directors or any of the Committees appointed
under the Incentive Plan at the time of grant.
The Company’s outstanding stock options
have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant vested immediately. Outstanding
incentive stock options issued to employees vest over a three-year period. The incentive stock options granted vest based
solely upon continued employment (“time-based”). The Company’s time-based share awards that vest in their entirety at
the end of three-year periods, time-based share awards where 33.3% of the award vests on each of the three anniversary
dates.
|
|
Year
Ended
December
31:
|
|
|
|
2018
|
|
|
2017
|
|
Non-Qualified
Stock Options – Immediate
|
|
$
|
251,023
|
|
|
$
|
194,197
|
|
Incentive
Stock Options - Time Bases
|
|
|
623,620
|
|
|
|
—
|
|
Total
Stock-based Compensation Expense
|
|
$
|
874,643
|
|
|
$
|
194,197
|
|
Stock option activity was as follows in the periods ended December
31, 2018 and December 31, 2017:
|
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise
|
|
|
Weighted-
Average
Remaining
|
|
Outstanding at December 31, 2017
|
|
|
|
3,200,000
|
|
|
$
|
0.08
|
|
|
|
9.75 Years
|
|
Granted
|
|
|
|
6,050,000
|
|
|
$
|
0.35
|
|
|
|
9.60 Years
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
|
9,100,000
|
|
|
$
|
0.26
|
|
|
|
9.30 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2018
|
|
|
|
2,575,000
|
|
|
$
|
0.34
|
|
|
|
9.15 Years
|
|
Exercisable at December 31, 2018
|
|
|
|
2,575,000
|
|
|
$
|
0.34
|
|
|
|
9.15 Years
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5: STOCK BASED COMPENSATION
(CONTINUED)
The Company estimated the fair value of
each stock option on the date of grant using the Black Scholes valuation model with the following assumptions:
Valuation Assumptions
|
|
Risk-free interest rate
|
2.14% – 2.94%
|
Expected dividend yield
|
0%
|
Expected stock price volatility
|
105% - 180%
|
Expected life of stock options (in years)
|
10
|
NOTE 6: OPERATING LEASES
On January 15, 2017, the Company entered
an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s cultivation process. The agreement went
into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026, with an option to extend the lease upon
expiration for 10 additional years. This agreement replaced previously entered agreements with Pueblo, CO Board of Water Works.
The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge of $1,063 per acre for 30 acres. The
minimum service fees and usage charges are subject to escalators for each year based upon percentage increases of Pueblo, CO Board
of Water Works rates from the previous calendar year. Total water lease expense was $44,813 and $48,896 for the years ended December
31, 2018 and 2017, respectively.
As of December 31, 2018 and December 31,
2017, operating leases have no minimum rental commitments.
NOTE 7: COMMON STOCK
Effective September 27, 2017, the Company
acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal
Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split) restricted shares of the Company’s
common stock.
On November 9, 2017, Financial Industry
Regulatory Authority authorized a 6-for-1 forward split of the Company’s issued and outstanding shares of common stock in
the form of a stock dividend. Accordingly, stockholders of the Company as of the record date of November 9, 2017 received five
additional shares of common stock for each share then held. All relevant information relating to number of shares and per share
information have been retrospectively adjusted to reflect the split for all periods presented.
In 2017 the Company issued 1,395,000 shares
of common stock for proceeds of $700,500.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 7: COMMON STOCK (CONTINUED)
In 2018 the Company issued 50,384,833 shares
of common stock for proceeds of $5,532,852, net of $409,495 issuance costs, and 1,225,000 shares of common stock for marketing
services valued at $388,000.
The reconciliation of income tax computed at the Federal statutory
rate to the provision for income taxes from continuing operations is as follows:
|
|
Year Ended
December 31, 2018
|
|
|
Year Ended
December 31, 2017
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(965,000
|
)
|
|
$
|
(518,000
|
)
|
State and local taxes, net of Federal benefit
|
|
$
|
(177,000
|
)
|
|
$
|
(69,000
|
)
|
Change in valuation allowance
|
|
|
1,142,000
|
|
|
|
587,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Components of deferred tax assets are as follows:
|
|
December 31, 2018
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
1,515,000
|
|
|
$
|
397,000
|
|
Accrued Related Party Expenses
|
|
|
5,000
|
|
|
|
—
|
|
Total Deferred Tax Assets
|
|
|
1,520,000
|
|
|
|
397,000
|
|
Valuation Allowance
|
|
|
(1,304,000
|
)
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
216,000
|
|
|
$
|
235,000
|
|
Deferred Tax Liabilities;
|
|
|
—
|
|
|
|
—
|
|
Depreciation and Amortization
|
|
|
200,000
|
|
|
|
235,000
|
|
Prepaid Expense
|
|
|
16,000
|
|
|
|
—
|
|
Total Deferred Tax Liabilities
|
|
|
216,000
|
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 8: INCOME TAX (CONTINUED)
The Company has approximately $5,713,000
net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in 2038. In assessing
the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full
valuation allowance against all of the deferred tax assets for every period because it is more likely than not that all of the
deferred tax assets will not be realized.
The Company’s deferred tax liability
associated with timing differences related to depreciation and amortization includes $69,000 of liability resulting from tax depreciation
deducted in excess of GAAP depreciation prior to the Company becoming taxed as a C-Corporation.
The Company files income tax returns in
the U.S. federal jurisdiction, and the state of Colorado.
The Company adopted the provisions of FASB
ASC 740, A
ccounting for Uncertainty in Income Taxes
. Management evaluated the Company’s tax positions and concluded
that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company has no significant adjustments as a result of the implementation of FASB ASC 740.
NOTE 9: CONCENTRATIONS
The Company had one customer in the year
ended December 31, 2018 accounting for 31% of total sales. In 2017, the Company had one customer accounting for 72% of sales.
The Company had two customers at December
31, 2018 accounting for 30% and 24% of accounts receivable. At December 31, 2017, one customer accounted for 79% of accounts receivable.
NOTE 10: 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. However, the Company has sustained substantial losses from operations since
its inception. As of and for the year ended December 31, 2018, the Company had an accumulated deficit of $7,927,000, and a
net loss of $3,835,983. These factors, among others, raise substantial doubt about the ability of the Company to continue as
a going concern. Continuation as a going concern is dependent on the ability to raise additional capital and financing,
though there is no assurance of success.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 10: GOING CONCERN (CONTINUED)
The Company recently launched a new rebranded
line of hemp oil and extract products as part of the Company’s increased focus on sales and marketing. The rebranded product
line, including new trade name and packaging, is being used to expand the company’s potential customer base. The newly branded
products became available to consumers, retailers, and distributors in the second quarter of 2018, and include vegan capsules,
tinctures, lotions, salves, and oral syringes in various potency levels and flavors.
Currently, the Company incorporates an
aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the market, the Company will use
three primary departments to market its products including: web-based marketing, traditional marketing, and medical marketing departments.
NOTE 11: RELATED PARTY
The Company incurred $239,305 and $152,480
of related party legal expenses during the years ended December 31, 2018 and 2017, respectively for legal services. As of December
31, 2018 and December 31, 2017, the Company had related party legal accruals for $0 and $93,220, respectively.
The Company entered into various note payables
with stockholders of the company between June 2017 and June 2018. The notes bear interest between 2.00% and 3.00% per annum. Principal
and interest are payable in one installment due January 1, 2019. The principal balance due on these notes was $262,924 and $1,030,080
as of December 31, 2018 and December 31, 2017. Interest accrued was $17,949 and $16,230 as of December 31, 2018 and December 31,
2017, respectively. The Company issued stock incentives to various directors and employees. Refer to Note 5 for additional details.
NOTE 12: SUBSEQUENT EVENTS
The Company has evaluated subsequent events
through the date these consolidated financial statements were issued and determined that there were no events requiring adjustment
to our disclosure in the consolidated financial statements.