Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Veritas
Farms, Inc. (Formerly Known as SanSal Wellness Holdings Inc.) (the “Company”), was incorporated as Armeau Brands Inc.
in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation
with the Nevada Secretary of State changing the name from “Armeau Brands Inc.” to “SanSal Wellness Holdings,
Inc.” The Company’s business objectives are to produce natural rich-hemp products, using strict natural protocols
and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and isolates. The Company is licensed by the
Colorado Department of Agriculture to grow industrial hemp pursuant to Federal law on its farm.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8
of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain
all information and footnotes required by accounting principles generally accepted in the United States of America for annual
financial statements. In the opinion of the Company’s management, the accompanying unaudited financial statements contain
all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company
as of March 31, 2020, and the results of operations and cash flows for the periods presented. The results of operations for the
three months ended March 31, 2020, are not necessarily indicative of the operating results for the full fiscal year or any future
period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related
notes thereto included in the Form 10-K for the year ended December 31, 2019, filed with the SEC on May 15, 2020.
Principles
of Consolidation
The
accompanying consolidated financial statements reflect the accounts of Veritas Farms, Inc. and 271 Lake Davis Holdings and its
wholly owned subsidiary, SanSal, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could
differ from these estimates.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value Measurement
The
Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used
in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value
because the effective yields on these obligations, which include contractual interest rates taken together with other features
such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments
of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The
Company does not have any assets or liabilities measured at fair value on a recurring basis.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times,
cash and cash equivalents may be in excess of FDIC insurance limits.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition
”Under ASC 606, the Company”
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 ASU No. 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.
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.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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 March 31,
2020 and December 31, 2019.
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
(Unaudited)
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 the same manner in which it accounts for employees.
Income
Taxes
The
Company accounts for income taxes under ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is
more likely than not that the Company will not realize tax assets through future operations.
In
accordance with Financial Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax
positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements
to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there
are currently no audits for any tax periods in progress.
Income
tax benefits are recognized for income tax positions taken or expected to be taken in a tax return, only when it is determined
that the income tax position will more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed
tax positions taken for filings with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes
that income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result
in a material adverse effect on the Company’s financial condition, results of operations or cash flows. Accordingly, the
Company has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at March
31, 2020 and December 31, 2019.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases
The
Company has two leased buildings one in Fort Lauderdale, Florida and the other in Aurora, Colorado that are classified as operating
lease right-of use (“ROU”) assets and operating lease liabilities in the Company’s consolidated balance sheet. ROU assets
and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the
commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of Selling, General
and Administrative expenses.
The
standard was effective for us beginning January 1, 2019. The Company elected the available practical expedients on adoption. The
adoption had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated income
statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. Finance
leases are not material to the Company and were not impacted by the adoption of ASC 842, as finance lease liabilities and the
corresponding assets were already recorded in the balance sheet under the previous guidance, ASC 840.
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.
Recent
Accounting Pronouncements
No new pronouncements are applicable to the
Company.
Veritas
Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
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. However, the Company has sustained substantial losses
from operations since its inception. As of and for the three months ended March 31, 2020, the Company had an accumulated deficit
of $21,399,877, and a net loss of $2,325,269. These factors, among others, raise substantial doubt about the ability of the Company
to continue as a going concern. Continuation as a going concern is dependent on the ability to raise additional capital and financing,
though there is no assurance of success. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
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. At this time, we cannot accurately predict the effect the COVID-19 pandemic will have on the Company.
Management’s plans include:
Taking full advantage of all government programs for the COVID – 19 crisis Future equity
raises Future debt raises Rebalancing of Marketing and G&A expenses to mimic current economic environment New and reorder
sales to large retailers.
The
Company’s rebranded line of hemp oil and extract product allowed market penetration into large retail chains vastly increasing
brand exposure and awareness. The initial rollouts have been successful creating opportunities for thousands of new retail outlets
across the country. The shift from smaller order fulfillment to larger “big box store” orders creates an economy of
scale and increased profitability. In addition to the volume transactions of the large retail stores, the Company has also found
success with a direct to consumer approach on their E-Commerce site.
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
3: INVENTORIES
Inventory
consists of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
4,010,239
|
|
|
$
|
4,062,890
|
|
Finished Goods
|
|
|
2,097,896
|
|
|
|
1,983,107
|
|
Other
|
|
|
554,458
|
|
|
|
554,458
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
6,662,593
|
|
|
$
|
6,600,455
|
|
During
the periods ending March 31, 2020 and March 31, 2019 the Company realized a loss from destruction of plants in the amounts of
$0 and $77,387, respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
4: PROPERTY AND EQUIPMENT
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Life
|
|
2020
|
|
|
2019
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
-
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building and Improvements
|
|
39
|
|
|
1,510,175
|
|
|
|
1,510,175
|
|
Greenhouse
|
|
39
|
|
|
965,388
|
|
|
|
920,896
|
|
Fencing and Irrigation
|
|
15
|
|
|
203,793
|
|
|
|
203,793
|
|
Machinery and Equipment
|
|
7
|
|
|
2,480,475
|
|
|
|
2,480,475
|
|
Furniture and Fixtures
|
|
7
|
|
|
269,275
|
|
|
|
236,344
|
|
Computer Equipment
|
|
5
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
5
|
|
|
120,206
|
|
|
|
120,206
|
|
|
|
|
|
$
|
5,967,491
|
|
|
$
|
5,890,068
|
|
Less Accumulated Depreciation
|
|
|
|
|
(1,104,663
|
)
|
|
|
(976,005
|
)
|
Property and Equipment
|
|
|
|
$
|
4,862,828
|
|
|
|
4,914,063
|
|
Total
depreciation expense was $128,658 and $83,998 for the three month period ending March 31, 2020 and 2019, respectively.
NOTE
5: LONG-TERM DEBT
Long-term
debt consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Notes Payable which require monthly payments of $3,690, $669, and $1,691, including interest at 5.16% per annum until December 1, 2022, May 1, 2023, and August 1, 2024, when the balance is due in full. The note is secured by specific assets of the Company.
|
|
|
196,868
|
|
|
|
211,952
|
|
|
|
|
|
|
|
|
|
|
Note Payable which require monthly payments of $758, including
interest at 3.4% per annum until April 1, 2025, when the balance is due in full. The note is secured by specific assets of
the Company.
|
|
|
38,955
|
|
|
|
40,870
|
|
|
|
|
235,823
|
|
|
|
252,822
|
|
Less Current Portion
|
|
|
(67,996
|
)
|
|
|
(67,996
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
167,827
|
|
|
$
|
184,826
|
|
Future
principal payments for the next 5 years are as follows for the years ended December 31:
2020
|
|
$
|
50,997
|
|
2021
|
|
|
67,996
|
|
2022
|
|
|
67,996
|
|
2023
|
|
|
27,299
|
|
2024
|
|
|
18,980
|
|
Thereafter
|
|
|
2,554
|
|
|
|
$
|
235,823
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
6: CONVERTIBLE DEBT
In
March 2020, the Company secured a $200,000 loan from a single investor, evidenced by a one-year 10% convertible promissory note
(the “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 $.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 this note.
NOTE
7: STOCK-BASED COMPENSATION
The
Company approved their 2017 Incentive Stock Plan on September 27, 2017 (the “Incentive Plan”) which authorizes the Company
to grant or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted
stock units and other equity awards up to a total of 45 million shares. Under the terms of the Incentive Plan, awards
may be granted to our employees, directors or consultants. Awards issued under the Incentive Plan vest as determined by the Board
of Directors or any of the Committees appointed under the Incentive Plan at the time of grant.
The
Company’s outstanding stock options have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant
vest on a case by case basis. Outstanding incentive stock options issued to employees vest over a three-year period. The incentive
stock options granted vest based solely upon continued employment (“time-based”). The Company’s time-based share awards
that vest in their entirety at the end of three-year periods, time-based share awards where 33.3% of the award vests on each of
the three anniversary dates. Outstanding incentive stock options issued to executives vest partially upon grant date, with the
residual vesting over the subsequent 6 or 12 months. The Company estimates the fair value of each stock option on the date of grant using the Black Scholes valuation model.
Stock-based
compensation expense was as follows:
|
|
Three Months Ended
|
|
|
|
Mar 31:
|
|
|
|
2020
|
|
|
2019
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
472,726
|
|
|
$
|
661,302
|
|
Incentive Stock Options - Time Bases
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Stock-based Compensation Expense
|
|
$
|
472,726
|
|
|
$
|
661,302
|
|
Stock
option activity was as follows in the periods ended Mar 31, 2020 and December 31, 2019:
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Stock
|
|
|
Average
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
Outstanding at December 31, 2019
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.91
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2020
|
|
|
3,154,407
|
|
|
$
|
1.14
|
|
|
|
8.48
|
|
Exercisable at March 31, 2020
|
|
|
3,154,407
|
|
|
$
|
1.14
|
|
|
|
8.48
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
8: LEASES
We
adopted ASC 842 using the modified retrospective approach, electing the practical expedient that allows us not to restate our
comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842
are not presented for periods before the date of adoption.
The
Company recognized the following related to leases in its Unaudited Consolidated Balance Sheet:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
255,768
|
|
|
$
|
80,046
|
|
Long-term portion
|
|
|
906,020
|
|
|
|
52,798
|
|
|
|
$
|
1,161,788
|
|
|
$
|
132,844
|
|
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 $12,876
and $8,159 for the three month period ending March 31, 2020 and 2019, respectively.
On
June 22, 2018, the Company entered into a sublease agreement with ESDA Inc., a Florida Corporation. The Agreement went into
effect as of July 1, 2018 with a term of three years expiring August 31, 2021. The lease contains annual escalators and
charges Florida sales tax. Total depreciation expense related to the lease was $20,152 and $20,152 for the three month period
ending March 31, 2020 and 2019, respectively.
In
March of 2020, the Company entered into a 61 month lease agreement with Majestic Realty Co. The agreement allows for an
abated first month of rent. The lease contains annual escalators in addition to other periodic payments pertaining to taxes,
utilities, insurance and common area costs. Total depreciation expense related to the lease was $17,198 and $0 for the three
month period ending March 31, 2020 and 2019, respectively. The lease was calculated with a 5% interest rate creating a Right
of Use liability of 1,049,067.
As
of March 31, 2020, and December 31, 2019, operating leases have no minimum rental commitments.
NOTE
9: COMMON STOCK
In
March of 2020, the Company issued 153,279 shares of common stock in accordance with a cashless exercise of warrants.
During
the quarter ending March 31 2019, 191,667 stock warrants were exercised for $115,000.
As
of March 31, 2019, there was a liability of $1,343,125 for funds received from exercising warrants from investors that had not
yet been converted into equity.
In
September of 2019, the board of directors approved an amendment to the Company’s Certificate of Incorporation, as amended,
to effect a 1-for-4 reverse stock split on the issued and outstanding common. All relevant information relating to numbers of
shares and warrants and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods
presented. The reverse split was effected on September 19, 2019.
Veritas Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
10: INCOME TAX
The
reconciliation of income tax computed at the Federal statutory rate to the provision (benefit) for income taxes from continuing
operations is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(500,000
|
)
|
|
$
|
(400,000
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(100,000
|
)
|
|
|
(84,000
|
)
|
Change in valuation allowance
|
|
|
600,000
|
|
|
|
484,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Components of deferred tax assets are as follows:
|
|
Three Months Ended
March 31,
2020
|
|
|
December 31,
2019
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
4,320,000
|
|
|
$
|
3,930,000
|
|
Stock Compensation
|
|
|
980,000
|
|
|
|
910,000
|
|
Accrued Related Party Expenses
|
|
|
15,000
|
|
|
|
-
|
|
Total Deferred Tax Assets
|
|
|
5,315,000
|
|
|
|
4,840,000
|
|
Valuation Allowance
|
|
|
(4,900,000
|
)
|
|
|
(4,300,000
|
)
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
415,000
|
|
|
$
|
540,000
|
|
Depreciation and Amortization
|
|
|
330,000
|
|
|
|
370,000
|
|
Prepaid Expense
|
|
|
85,000
|
|
|
|
170,000
|
|
Total Deferred Tax Liabilities
|
|
|
415,000
|
|
|
|
540,000
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has approximately $16,000,000 net operating loss carryforwards that are available to reduce future taxable income. Those
NOLs begin to expire in 2038. In assessing the realization of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred
tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.
Veritas Farms, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
10: INCOME TAX (CONTINUED)
The
Company’s deferred tax liability associated with timing differences related to depreciation and amortization includes $69,000
of liability resulting from tax depreciation deducted in excess of GAAP depreciation prior to the Company becoming taxed as a
C-Corporation.
The
Company files income tax returns in the U.S. federal jurisdiction, and the state of Colorado.
The
Company adopted the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes. Management evaluated the Company’s
tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements
to comply with the provisions of this guidance. The Company has no significant adjustments as a result of the implementation of
FASB ASC 740.
NOTE
11: CONCENTRATIONS
The
Company had one customer in the three months ended March 31, 2020 accounting for 13% of sales. For the three months ended March
31, 2019, one customer accounted for 10% of sales.
The
Company had three customers at March 31, 2020 accounting for 59%, 11% and 10% of accounts receivable. At December 31, 2019, the
Company had two customers accounting for 46% and 12% of accounts receivable.
NOTE
12: RELATED PARTY
The
Company incurred $57,500 and $37,500 of related party legal expenses during the three month periods ended March 31, 2020 and 2019,
respectively
The
Company issued stock incentives to various directors and employees. Refer to Note 6 for additional details.
NOTE
13: SUBSEQUENT EVENTS
On
April 7, 2020, the Company issued 50,000 shares of common stock for marketing services.
On
May 13, 2020, the Company received loan proceeds of $800,000 pursuant to the U.S. Small Business Administration (“SBA”)
COVID-19 Paycheck Protection Program (PPP). Under the terms of this program, loan proceeds may be forgiven if used for payroll
costs, rent, and utilities within 24 weeks of receipt.