Veritas
Farms, Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
Unaudited
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
63,751
|
|
|
$
|
1,076,543
|
|
Inventories
|
|
|
6,449,956
|
|
|
|
6,600,455
|
|
Accounts Receivable, net of Allowance for Doubtful Accounts of $91,335 and $0 respectively
|
|
|
717,483
|
|
|
|
523,033
|
|
Prepaid Expenses
|
|
|
312,750
|
|
|
|
622,922
|
|
Total Current Assets
|
|
|
7,543,940
|
|
|
|
8,822,953
|
|
|
|
|
|
|
|
|
|
|
PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation of $1,362,547 and $976,005 respectively
|
|
|
4,613,059
|
|
|
|
4,914,063
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property
|
|
|
55,000
|
|
|
|
55,000
|
|
Right of Use Assets, net of accumulated amortization
|
|
|
1,002,571
|
|
|
|
134,345
|
|
Deposits
|
|
|
281,213
|
|
|
|
292,196
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
13,495,783
|
|
|
$
|
14,218,557
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,754,649
|
|
|
$
|
1,567,611
|
|
Accrued Expenses
|
|
|
185,625
|
|
|
|
51,240
|
|
Accrued Interest - Related Parties
|
|
|
13,677
|
|
|
|
18,828
|
|
Convertible Notes Payable (Net of discount of $47,500)
|
|
|
152,500
|
|
|
|
-
|
|
Deferred Revenue
|
|
|
116,012
|
|
|
|
-
|
|
Current Portion of Right of Use Lease Liability
|
|
|
256,487
|
|
|
|
80,046
|
|
Current Portion of Long Term Debt
|
|
|
67,996
|
|
|
|
67,996
|
|
Total Current Liabilities
|
|
|
2,546,946
|
|
|
|
1,785,721
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term Debt, net of current portion
|
|
|
1,097,604
|
|
|
|
184,826
|
|
Right of Use Lease Liability, net of current portion
|
|
|
778,415
|
|
|
|
52,798
|
|
Total Liabilities
|
|
|
4,422,965
|
|
|
|
2,023,345
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common Stock, $0.004 par value, 50,000,000 shares authorized, 43,624,977 and 41,421,698 shares issued and outstanding at September 30, 2020 and December 31, 2019 respectively
|
|
|
174,259
|
|
|
|
165,446
|
|
Additional Paid in Capital
|
|
|
33,106,377
|
|
|
|
31,104,373
|
|
Accumulated Deficit
|
|
|
(24,207,818
|
)
|
|
|
(19,074,608
|
)
|
Total Stockholders’ Equity
|
|
|
9,072,818
|
|
|
|
12,195,212
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
13,495,783
|
|
|
$
|
14,218,557
|
|
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
Veritas
Farms, Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Sales
|
|
$
|
1,466,824
|
|
|
$
|
1,215,810
|
|
|
$
|
4,830,523
|
|
|
$
|
5,712,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
574,277
|
|
|
|
720,752
|
|
|
|
2,252,016
|
|
|
|
2,988,793
|
|
Plant Inventory Write-off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,387
|
|
Total Cost of Sales
|
|
|
574,277
|
|
|
|
720,752
|
|
|
|
2,252,016
|
|
|
|
3,066,180
|
|
Gross profit
|
|
|
892,547
|
|
|
|
495,058
|
|
|
|
2,578,507
|
|
|
|
2,645,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
2,429,989
|
|
|
|
4,084,697
|
|
|
|
7,613,994
|
|
|
|
9,380,589
|
|
Total Operating Expenses
|
|
|
2,429,989
|
|
|
|
4,084,697
|
|
|
|
7,613,994
|
|
|
|
9,380,589
|
|
Operating Loss
|
|
|
(1,537,442
|
)
|
|
|
(3,589,639
|
)
|
|
|
(5,035,487
|
)
|
|
|
(6,734,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Disposal of Property and Equipment
|
|
|
-
|
|
|
|
2,207
|
|
|
|
-
|
|
|
|
2,207
|
|
Interest Expense - Related Party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,714
|
|
Interest Expense - Other
|
|
|
42,464
|
|
|
|
3,273
|
|
|
|
97,723
|
|
|
|
12,453
|
|
Total Other Expenses
|
|
|
42,464
|
|
|
|
5,480
|
|
|
|
97,723
|
|
|
|
20,374
|
|
Loss before Provision for Income Taxes
|
|
|
(1,579,906
|
)
|
|
|
(3,595,119
|
)
|
|
|
(5,133,210
|
)
|
|
|
(6,755,058
|
)
|
Income Tax Provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
|
|
(1,579,906
|
)
|
|
|
(3,595,119
|
)
|
|
|
(5,133,210
|
)
|
|
|
(6,755,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Share, Basic and Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.21
|
)
|
Weighted Average Shares Outstanding, Basic and Diluted
|
|
|
41,646,716
|
|
|
|
38,682,615
|
|
|
|
41,606,299
|
|
|
|
32,450,833
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
Veritas
Farms, Inc. and Subsidiary
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
|
|
Common Stock
|
|
|
Additional Paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2019
|
|
|
41,421,698
|
|
|
$
|
165,446
|
|
|
$
|
31,104,373
|
|
|
$
|
(19,074,608
|
)
|
|
$
|
12,195,212
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
472,726
|
|
|
|
-
|
|
|
|
472,726
|
|
Warrants Exercised
|
|
|
153,279
|
|
|
|
613
|
|
|
|
(613
|
)
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,325,269
|
)
|
|
|
(2,325,269
|
)
|
Balance, March 31, 2020
|
|
|
41,574,977
|
|
|
|
166,059
|
|
|
|
31,576,486
|
|
|
|
(21,399,877
|
)
|
|
|
10,342,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for Services
|
|
|
50,000
|
|
|
|
200
|
|
|
|
36,800
|
|
|
|
-
|
|
|
|
37,000
|
|
Beneficial Conversion Feature
|
|
|
-
|
|
|
|
-
|
|
|
|
95,000
|
|
|
|
-
|
|
|
|
95,000
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
407,042
|
|
|
|
-
|
|
|
|
407,042
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,228,035
|
)
|
|
|
(1,228,035
|
)
|
Balance, June 30, 2020
|
|
|
41,624,977
|
|
|
|
166,259
|
|
|
|
32,115,328
|
|
|
|
(22,627,912
|
)
|
|
|
9,653,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for Cash
|
|
|
2,000,000
|
|
|
|
8,000
|
|
|
|
423,895
|
|
|
|
-
|
|
|
|
431,895
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
567,153
|
|
|
|
-
|
|
|
|
567,153
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,579,906
|
)
|
|
|
(1,579,906
|
)
|
Balance, September 30, 2020
|
|
|
43,624,977
|
|
|
$
|
174,259
|
|
|
$
|
33,106,377
|
|
|
$
|
(24,207,818
|
)
|
|
$
|
9,072,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
27,876,208
|
|
|
$
|
111,505
|
|
|
$
|
13,894,844
|
|
|
$
|
(7,927,000
|
)
|
|
$
|
6,079,349
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
661,302
|
|
|
|
|
-
|
|
|
661,302
|
|
Warrants Exercised
|
|
|
191,667
|
|
|
|
767
|
|
|
|
114,233
|
|
|
|
|
-
|
|
|
115,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,826,924
|
)
|
|
|
(1,826,924
|
)
|
Balance, March 31, 2019
|
|
|
28,067,875
|
|
|
|
112,272
|
|
|
|
14,670,379
|
|
|
|
(9,753,924
|
)
|
|
|
5,028,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Exercised
|
|
|
2,326,042
|
|
|
|
9,304
|
|
|
|
1,386,321
|
|
|
|
-
|
|
|
|
1,395,625
|
|
Issuance of Common Stock for Services
|
|
|
15,625
|
|
|
|
63
|
|
|
|
16,812
|
|
|
|
-
|
|
|
|
16,875
|
|
Issuance of Common Stock for Cash
|
|
|
4,434,375
|
|
|
|
17,738
|
|
|
|
6,105,196
|
|
|
|
-
|
|
|
|
6,122,934
|
|
Stock Based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
176,495
|
|
|
|
-
|
|
|
|
176,495
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,333,015
|
)
|
|
|
(1,333,015
|
)
|
Balance, June 30, 2019
|
|
|
34,843,917
|
|
|
|
139,377
|
|
|
|
22,355,203
|
|
|
|
(11,086,939
|
)
|
|
|
11,407,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Exercised
|
|
|
1,290,457
|
|
|
|
5,158
|
|
|
|
(5,158
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of Common Stock for Cash
|
|
|
5,209,479
|
|
|
|
20,841
|
|
|
|
7,216,602
|
|
|
|
-
|
|
|
|
7,237,443
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
820,810
|
|
|
|
-
|
|
|
|
820,810
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,595,119
|
)
|
|
|
(3,595,119
|
)
|
Balance, September 30, 2019
|
|
|
41,343,852
|
|
|
$
|
165,375
|
|
|
$
|
30,387,458
|
|
|
$
|
(14,682,058
|
)
|
|
$
|
15,870,775
|
|
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
Veritas
Farms, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net Loss
|
|
$(5,133,210)
|
|
|
$(6,755,058)
|
|
Adjustments to Reconcile Net Loss to Net Cash
|
|
|
|
|
|
|
|
|
Used Operating Activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
386,542
|
|
|
|
280,340
|
|
Stock-based Compensation
|
|
|
1,446,922
|
|
|
|
1,675,482
|
|
Loss on Disposal of Property and Equipment
|
|
|
-
|
|
|
|
2,207
|
|
Non Cash Interest Expense
|
|
|
47,500
|
|
|
|
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
150,499
|
|
|
|
(3,134,821
|
)
|
Prepaid Expenses
|
|
|
310,172
|
|
|
|
(761,774
|
)
|
Accounts Receivable
|
|
|
(194,450
|
)
|
|
|
(476,996
|
)
|
Deposits
|
|
|
10,984
|
|
|
|
(11,293
|
)
|
Deferred Revenue
|
|
|
116,012
|
|
|
|
(42,750
|
)
|
Accrued Interest – Related Parties
|
|
|
13,677
|
|
|
|
879
|
|
Accrued Expenses
|
|
|
120,711
|
|
|
|
71,127
|
|
Change in Lease Liabilities
|
|
|
71,916
|
|
|
|
(1,276
|
)
|
Accounts Payable
|
|
|
181,884
|
|
|
|
1,338,247
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(2,470,841
|
))
|
|
|
(7,815,686
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
|
(77,423
|
)
|
|
|
(1,283,069
|
)
|
Purchase of Intangible Asset
|
|
|
-
|
|
|
|
(55,000
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(77,423
|
)
|
|
|
(1,338,069
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds From Long-term Debt
|
|
|
159,900
|
|
|
|
(19,658
|
)
|
Proceeds From PPP Loan
|
|
|
803,994
|
|
|
|
|
|
Cash Paid Notes Payable - Related Parties
|
|
|
-
|
|
|
|
(262,924
|
)
|
Loan Payments
|
|
|
(60,317
|
)
|
|
|
-
|
|
Proceeds from Convertible Note Payable
|
|
|
200,000
|
|
|
|
-
|
|
Proceeds from Stock Warrants Exercised
|
|
|
-
|
|
|
|
1,510,625
|
|
Proceeds from Issuance of Common Stock
|
|
|
431,895
|
|
|
|
13,360,377
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,535,472
|
|
|
|
14,588,420
|
|
NET INCREASE / (DECREASE) IN CASH
|
|
|
(1,012,792
|
)
|
|
|
5,434,665
|
|
CASH - Beginning of Period
|
|
|
1,076,543
|
|
|
|
164,086
|
|
CASH - End of Period
|
|
$
|
63,751
|
|
|
$
|
5,598,751
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
13,677
|
|
|
$
|
19,699
|
|
Cash Paid for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing Activities
|
|
|
|
|
|
|
|
|
Operating Lease Right of Use Asset Obtained in Exchange for Lease Obligations
|
|
$
|
928,302
|
|
|
$
|
214,952
|
|
See
Accompanying Notes to Unaudited 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. (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 on its 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 (the “SEC”).
Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the
United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying
unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to
present the financial position of the Company as of September 30, 2020 and September 30, 2019, and the results of operations
and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2020,
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 Form 10-K for the year ended December 31, 2019, filed with the SEC on May 15, 2020.
Principles
of Consolidation
The
accompanying condensed 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.
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.
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
Under
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 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.
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.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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, 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.
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.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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, 2020 and December 31, 2019.
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 under ASC842, Leases. 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, Leases.
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.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed 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. At
September 30, 2020, the Company had an accumulated deficit of ($24,207,818), and a net loss of ($5,133,210) for the nine months
ended September 30, 2020. 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.
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 in 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.
Management’s
plans include but are not limited to the following areas. Over $800,000 of current liabilities are likely to be forgiven with
the proper documentation and usage per the Paycheck Protection Program. The Company anticipates that funding will be
generated from subsequent public or private offerings of its equity and/or debt securities. Financial statements are already
reflecting general and administrative expense rebalancing, including a reduction in personnel and 20% pay cuts taken by
management and other senior staff in response to the COVID-19 outbreak. Large “Big Box” orders are to be
fulfilled in the third quarter in addition to continued new and reorder sales to large retailers. Ecommerce continues to grow
and provide improved margins and with the addition of hand sanitizer all sales platforms are likely to reflect
growth.
NOTE
3: INVENTORIES
Inventory
consists of:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Inventory
|
|
|
|
|
|
|
Work
In Progress
|
|
$
|
4,173,381
|
|
|
$
|
4,062,890
|
|
Finished
Goods
|
|
|
1,493,244
|
|
|
|
1,983,107
|
|
Other
|
|
|
783,331
|
|
|
|
554,458
|
|
Inventory
|
|
$
|
6,449,956
|
|
|
$
|
6,600,455
|
|
During
the nine months ending September 30, 2020 and 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 Condensed Consolidated Financial Statements
(Unaudited)
NOTE
4: PROPERTY AND EQUIPMENT
|
|
Estimated
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
Life
|
|
|
2020
|
|
|
2019
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and Land Improvements
|
|
|
-
|
|
|
$
|
398,126
|
|
|
$
|
398,126
|
|
Building
and Improvements
|
|
|
39
|
|
|
|
1,551,221
|
|
|
|
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
|
|
|
|
236,344
|
|
|
|
236,344
|
|
Computer
Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
120,206
|
|
|
|
120,206
|
|
|
|
|
|
|
|
$
|
5,975,606
|
|
|
$
|
5,890,068
|
|
Less
Accumulated Depreciation
|
|
|
|
|
|
|
(1,362,547
|
)
|
|
|
(976,005
|
)
|
Property
and Equipment
|
|
|
|
|
|
$
|
4,613,059
|
|
|
$
|
4,914,063
|
|
Total depreciation expense was $128,942
and $101,174 for the three month periods and $386,542 and $280,340 for the nine month periods ending September 30, 2020 and 2019,
respectively.
NOTE
5: LONG-TERM DEBT
Long-term
debt consisted of the following:
|
|
September
30,
|
|
|
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.
|
|
$
|
166,702
|
|
|
$
|
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.
|
|
|
35,004
|
|
|
|
40,870
|
|
|
|
|
|
|
|
|
|
|
In
May 2020, the Company received a loan in the amount of $803,994 under the Payroll Protection Program (“PPP Loan”).
The loan accrues interest at a rate of 1% and has an original maturity date of two years which can be extended to five years
by mutual agreement of the Company and SBA. (A)
|
|
|
803,994
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
In
September 2020, the Company received loan in the amount of $159,900 from the Small Business Administration as an Economic
Injury Disaster Loan (“EIDL”). The loan accrues interest at the rate of 3.75% and has an original maturity date
of 30 years. (B)
|
|
|
159,900
|
|
|
|
-
|
|
|
|
|
1,165,600
|
|
|
|
252,822
|
|
Less
Current Portion
|
|
|
(67,996
|
)
|
|
|
(67,996
|
)
|
Long-Term
Debt - net of current portion
|
|
$
|
1,097,604
|
|
|
$
|
184,826
|
|
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Future
principal payments for the next 5 years are as follows for the years ended December 31:
2020
|
|
$
|
33,998
|
|
2021
|
|
|
67,996
|
|
2022
|
|
|
874,747
|
|
2023
|
|
|
32,813
|
|
2024
|
|
|
24,494
|
|
Thereafter
|
|
|
131,552
|
|
|
|
$
|
1,165,600
|
|
(A)
In May 2020, the Company received a loan in the amount of $803,994 under the Payroll Protection Program (“PPP Loan”).
The loan accrues interest at a rate of 1% and has an original maturity date of two years which can be extended to five years by
mutual agreement of the Company and SBA. The 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 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 intends to utilize the proceeds of the PPP loan in a manner which will enable qualification as a forgivable
loan. However, no assurance can be provided that all or any portion of the PPP loan will be forgiven. The balance on this PPP
loan was $803,994 as of September 30, 2020 and has been classified as a long-term liability in notes payable.
(B)
In September 2020, the Company received loan in the amount of $159,900 from the Small Business Administration as an Economic Injury
Disaster Loan (“EIDL”). The loan accrues interest at the rate of 3.75% and has an original maturity date of 30 years.
Up
to $10,000 of the EIDL can be forgiven as long as such funds were utilized to provide working capital. The residual amount of
the loan is payable under the previous terms. The first payment due is deferred one year. The entirety of the loan as of September
30, 2020 has been classified as a long-term liability in notes payable.
NOTE
6: CONVERTIBLE DEBT
In
March 2020, the Company secured a $200,000 loan from a single investor, evidenced by a one-year 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. The note matures on the first anniversary of the original issuance date or
such earlier date on which this Note becomes due in accordance with its terms
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 this note which is
being amortized over the life of the note, using the using the effective interest method. The note is presented net of a
discount of $47,500 on the accompanying balance sheet with amortization to interest of $23,750 for the 3 months and $47,500 for the 9 months ended September
30, 2020.
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 11,250,000 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 at the time of grant by the Board of Directors
or any of the Committees appointed under the Incentive Plan.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 vest over a
three-year period. The incentive stock options granted vest based solely upon continued employment
(“time-based”). The Company’s time-based share awards that vest in their entirety at the end of three-year
periods, time-based share awards where 33.3% of the award vests on each of the three anniversary dates. Outstanding incentive
stock options issued to executives vest partially upon grant date, with the residual vesting over the subsequent 6 or 12
months.
Stock based compensation expense was as follows in the three
month and nine month periods ended September 30, 2020 and September 31, 2019:
|
|
Three Months Ended
September 30:
|
|
|
Nine months Ended
September 30:
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
567,153
|
|
|
$
|
820,881
|
|
|
$
|
1,466,921
|
|
|
$
|
1,658,607
|
|
Incentive Stock Options - Time Based
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total Stock-based Compensation Expense
|
|
$
|
567,153
|
|
|
$
|
820,881
|
|
|
$
|
1,466,921
|
|
|
$
|
1,658,607
|
|
Stock
option activity was as follows in the period ended September 30, 2020:
|
|
Stock Options
|
|
|
Weighted-Average
Exercise
|
|
|
Weighted-Average
Remaining
|
|
Outstanding at December 31, 2019
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.78
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2020
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2020
|
|
|
3,203,886
|
|
|
$
|
1.14
|
|
|
|
7.99
|
|
Exercisable at September 30, 2020
|
|
|
3,203,886
|
|
|
$
|
1.14
|
|
|
|
7.99
|
|
Valuation Assumptions
|
|
|
Risk-free interest rate
|
|
2.14% – 2.94%
|
Expected dividend yield
|
|
0%
|
Expected stock price volatility
|
|
105% to 180%
|
Expected life of stock options (in years)
|
|
10
|
NOTE
8: LEASES
We adopted ASC 842, Leases, using the modified
retrospective approach, electing the practical expedient that allows us to 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 Condensed Consolidated Balance Sheet:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
Current Portion
|
|
$
|
256,487
|
|
|
$
|
80,046
|
|
Long-term Portion
|
|
|
778,415
|
|
|
|
52,798
|
|
|
|
$
|
1,034,902
|
|
|
$
|
132,844
|
|
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 $12,875 and $6,346 for the three month period and $38,625 and $22,664 for the nine
month period ending September 30, 2020 and 2019, respectively.
On September 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 and $60,456 and $60,456 for the nine month period
ending September 30, 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 $51,593 and $0 for the three month period and $123,507 and $0 for the nine month period ending September
30, 2020 and 2019, respectively.
As
of September 30, 2020, and December 31, 2019, operating leases have no minimum rental commitments.
NOTE
9: COMMON STOCK
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.
In 2019, the Company issued 9,643,854 shares
of common stock for proceeds of $15,372,380, net of $1,994,413 issuance costs, and 15,625 shares of common stock for marketing
services valued at $16,875.
In 2019, 3,886,011 stock warrants were
exercised for $1,517,502.
In March of 2020, the Company issued 153,279
shares of common stock in accordance with a cashless exercise of warrants.
In April of 2020, the Company issued 50,000 shares of common
stock for services. Upon grant date the value of the stock was valued at $37,000 based on the market price of $0.74 of the Company’s
common stock.
In September 2020, the Company commenced
a $4.0 million private offering of up to 8,000,000 Units (which may be increased by the Company up to 12,000,000 Units) at a price
of $0.50 per Unit. 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 September 30, 2020 sold
1,000,000 Units in the private offering for net proceeds of $431,895. The Company also entered into a registration rights agreement
with the Investors which states, among other things, that on or prior to the filing date, 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 on such filing date that are not then registered on an effective registration statement.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
10: CONCENTRATIONS
The Company had one customer in the nine
months ended September 30, 2020 that accounted for 19% of sales. For the nine months ended September 30, 2019, one customer accounted
for 25% and another customer accounted for 13% of sales.
The Company had one customer in the
three months ended September 30, 2020 accounting for 8% of sales. For the three months ended September 30, 2019, one
customer accounted for 38% and another customer accounted for 12% of sales.
The
Company had two customers at September 30, 2020 accounting for 23% and 10% of accounts receivable. At December 31, 2019, the Company
had two customers accounting for 46% and 12% of accounts receivable.
NOTE
11: RELATED PARTY
The Company incurred $28,800 and $66,300 of related party legal
expenses during the three month periods ended and $95,500 and $141,300 for the nine month period ending September 30, 2020 and
2019, respectively
The Company issued stock incentives to
various directors and employees. Refer to Note 7 for additional details.
NOTE
12: SUBSEQUENT EVENTS
Under the $4.0 million private offering
that commenced in September 2020, the Company sold 1,000,000 Units. The company received net proceeds of $421,165 and issued 2,000,000
shares of common stock and 1,000,000 warrants with an exercise price of $0.50 with an expiration date of August 31, 2025.
Company has evaluated events and transactions
that occurred after the balance sheet date through the date which these financial statements were issued and determined that no
other subsequent events require disclosure or recognition in the financial statements.