Veritas Farms, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
91,980
|
|
|
$
|
107,693
|
|
Inventories
|
|
|
5,788,338
|
|
|
|
5,891,983
|
|
Accounts Receivable
|
|
|
530,468
|
|
|
|
386,379
|
|
Prepaid Expenses
|
|
|
256,132
|
|
|
|
270,557
|
|
Total Current Assets
|
|
|
6,666,918
|
|
|
|
6,656,612
|
|
|
|
|
|
|
|
|
|
|
PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation of $1,612,153 and $1,483,736 respectively
|
|
|
4,365,953
|
|
|
|
4,494,370
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property
|
|
|
55,000
|
|
|
|
55,000
|
|
Right of Use Assets, net of accumulated amortization
|
|
|
200,080
|
|
|
|
930,826
|
|
Deposits
|
|
|
80,393
|
|
|
|
271,213
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
11,368,344
|
|
|
$
|
12,408,021
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
2,081,790
|
|
|
$
|
2,020,605
|
|
Accrued Expenses
|
|
|
295,241
|
|
|
|
414,777
|
|
Accrued Interest, non related parties
|
|
|
21,556
|
|
|
|
13,677
|
|
Convertible Notes Payable, net of discount of $-0- and $23,750 respectively
|
|
|
200,000
|
|
|
|
176,250
|
|
Deferred Revenue
|
|
|
17,157
|
|
|
|
16,256
|
|
Operating Lease Liability, current portion
|
|
|
86,253
|
|
|
|
240,324
|
|
PPP Loan, current portion
|
|
|
1,607,988
|
|
|
|
803,994
|
|
Long Term Debt, current portion
|
|
|
67,996
|
|
|
|
66,080
|
|
Total Current Liabilities
|
|
|
4,377,981
|
|
|
|
3,751,963
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term Debt, net of current portion
|
|
|
259,611
|
|
|
|
278,527
|
|
Operating Lease Liability, net of current portion
|
|
|
97,737
|
|
|
|
730,164
|
|
Total Liabilities
|
|
|
4,735,329
|
|
|
|
4,760,654
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value, 200,000,000 shares authorized, 46,184,977 and 45,784,977 shares issued and outstanding at March 31, 2021 and December 31, 2020 respectively
|
|
|
46,185
|
|
|
|
45,785
|
|
Additional Paid in Capital
|
|
|
34,408,635
|
|
|
|
34,268,729
|
|
Accumulated Deficit
|
|
|
(27,821,806
|
)
|
|
|
(26,667,147
|
)
|
Total Stockholders’ Equity
|
|
|
6,633,015
|
|
|
|
7,647,367
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
11,368,344
|
|
|
$
|
12,408,021
|
|
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
Veritas Farms, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
March 31
|
|
|
Three Months Ended
March 31
|
|
|
|
2021
|
|
|
2020
|
|
Sales
|
|
$
|
888,261
|
|
|
$
|
1,154,311
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
601,428
|
|
|
|
676,698
|
|
Gross profit
|
|
|
286,833
|
|
|
|
477,613
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
1,166,946
|
|
|
|
2,795,818
|
|
Total Operating Expenses
|
|
|
1,166,946
|
|
|
|
2,795,818
|
|
Operating Loss
|
|
|
(880,113
|
)
|
|
|
(2,318,205
|
)
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
Loss on Lease Termination
|
|
|
244,840
|
|
|
|
-
|
|
Interest Expense – Related Party
|
|
|
-
|
|
|
|
1,644
|
|
Interest Expense – Non Related Party
|
|
|
29,706
|
|
|
|
5,420
|
|
Total Other Expenses
|
|
|
274,546
|
|
|
|
7,064
|
|
Loss before Provision for Income Taxes
|
|
|
(1,154,659
|
)
|
|
|
(2,325,269
|
)
|
Income Tax Provision
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
|
|
(1,154,659
|
)
|
|
|
(2,325,269
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss per Share, Basic and Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
Weighted Average Shares Outstanding, Basic and Diluted
|
|
|
45,836,802
|
|
|
|
41,549,431
|
|
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, 2020
|
|
|
45,784,977
|
|
|
$
|
45,785
|
|
|
$
|
34,268,729
|
|
|
$
|
(26,667,147
|
)
|
|
$
|
7,647,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for Cash
|
|
|
400,000
|
|
|
|
400
|
|
|
|
86,495
|
|
|
|
-
|
|
|
|
86,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
53,412
|
|
|
|
-
|
|
|
|
53,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,154,659
|
)
|
|
|
(1,154,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2021
|
|
|
46,184,977
|
|
|
|
46,185
|
|
|
|
34,408,636
|
|
|
|
(27,821,806
|
)
|
|
|
6,633,015
|
|
|
|
Common Stock
|
|
|
Additional Paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, December 31, 2019
|
|
|
41,421,698
|
|
|
$
|
41,422
|
|
|
$
|
31,228,397
|
|
|
$
|
(19,074,608
|
)
|
|
$
|
12,195,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
472,726
|
|
|
|
-
|
|
|
|
472,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Exercised
|
|
|
153,279
|
|
|
|
153
|
|
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,325,269
|
)
|
|
|
(2,325,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
|
45,784,977
|
|
|
$
|
41,575
|
|
|
$
|
31,700,970
|
|
|
$
|
(21,399,877
|
)
|
|
$
|
10,342,669
|
|
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
Veritas Farms, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
3 Months Ended March 31
|
|
|
|
2021
|
|
|
2020
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,154,659
|
)
|
|
$
|
(2,325,269
|
)
|
Adjustments to Reconcile Net Loss to Net Cash Used Operating Activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
128,417
|
|
|
|
128,658
|
|
Stock-based Compensation
|
|
|
53,412
|
|
|
|
472,726
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
103,646
|
|
|
|
(62,138
|
)
|
Prepaid Expenses
|
|
|
14,425
|
|
|
|
289,384
|
|
Accounts Receivable
|
|
|
(143,186
|
)
|
|
|
40,949
|
|
Deposits
|
|
|
190,820
|
|
|
|
10,983
|
|
Deferred Revenue
|
|
|
-
|
|
|
|
15,559
|
|
Accrued Interest, non related parties
|
|
|
7,879
|
|
|
|
-
|
|
Net change in Operating Lease Assets and Liabilities
|
|
|
(55,753
|
)
|
|
|
(20,122
|
)
|
Accrued Expenses
|
|
|
(119,535
|
)
|
|
|
56,461
|
|
Accounts Payable
|
|
|
61,184
|
|
|
|
309,238
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(913,352
|
)
|
|
|
(1,046,222
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
|
-
|
|
|
|
(77,423
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
(77,423
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments of Long-term Debt
|
|
|
(16,999
|
)
|
|
|
(16,999
|
)
|
Notes Payable
|
|
|
-
|
|
|
|
201,644
|
|
Proceeds from Note Payable
|
|
|
827,744
|
|
|
|
-
|
|
Proceeds from Issuance of Common Stock
|
|
|
86,895
|
|
|
|
-
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
897,640
|
|
|
|
184,645
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(15,712
|
)
|
|
|
(939,000
|
)
|
CASH AND CASH EQUIVALENTS - Beginning of Period
|
|
|
107,693
|
|
|
|
1,076,543
|
|
CASH AND CASH EQUIVALENTS - End of Period
|
|
$
|
91,980
|
|
|
$
|
137,543
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
-
|
|
|
$
|
3,675
|
|
Non-Cash Transactions
|
|
|
|
|
|
|
|
|
Operating Lease Right of Use Asset Obtained in Exchange for Lease Obligations
|
|
$
|
160,476
|
|
|
$
|
1,049,067
|
|
See Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: NATURE OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Veritas Farms, Inc. (formerly known as SanSal
Wellness Holdings, Inc.) (the “Company” or “Veritas FarmsTM”), was incorporated as Armeau Brands Inc.
in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation with
the Nevada Secretary of State changing the name from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.,” and on January 30, 2019, the
Company filed a Certificate of Amendment to the Articles of Incorporation with the Nevada Secretary of State changing the name from SanSal
Wellness Holdings, Inc. to Veritas Farms, Inc. The Company’s business objectives are to produce natural rich-hemp products, using
strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and isolates. The Company
is licensed by the Colorado Department of Agriculture to grow industrial hemp on its 135 acre farm pursuant to Federal law.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for
interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and
Exchange Commission (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, 2021 and March 31, 2020, and the results of operations and cash flows for
the periods presented. The results of operations for the three months ending March 31, 2021, are not necessarily indicative of the operating
results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction
with the financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2020, filed with the
SEC on April 20, 2021.
Principles of Consolidation
The accompanying condensed consolidated financial
statements reflect the accounts of Veritas Farms, Inc. and the company’s wholly owned subsidiary 271 Lake Davis Holdings, LLC, a
Delaware limited liability company (“271 Lake Davis”). All significant inter-company accounts and transactions have been eliminated
in consolidation.
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 Accounting
Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair
value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value
measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of the Company’s
short and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual
interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable
to rates of returns for instruments of similar credit risk.
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.
As of March 31, 2021 and December 31, 2020, the Company had no cash equivalents.
Revenue Recognition
Under ASC 606, Revenue from Contracts with Customers
(“ASC 606”), the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount
that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the
five-step model prescribed under Accounting Standards Update (“ASU”) 2014-09: (i) identify contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when
the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer.
The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that
it would have recognized is one year or less or the amount is immaterial.
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 Condensed Consolidated Financial Statements
(Unaudited)
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, 2021 and December 31, 2020.
Stock-Based Compensation
The Company accounts for share-based payments
in accordance with ASC Topic 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award.
In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company estimates the fair
value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this
model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and
interest rates, and to allow for actual exercise behavior of option holders.
The simplified method is used to determine compensation
expense since historical option exercise experience is limited relative to the number of options issued. The compensation cost is recognized
ratably using the straight-line method over the expected vesting period.
The Company accounts for stock-based compensation
to other than employees in the same manner in which it accounts for stock-based compensation for employees.
Income Taxes
The Company accounts for income taxes under ASC
740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for
certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
In accordance with ASC Topic 740 management evaluated
the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial
statements to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however,
there are currently no audits for any tax periods in progress.
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 March 31, 2021 and December 31, 2020.
Leases
The Company has one leased building in Fort Lauderdale,
Florida that is classified as operating lease right-of use (“ROU”) assets and operating lease liabilities in the Company’s
consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments
over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component
of the agreement. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of Selling,
General and Administrative expenses.
ASC Topic 842, Leases (“ASC 842”) 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 operating lease liabilities and the corresponding assets were already recorded in the balance
sheet under the previous guidance, ASC Topic 840, Leases.
Related Party Transactions
The Company follows ASC 850, 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 for an understanding of the effects of the transactions on the
financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and
the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to
related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
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. As of and for the period ended March 31, 2021,
the Company had an accumulated deficit of $27,821,806, and a net loss of $1,154,659. 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.
In December 2019, a novel strain of coronavirus (COVID-19) emerged.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. The ultimate impact of the
COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and
cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the
severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct,
which may result in an extended period of continued business disruption, and reduced operations. Any resulting financial impact cannot
be reasonably estimated at this time, but it may have a material adverse impact on our business, financial condition and results of operations.
Management expects that its business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the
Company’s business and the duration for which it may have an impact cannot be determined at this time.
MANAGEMENT PLANS
To become market leaders in the market, the Company
will use three primary methods to market its products including: web-based marketing, traditional marketing, and medical marketing.
The Company believes that it will require additional
financing to fund its growth and achieve profitability The Company anticipates that such financing, will be generated from subsequent
public or private offerings of its equity and/or debt securities. Outside financing, in concert with increased profitability of "Big
Box" retail orders and Ecommerce allow management to conclude that the Company will continue as a going concern.
The accompanying financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3: INVENTORIES
Inventory consists of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
4,174,062
|
|
|
$
|
4,202,811
|
|
Finished Goods
|
|
|
1,154,403
|
|
|
|
1,232,944
|
|
Other
|
|
|
459,873
|
|
|
|
456,228
|
|
Inventory
|
|
$
|
5,788,338
|
|
|
$
|
5,891,983
|
|
NOTE 4: PROPERTY AND EQUIPMENT
|
|
Estimated
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Life
|
|
|
2021
|
|
|
2020
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
|
-
|
|
|
$
|
398,126
|
|
|
$
|
398,126
|
|
Building and Improvements
|
|
|
39
|
|
|
|
1,553,722
|
|
|
|
1,553,722
|
|
Greenhouse
|
|
|
39
|
|
|
|
965,388
|
|
|
|
965,388
|
|
Fencing and Irrigation
|
|
|
15
|
|
|
|
203,793
|
|
|
|
203,793
|
|
Machinery and Equipment
|
|
|
7
|
|
|
|
2,480,474
|
|
|
|
2,480,474
|
|
Furniture and Fixtures
|
|
|
7
|
|
|
|
236,344
|
|
|
|
236,344
|
|
Computer Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
120,206
|
|
|
|
120,206
|
|
|
|
|
|
|
|
$
|
5,978,106
|
|
|
$
|
5,978,106
|
|
Less Accumulated Depreciation
|
|
|
|
|
|
|
(1,612,153
|
)
|
|
|
(1,483,736
|
)
|
Property and Equipment
|
|
|
|
|
|
$
|
4,365,953
|
|
|
$
|
4,494,370
|
|
Total depreciation expense was $128,942 and $101,174
for the three month periods ending March 31, 2021 and March 31, 2020, respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5: LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Notes Payable which require monthly payments of $3,058, $555, and $1,415, including interest at 5.16% per annum until December 1, 2022, May 1, 2023, and August 1, 2024, when the balances are due in full. The notes are secured by specific assets of the Company.
|
|
$
|
135,777
|
|
|
$
|
118,627
|
|
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $639, 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.
|
|
|
31,930
|
|
|
|
66,080
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
803,994
|
|
|
|
|
|
|
|
|
|
|
In September 2020, the Company received a 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
|
|
|
|
159,900
|
|
|
|
|
|
|
|
|
|
|
In February 2021, 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 five years. (C)
|
|
|
803,994
|
|
|
|
-
|
|
|
|
|
1,935,595
|
|
|
|
1,148,601
|
|
Less Current Portion
|
|
|
(1,675,984
|
)
|
|
|
(870,074
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
259,611
|
|
|
$
|
278,527
|
|
Future principal payments for the next 5 years
are as follows for the years ended December 31:
|
|
March 31,
2021
|
|
2021
|
|
$
|
25,499
|
|
2022
|
|
|
67,996
|
|
2023
|
|
|
874,747
|
|
2024
|
|
|
836,807
|
|
2025
|
|
|
24,494
|
|
Thereafter
|
|
|
106,052
|
|
|
|
$
|
1,935,595
|
|
(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 utilized the proceeds of
the PPP loan in a manner which should enable qualification as a forgivable loan. However, no assurance can be provided that all or any
portion of the PPP loan will be forgiven. The balance on this PPP loan was $803,994 as of March 31, 2021 and has been classified as a
short-term liability in notes payable.
(B) In September 2020, the Company received a
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 above terms. The first
payment due is deferred two years. The entirety of the loan as of March 31, 2021 has been classified as a long-term liability in notes
payable.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(C) In February 2021, 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 five years. 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 should 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 March 31, 2021 and has been classified
as a short-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 $0 as of March 31, 2021 and $23,750 as of December 31,
2020 on the accompanying balance sheet with amortization to interest expense of $23,750 for the period ended March 31, 2021. As of March
31, 2021, $21,556 of interest has been accrued. As of March 31, 2021, the Company is in default on the Convertible Note which was due
on March 6, 2021. See Note 12: Subsequent Events,
NOTE 7: STOCK-BASED COMPENSATION
The Company approved its 2017 Stock Incentive
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
6,927,747 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.
The Company’s outstanding stock options
typically have a 10-year term. Outstanding non-qualified stock options granted to employees and consultants vest on a case by case basis.
Outstanding incentive stock options issued to employees typically vest over a three-year period. The incentive stock options granted vest
based solely upon continued employment (“time-based”). The Company’s time-based share awards 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 typically 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 periods ended March 31, 2021 and March 31, 2020:
|
|
Three months Ended
March 31:
|
|
|
|
2021
|
|
|
2020
|
|
Total Stock-based Compensation Expense
|
|
$
|
53,412
|
|
|
$
|
472,726
|
|
|
|
|
|
|
|
|
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock option activity was as follows in the period ended March 31,
2021:
|
|
Stock
Options
|
|
|
Weighted-Average
Exercise
|
|
|
Weighted-Average
Remaining
|
|
Outstanding at December 31, 2020
|
|
|
4,193,751
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(18,750
|
)
|
|
$
|
1.51
|
|
|
|
-
|
|
Outstanding at March 31, 2021
|
|
|
4,175,001
|
|
|
$
|
1.14
|
|
|
|
8.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2021
|
|
|
3,903,343
|
|
|
$
|
1.14
|
|
|
|
7.99
|
|
Exercisable at March 31, 2021
|
|
|
3,903,343
|
|
|
$
|
1.14
|
|
|
|
7.99
|
|
Valuation Assumptions
|
|
|
|
Risk-free interest rate
|
|
|
0.36% – 1.79 %
|
|
Expected dividend yield
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
213% to 227 %
|
|
Expected life of stock options (in years)
|
|
|
10
|
|
Stock option activity was as follows in the period ended March 31,
2020:
|
|
Stock
Options
|
|
|
Weighted-Average
Exercise
|
|
|
Weighted-Average
Remaining
|
|
Outstanding at December 31, 2019
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.91
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
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
|
|
Valuation Assumptions
|
|
|
|
Risk-free interest rate
|
|
|
2.14%
– 2.94 %
|
|
Expected dividend yield
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
105%
to 108 %
|
|
Expected life of stock options (in years)
|
|
|
10
|
|
NOTE 8: LEASES
The Company recognized the following related to
leases in its Balance Sheet:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
unaudited
|
|
|
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
Current Portion
|
|
$
|
86,253
|
|
|
$
|
240,324
|
|
Long-term Portion
|
|
|
97,737
|
|
|
|
730,164
|
|
|
|
$
|
183,990
|
|
|
$
|
970,488
|
|
On June 22, 2018, the Company entered into a sublease
agreement with EDSA Inc. for the lease of the Company’s principal executive offices in Fort Lauderdale, Florida. The lease 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 amortization expense related to the lease was $20,152 and $20,152 for the three month period ending March 31, 2021 and
March 31, 2020, respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On December 2, 2019, the Company entered into
a 61 month lease with Majestic Commercenter Phase 9, LLC. (Majestic”), for warehousing, distribution and related administration
office in Aurora, Colorado. The lease 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 amortization expense related to the lease was
$0 and $9,286 for the three month periods ending March 31, 2021 and March 31, 2020, respectively.
On February 10, 2021, the Company entered into
a conditional lease termination agreement with Majestic pursuant to which the Company terminated the lease with Majestic (“Termination
Agreement”). Pursuant to the terms of the Termination Agreement, Veritas Farms made one payment of $125,000 on February 23, 2021.
The final amount of $125,000 was paid to Majestic by April 30, 2021, upon which both parties were released from all further obligations
to each other. The net expense on the termination of the lease was $244,840. The extra-ordinatry expense was reported as Other Expenses,
Loss on Lease Termination - Aurora.
On February 11, 2021, the Company entered into a 3
year lease with Cheyenne Avenue Holdings, LLC for warehouse and distribution facilities. The lease contains annual escalators. The Company
analyzed the classification of the lease under ASC 842, and as it did not meet any of the criteria for a financing lease it has been classified
as an operating lease. The Company determined the Right of Use asset and Lease liability values at inception calculated at the present
value of all future lease payments for the lease term, using an incremental borrowing rate of 5%. The Right of Use Asset value was $160,476
and the Liability was $160,476. The Lease Liability will be expensed each month, on a straight-line basis, over the life of the lease.
Total amortization expense related to the lease was $4,711 and $0 for the three month periods ending March 31, 2021 and March 31, 2020
respectively.
As of March 31, 2021, and December 31, 2020, operating
leases have no minimum rental commitments.
NOTE 9: COMMON STOCK
In September 2019, 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 December 31, 2020, the Company sold 2,080,000 Units in
the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. As of March
31, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105 resulting in net
proceeds of $86,895. The Company also entered into a registration rights agreement with the investors which states, among other things,
that the Company shall use commercially reasonable efforts to prepare and file with the SEC a registration statement covering, among other
things, the resale of all or such portion of the registrable securities that are not then registered on an effective registration statement.
In March of 2020, the Company issued 153,279 shares
of common stock in accordance with a cashless exercise of warrants.
NOTE 10: CONCENTRATIONS
The Company had no single customer in the three
months ended March 31, 2021 that accounted for more than 10% of sales. For the three months ended March 31, 2020, one customer accounted
for 14% of sales.
The Company had two customers at March 31, 2021
accounting for 47% and 23% of accounts receivable. At December 31, 2020, the Company had two customers accounting for 43% and 17% of
accounts receivable.
NOTE 11: RELATED PARTY
A law firm owned by the brother of Alexander
M. Salgado, our Chief Executive Officer, rendered legal services to the Company. The firm incurred expenses in aggregate of $13,825 and
$57,500 for such services during the three month periods ended March 31, 2021 and March 31, 2020, respectively.
The Company issued stock incentives to various
directors and employees.
NOTE
12: SUBSEQUENT EVENTS
On May 11, 2021 (the “Effective Date”),
the Company entered into a Securities Purchase Agreement (the “SPA”) with The Cornelis F. Wit Revocable Living Trust,
of which Cornelis F. Wit is trustee (the “Purchaser”), an existing shareholder, pursuant to which the Company contemporaneously
sold to the Purchaser an aggregate of (a) 2,000,000 shares of its Series A Convertible Preferred Stock (the “Series A Preferred
Shares”); and (b) 1,000,000 shares of its Series B Convertible Preferred Stock (the “Series B Preferred Shares,”
and together with the Series A Preferred Shares, collectively, the “Preferred Shares”) in exchange for (i) the payment
of $2,000,000 (including $302,500 principal plus accrued but unpaid interest in bridge financing provided by the Purchaser to the Company
during April 2021); and (ii) the surrender by the purchaser to the Company of 2,000,000 units (the “Units”), each Unit
consisting of two shares of common stock and one warrant to purchase an additional share of common stock in accordance with the terms
of the subscription agreements for the purchase of the Units entered into by the Purchaser and the Company in September and October 2020.
As a result of the transaction and the voting rights accorded the Preferred Shares as set forth below, the Purchaser now holds approximately
88% of the voting power of the Company and accordingly, a “Change in Control” has occurred.
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Series A Preferred Shares have a stated value
of $1.00 per share. Each Series A Preferred Share is convertible into Common Stock at the option of the holder thereof at a conversion
rate of $0.05 per share of Common Stock. The conversion rate is subject to adjustment in the event of stock splits, stock dividends,
other recapitalizations and similar events, as well as in the event of issuance by the Company of shares of Common Stock or securities
exercisable for, convertible into or exchangeable for Common Stock at an effective price per share less than the conversion rate then
in effect (other than certain customary exceptions). In respect of rights to the payment of dividends and the distribution of assets
in the event of any liquidation, dissolution or winding-up of the Company, the Series A Preferred Shares rank (a) junior to the Company’s
Series B Shares; and (b) senior to (i) the Company’s common stock, par value $0.001 per share (the “Common Stock”)
and any other class or series of stock (including other series of Preferred Stock) of the Company (collectively, “Junior Stock”).
From and after the date of the issuance of Series A Preferred Shares, dividends at the rate per annum of 8%, compounded annually, accrue
daily on the Stated Value (the “Accruing Dividends”). Accruing Dividends shall accrue from day to day, whether
or not declared, and shall be cumulative; provided, however, such Accruing Dividends shall be payable only when, as, and
if declared by the Board of Directors and the Company shall be under no obligation to pay such Accruing Dividends except as set forth
herein. The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the
Company (other than dividends on (a) shares of Series B Preferred Shares; and (b) Common Stock payable in shares of Common Stock) unless
(in addition to the obtaining of any consents required elsewhere in the Articles of Incorporation) the holders of the Series A Preferred
Shares then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred Share
in an amount at least equal to the sum of (a) the amount of the aggregate Accruing Dividends then accrued on such Series A Preferred
Shares and not previously paid; and (b) (i) in the case of a dividend on Common Stock or any class or series that is convertible into
Common Stock, that dividend per Series A Preferred Share as would equal the product of (A) the dividend payable on each share of such
class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock; and (B) the
number of shares of Common Stock issuable upon conversion of a Series A Preferred Share, in each case calculated on the record date for
determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any class or series that is not convertible
into Common Stock, at a rate per Series A Preferred Share determined by (A) dividing the amount of the dividend payable on each share
of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class
or series); and (B) multiplying such fraction by an amount equal to the Stated Value of the Series A Preferred Shares; provided,
that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital
stock of the Company, the dividend payable to the holders of Series A Preferred Shares shall be calculated based upon the dividend on
the class or series of capital stock that would result in the highest Series A Preferred Share.
The Series B Preferred Shares
have a stated value of $1.00 per share. Each Series A Preferred Share is convertible into Common Stock at the option of the holder thereof
at a conversion rate of $0.20 per share of Common Stock. The conversion rate is subject to adjustment in the event of stock splits, stock
dividends, other recapitalizations and similar events, as well as in the event of issuance by the Company of shares of Common Stock or
securities exercisable for, convertible into or exchangeable for Common Stock at an effective price per share less than the conversion
rate then in effect (other than certain customary exceptions). In respect of rights to the payment of dividends and the distribution of
assets in the event of any liquidation, dissolution or winding-up of the Company, the Series B Preferred Shares rank senior to the (a)
Series A Preferred Shares; (b) the Company’s Common Stock and any other class or series of Junior Stock. From and after the date
of the issuance of Series B Preferred Shares, dividends at the rate per annum of 8%, compounded annually, accrue daily on the Stated Value
(the “Accruing Dividends”). Accruing Dividends shall accrue from day to day, whether or not declared, and shall
be cumulative; provided, however, such Accruing Dividends shall be payable only when, as, and if declared by the Board of
Directors and the Company shall be under no obligation to pay such Accruing Dividends except as set forth herein. The Company shall not
declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on
(a) shares of Series B Preferred Shares; and (b) Common Stock payable in shares of Common Stock) unless (in addition to the obtaining
of any consents required elsewhere in the Articles of Incorporation) the holders of the Series B Preferred Shares then outstanding shall
first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred Share in an amount at least equal
to the sum of (a) the amount of the aggregate Accruing Dividends then accrued on such Series B Preferred Shares and not previously paid;
and (b) (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per
Series B Preferred Share as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable,
as if all shares of such class or series had been converted into Common Stock; and (B) the number of shares of Common Stock issuable upon
conversion of a Series B Preferred Share, in each case calculated on the record date for determination of holders entitled to receive
such dividend; or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per Series
B Preferred Share determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock
by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization with respect to such class or series); and (B) multiplying such fraction by
an amount equal to the Stated Value of the Series B Preferred Shares; provided, that if the Company declares, pays or sets aside,
on the same date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders
of Series B Preferred Shares shall be calculated based upon the dividend on the class or series of capital stock that would result in
the highest Series B Preferred Share.
Pursuant to the SPA, the Purchaser and the Company
agreed to fix the number of members of the board of directors of the Company at five (5), three of whom shall be designated by the Purchaser
and two of whom shall be “independent” and acceptable to the Purchaser. In addition, the Purchaser has been accorded
certain registration rights under the Securities Act of 1933, as amended, with respect to the shares of Common Stock issuable upon conversion
of the Preferred Shares and ongoing financial and other information rights with respect to the Company.
On May 14, 2021, the single investor signed a
six-month extension to the $200,000 Convertible Note. The note will become due in September 2021.