VERITAS FARMS,
INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| |
June 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
ASSETS |
| |
| | |
| |
CURRENT ASSETS | |
| | |
| |
Cash | |
$ | 164,383 | | |
$ | 481,763 | |
Inventories | |
| 3,447,871 | | |
| 3,211,882 | |
Accounts receivable, net of allowance for doubtful accounts | |
| 337,387 | | |
| 104,773 | |
Prepaid expenses | |
| 208,684 | | |
| 243,273 | |
Total current assets | |
| 4,158,325 | | |
| 4,041,691 | |
Property and equipment, net of accumulated depreciation | |
| 3,568,544 | | |
| 3,858,221 | |
Intangible assets, net of accumulated amortization | |
| 55,000 | | |
| 55,000 | |
Right of use assets, net of accumulated amortization | |
| 334,648 | | |
| 414,317 | |
Other assets | |
| 58,633 | | |
| 228,611 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 8,175,150 | | |
$ | 8,597,840 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable | |
$ | 1,364,879 | | |
$ | 1,423,300 | |
Accrued expenses | |
| 103,011 | | |
| 144,534 | |
Accrued interest | |
| 109,200 | | |
| 28,881 | |
Dividends payable | |
| 394,186 | | |
| 195,830 | |
Convertible notes payable | |
| 200,000 | | |
| 200,000 | |
Deferred revenue | |
| 276,188 | | |
| 4,580 | |
Operating lease liability | |
| 149,993 | | |
| 150,135 | |
Notes payable, current portion | |
| 26,189 | | |
| 61,836 | |
Total current liabilities | |
| 2,623,646 | | |
| 2,209,096 | |
| |
| | | |
| | |
LONG TERM LIABILITIES | |
| | | |
| | |
Notes payable, long term, net of current portion | |
| 150,000 | | |
| 186,592 | |
Convertible notes payable, related parties, long term, net of current portion, net of discount | |
| 2,388,929 | | |
| 308,691 | |
Paycheck Protection Program loan | |
| - | | |
| 803,994 | |
Operating lease liability, net of current portion | |
| 184,655 | | |
| 264,182 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 5,347,230 | | |
| 3,772,555 | |
| |
| | | |
| | |
SHAREHOLDERS' EQUITY | |
| | | |
| | |
Preferred stock, 5,000,000 shares authorized at $0.001 par value | |
| | | |
| | |
Series A convertible preferred stock, 4,000,000 shares authorized, 4,000,000 and 4,000,000 issued and outstanding, respectively, at $0.001 par value | |
| 4,000 | | |
| 4,000 | |
Series B convertible preferred stock, 1,000,000 shares authorized, 1,000,000 and 1,000,000 issued and outstanding, respectively, at $0.001 par value | |
| 1,000 | | |
| 1,000 | |
Common stock, 200,000,000 shares authorized, 41,625,331 and 41,625,331 issued and outstanding, respectively, at $0.001 par value | |
| 41,625 | | |
| 41,625 | |
Additional paid in capital | |
| 38,799,444 | | |
| 38,709,374 | |
Accumulated (deficit) | |
| (36,018,149 | ) | |
| (33,930,714 | ) |
| |
| | | |
| | |
TOTAL SHAREHOLDERS' EQUITY | |
| 2,827,920 | | |
| 4,825,285 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | |
$ | 8,175,150 | | |
$ | 8,597,840 | |
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
VERITAS FARMS, INC. AND
SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| |
For the six months ended | | |
For the three months ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 767,638 | | |
$ | 1,448,201 | | |
$ | 285,552 | | |
$ | 559,940 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of goods sold | |
| 643,641 | | |
| 1,005,388 | | |
| 324,813 | | |
| 403,960 | |
Total cost of goods sold | |
| 643,641 | | |
| 1,005,388 | | |
| 324,813 | | |
| 403,960 | |
| |
| | | |
| | | |
| | | |
| | |
Gross margin/(expense) | |
| 123,997 | | |
| 442,813 | | |
| (39,261 | ) | |
| 155,980 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative | |
| 2,642,727 | | |
| 2,801,605 | | |
| 1,286,634 | | |
| 1,634,659 | |
Total operating expenses | |
| 2,642,727 | | |
| 2,801,605 | | |
| 1,286,634 | | |
| 1,634,659 | |
| |
| | | |
| | | |
| | | |
| | |
Operating (loss) | |
| (2,518,730 | ) | |
| (2,358,792 | ) | |
| (1,325,895 | ) | |
| (1,478,679 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income/(expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense, related parties | |
| (164,827 | ) | |
| (1,661 | ) | |
| (96,215 | ) | |
| (1,661 | ) |
Interest expense | |
| (32,688 | ) | |
| (60,649 | ) | |
| (11,223 | ) | |
| (30,943 | ) |
Derivative (loss) | |
| - | | |
| (7,500 | ) | |
| - | | |
| (7,500 | ) |
Gain on loan forgiveness | |
| 812,981 | | |
| 822,837 | | |
| 812,981 | | |
| 822,837 | |
Gain on disposal | |
| 14,185 | | |
| - | | |
| 14,185 | | |
| - | |
(Loss) on lease termination | |
| - | | |
| (244,840 | ) | |
| - | | |
| - | |
Total other income/(expense) | |
| 629,651 | | |
| 508,187 | | |
| 719,728 | | |
| 782,733 | |
(Loss) before income taxes | |
| (1,889,079 | ) | |
| (1,850,605 | ) | |
| (606,167 | ) | |
| (695,946 | ) |
Income tax provision | |
| - | | |
| - | | |
| - | | |
| - | |
Net (loss) | |
| (1,889,079 | ) | |
| (1,850,605 | ) | |
| (606,167 | ) | |
| (695,946 | ) |
Preferred stock dividends | |
| | | |
| | | |
| | | |
| | |
Preferred stock dividends in arrears | |
| | | |
| | | |
| | | |
| | |
Series A preferred stock | |
| (158,685 | ) | |
| (21,479 | ) | |
| (79,781 | ) | |
| (21,479 | ) |
Series B preferred stock | |
| (39,671 | ) | |
| (10,740 | ) | |
| (19,945 | ) | |
| (10,740 | ) |
Total preferred stock dividends | |
| (198,356 | ) | |
| (32,219 | ) | |
| (99,726 | ) | |
| (32,219 | ) |
Net (loss) attributable to common shareholders | |
$ | (2,087,435 | ) | |
$ | (1,882,824 | ) | |
$ | (705,893 | ) | |
$ | (728,165 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net (loss) per share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.05 | ) | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.02 | ) |
Diluted | |
$ | (0.05 | ) | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.02 | ) |
Weighted average number of shares outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 41,625,331 | | |
| 44,981,662 | | |
| 41,625,331 | | |
| 44,031,131 | |
Diluted | |
| 41,625,331 | | |
| 44,981,662 | | |
| 41,625,331 | | |
| 44,031,131 | |
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY
FOR THE SIX AND THREE MONTH PERIODS ENDED JUNE
30, 2022 AND JUNE 30, 2021
(unaudited)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2022
| |
Preferred Stock | | |
| | |
| | |
| | |
| |
| |
Series A Preferred | | |
Series B Preferred | | |
Common Stock | | |
Additional | | |
| | |
Total | |
| |
Number | | |
$0.001 | | |
Number | | |
$0.001 | | |
Number | | |
$0.001 | | |
paid in | | |
Accumulated | | |
shareholders' | |
| |
of shares | | |
Par value | | |
of shares | | |
Par value | | |
of shares | | |
Par value | | |
capital | | |
(deficit) | | |
equity | |
Balances at December 31, 2021 | |
| 4,000,000 | | |
$ | 4,000 | | |
| 1,000,000 | | |
$ | 1,000 | | |
| 41,625,331 | | |
$ | 41,625 | | |
$ | 38,709,374 | | |
$ | (33,930,714 | ) | |
$ | 4,825,285 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 27,671 | | |
| | | |
| 27,671 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock dividends | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (98,630 | ) | |
| (98,630 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (1,282,912 | ) | |
| (1,282,912 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at March 31, 2022 | |
| 4,000,000 | | |
| 4,000 | | |
| 1,000,000 | | |
| 1,000 | | |
| 41,625,331 | | |
| 41,625 | | |
| 38,737,045 | | |
| (35,312,256 | ) | |
| 3,471,414 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 62,399 | | |
| | | |
| 62,399 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock dividends | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (99,726 | ) | |
| (99,726 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (606,167 | ) | |
| (606,167 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at June 30, 2022 | |
| 4,000,000 | | |
$ | 4,000 | | |
| 1,000,000 | | |
$ | 1,000 | | |
| 41,625,331 | | |
$ | 41,625 | | |
$ | 38,799,444 | | |
$ | (36,018,149 | ) | |
$ | 2,827,920 | |
FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 2021
| |
Preferred Stock | | |
| | |
| | |
| | |
| |
| |
Series A Preferred | | |
Series B Preferred | | |
Common Stock | | |
Additional | | |
| | |
Total | |
| |
Number | | |
$0.001 | | |
Number | | |
$0.001 | | |
Number | | |
$0.001 | | |
paid in | | |
Accumulated | | |
shareholders' | |
| |
of shares | | |
Par value | | |
of shares | | |
Par value | | |
of shares | | |
Par value | | |
capital | | |
(deficit) | | |
equity | |
Balances at December 31, 2020 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| 45,784,977 | | |
$ | 45,785 | | |
$ | 34,268,729 | | |
$ | (26,667,147 | ) | |
$ | 7,647,367 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 53,412 | | |
| | | |
| 53,412 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash | |
| | | |
| | | |
| | | |
| | | |
| 400,000 | | |
| 400 | | |
| 86,495 | | |
| | | |
| 86,895 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (1,154,659 | ) | |
| (1,154,659 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at March 31, 2021 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 46,184,977 | | |
| 46,185 | | |
| 34,408,636 | | |
| (27,821,806 | ) | |
| 6,633,015 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 601 | | |
| | | |
| 601 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Series A preferred stock | |
| 2,000,000 | | |
| 2,000 | | |
| | | |
| | | |
| (4,000,000 | ) | |
| (4,000 | ) | |
| 904,720 | | |
| | | |
| 902,720 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of Series B preferred stock for cash | |
| | | |
| | | |
| 1,000,000 | | |
| 1,000 | | |
| | | |
| | | |
| 901,720 | | |
| | | |
| 902,720 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock dividends | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (32,219 | ) | |
| (32,219 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net (loss) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (695,946 | ) | |
| (695,946 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at June 30, 2021 | |
| 2,000,000 | | |
$ | 2,000 | | |
| 1,000,000 | | |
$ | 1,000 | | |
| 42,184,977 | | |
$ | 42,185 | | |
$ | 36,215,677 | | |
$ | (28,549,971 | ) | |
$ | 7,710,891 | |
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
VERITAS
FARMS, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| |
For the six months ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| |
Net (loss) attributable to common shareholders | |
$ | (2,087,435 | ) | |
$ | (1,882,824 | ) |
Adjustment to reconcile net income/(loss) to net cash provided by/(used in) operating activities | |
| | | |
| | |
Depreciation and amortization | |
| 237,980 | | |
| 261,528 | |
Stock-based compensation | |
| 90,070 | | |
| 54,013 | |
Gain on loan forgiveness | |
| (812,981 | ) | |
| (822,837 | ) |
Dividends payable | |
| 198,356 | | |
| 32,219 | |
Amortization of debt discount | |
| 80,238 | | |
| 23,750 | |
Net change in property and equipment assets upon disposal | |
| 28,076 | | |
| - | |
Net change in operating lease assets and liabilities | |
| - | | |
| (39,662 | ) |
Changes in operating assets and liabilities | |
| | | |
| | |
Inventories | |
| (235,989 | ) | |
| 25,768 | |
Prepaid expenses | |
| 34,589 | | |
| (104,327 | ) |
Accounts receivable | |
| (232,614 | ) | |
| (3,784 | ) |
Other assets | |
| 169,978 | | |
| 192,133 | |
Deferred revenue | |
| 271,608 | | |
| (11,752 | ) |
Accrued interest | |
| 80,319 | | |
| 20,586 | |
Accrued expenses | |
| (32,536 | ) | |
| (227,927 | ) |
Accounts payable | |
| (58,421 | ) | |
| 190,836 | |
Net cash (used in) operating activities | |
| (2,268,762 | ) | |
| (2,292,280 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | |
| | |
Purchase of property and equipment | |
| (5,069 | ) | |
| (37,158 | ) |
Sale of property and equipment | |
| 28,690 | | |
| - | |
Net cash provided by/(used in) investing activities | |
| 23,621 | | |
| (37,158 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Repayments of notes payable | |
| (72,239 | ) | |
| (31,519 | ) |
Proceeds from notes payable | |
| - | | |
| 25,000 | |
Proceeds from convertible notes payable | |
| 2,000,000 | | |
| - | |
Proceeds from Paycheck Protection Program loan | |
| - | | |
| 803,994 | |
Proceeds from issuance of common stock | |
| - | | |
| 86,895 | |
Proceeds from issuance of preferred stock, net of transaction fees | |
| - | | |
| 1,805,440 | |
Net cash provided by financing activities | |
| 1,927,761 | | |
| 2,689,810 | |
| |
| | | |
| | |
Net increase/(decrease) in cash and cash equivalents | |
| (317,380 | ) | |
| 360,372 | |
Cash and cash equivalents at beginning of period | |
| 481,763 | | |
| 107,693 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 164,383 | | |
$ | 468,065 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Income taxes | |
$ | - | | |
$ | - | |
Interest | |
$ | 9,973 | | |
$ | 20,000 | |
| |
| | | |
| | |
Non-cash transactions: | |
| | | |
| | |
Right of use asset and lease liability recognized at issuance | |
$ | - | | |
$ | 160,476 | |
See
Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Veritas
Farms, Inc. (“Company,” “Veritas Farms,” “we,” “us” and “our”), was incorporated
as Armeau Brands Inc. in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended and Restated Articles
of Incorporation with the Nevada Secretary of State changing the name from “Armeau Brands Inc.” to “SanSal Wellness
Holdings, Inc.,” and on January 31, 2019, the Company filed a Certificate of Amendment to the Articles of Incorporation with the
Nevada Secretary of State changing the name from “SanSal Wellness Holdings, Inc.” to “Veritas Farms, Inc.” The
Company’s business objectives are to produce natural rich-hemp products, using natural protocols and materials yielding broad spectrum
phytocannabinoid rich hemp oils, distillates and isolates. The Company is licensed by the Colorado Department of Agriculture to grow
industrial hemp on its 140-acre farm pursuant to federal law.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial statements and with the instructions to Form
10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not contain
all information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of the Company’s management,
the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal
recurring accruals) to present the financial position of the Company as of June 30, 2022 and June 30, 2021, and the results of operations
and cash flows for the periods presented. The results of operations for the six months ending June 30, 2022, are not necessarily indicative
of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should
be read in conjunction with the financial statements and related notes thereto included in the Company’s Form 10-K for the year
ended December 31, 2021.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements reflect the accounts of Veritas Farms, Inc. and its wholly owned subsidiary
271 Lake Davis Holdings, LLC, a Delaware limited liability company. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Estimates
in Financial Statements
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Actual results could differ from these estimates.
Reclassifications
Certain
reclassifications have been made in the 2021 financial statements to conform to the 2022 presentation. These reclassifications
did not have any effect on our net income/(loss) or shareholders’ deficit.
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Fair
Value Measurement
The
Company has adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures
(“ASC 820”), which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring
fair value and expands disclosure of fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these
instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The
Company does not have any assets or liabilities measured at fair value on a recurring basis.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying
amount reported in the accompanying unaudited condensed consolidated balance sheets approximates fair value. At times, cash and cash
equivalents may be in excess of FDIC insurance limits of $250,000. The Company had no cash equivalents as of June 30, 2022 and December
31, 2021.
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.
The
Company’s product revenue is generated primarily through two sales channels, e-commerce sales and wholesale sales. The Company
believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted
by economic factors.
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A
description of the Company’s principal revenue generating activities are as follows:
| ● | E-commerce
sales - consumer products sold through the Company’s online and telephonic channels.
Revenue is recognized when control of the merchandise is transferred to the customer, which
generally occurs upon shipment. Payment is typically due prior to the date of shipment; and |
| | |
| ● | Wholesale
sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue
is recognized when control of the goods is transferred to the customer, in accordance with
the terms of the applicable agreement. Payment terms vary and can typically be 30 days from
the date control over the product is transferred to the customer. |
The
following tables represent a disaggregation of revenue by sales channel:
| |
For the six months ended | | |
For the three months ended | |
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Wholesale revenue | |
$ | 315,740 | | |
$ | 579,880 | | |
$ | 87,876 | | |
$ | 235,008 | |
E-commerce revenue | |
| 451,898 | | |
| 868,321 | | |
| 197,676 | | |
| 324,932 | |
Total revenue | |
$ | 767,638 | | |
$ | 1,448,201 | | |
$ | 285,552 | | |
$ | 559,940 | |
Cost
of Goods Sold
Cost
of goods sold includes the costs directly attributable to production of inventory such as cultivation costs, extraction costs, packaging
costs, security, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities, and related
costs.
Inventories
Inventories
consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories
are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell
such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management,
the value of specific inventory items has been impaired.
Property
and Equipment
Purchases
of property and equipment are recorded at cost. Improvements and replacements of property 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 unaudited
condensed consolidated statements of operations. Depreciation is recognized over the estimated economic useful lives of each class of
assets and is computed using the straight-line method.
Impairment
of Long-Lived Assets
The
carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization
period may need to be changed. The Company considers internal and external factors relating to each asset, including cash flows, local
market developments, industry trends and other publicly available information. If these factors and the projected undiscounted cash flows
of the Company over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted
to the fair market value. The Company has determined that no impairment exists at June 30, 2022 and December 31, 2021.
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and
Hedging Activities.
Applicable
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and
risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at
fair value under other U.S. GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the
same terms as the embedded derivative instrument would be considered a derivative instrument.
The
Company accounts for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from
their host instruments) as follows: the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion
options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized
over the term of the related debt to their stated date of redemption.
The
Company records a discount to convertible notes and convertible preferred stock for the intrinsic value of conversion options embedded
in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction
and the effective conversion price embedded in the instrument, if applicable. Debt discounts under these arrangements are amortized to
noncash interest expense using the effective interest rate method over the term of the related debt to their date of maturity. If a security
or instrument becomes convertible only upon the occurrence of a future event outside the control of the Company, or, is convertible from
inception, but contains conversion terms that change upon the occurrence of a future event, then any contingent beneficial conversion
feature is measured and recognized when the triggering event occurs and contingency has been resolved.
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 services
similar to those performed by the Company’s employees.
Stock-Based
Compensation
The
Company accounts for share-based payments in accordance with ASC 718, Compensation - Stock Compensation, which requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date
fair value of the award. In accordance with ASC 718-10-30-9, Measurement Objective – Fair Value at Grant Date, the Company estimates
the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes
this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility
and interest rates, and to allow for actual exercise behavior of option holders.
Veritas
Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The
simplified method is used to determine compensation expense since historical option exercise experience is limited relative to the number
of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.
The
Company accounts for stock-based compensation to other non-employees in the same manner in which it accounts for stock-based compensation
for employees.
Income
Taxes
The
Company accounts for income taxes under ASC 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company
will not realize tax assets through future operations.
In
accordance with ASC 740, management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain
tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. The Company is subject
to routine audits by taxing jurisdictions; however, there are currently no audits in progress for any open tax periods.
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 June 30, 2022 and December 31, 2021.
Leases
The
Company has two leased buildings that are classified as operating lease right of use (“ROU”) assets and operating lease liabilities
in the Company’s unaudited condensed consolidated balance sheets. ROU assets and lease liabilities are recognized based on the
present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum
lease payments include only the fixed lease component of the agreement. Operating lease expense is recognized on a straight-line basis
over the lease term and is included in Selling, general and administrative expenses.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Related
Party Transactions
The
Company follows ASC 850, Related Party Disclosures, (“ASC 850”) for the identification of related parties and disclosure
of related party transactions. Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which
investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection
of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees,
such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company;
e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
In
accordance with ASC 850, the unaudited condensed consolidated financial statements include disclosures of related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure
of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements.
The disclosures include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such
other information deemed necessary for an understanding of the effects of the transactions on the financial statements; c) the dollar
amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date
of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Impact
of New Accounting Standards
Accounting
standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to
determine their impact, if any, on our financial statements.
In
August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible
debt instruments and convertible preferred stock. Additionally, ASU 2020-06 removes certain settlement conditions that are required for
equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas.
ASU 2020-06 is effective for the Company starting January 1, 2024 and early adoption is allowed. The company is analyzing the effect
of this standard.
NOTE
2: GOING CONCERN
The accompanying financial statements have been
prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. The Company has sustained substantial
losses from operations since its inception. As of and for the period ended June 30, 2022, the Company had an accumulated deficit of $36,018,149,
and a net loss attributable to common shareholders of $2,087,435. These factors, among others, raise substantial doubt about the ability
of the Company to continue as a going concern. A going concern disclosure means that there is substantial doubt that the company can continue
as an ongoing business for the next 12 months from the date the financial statements are issued. Continuation as a going concern is dependent
on the ability to raise additional capital and financing until we can achieve a level of operational profitability, though there is no
assurance of success.
The
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.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Management
Plans
The
Company believes that it will require additional financing to fund its growth and achieve profitability The Company anticipates that
such financing, will be generated from subsequent private offerings of its equity and/or debt securities.
NOTE
3: INVENTORIES
Inventories
consist of:
| |
June 30,
2022 | | |
December 31,
2021 | |
Work in progress | |
$ | 2,245,090 | | |
$ | 1,967,648 | |
Finished goods | |
| 483,000 | | |
| 547,543 | |
Other | |
| 719,781 | | |
| 696,691 | |
Inventories | |
$ | 3,447,781 | | |
$ | 3,211,882 | |
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
4: PROPERTY AND EQUIPMENT
| |
June 30, 2022 | | |
December 31, 2021 | | |
| |
| |
Cost | | |
Accumulated depreciation | | |
Net book value | | |
Cost | | |
Accumulated depreciation | | |
Net book value | | |
Estimated useful life (years) | |
Land and land improvements | |
$ | 398,126 | | |
$ | - | | |
$ | 398,126 | | |
$ | 398,126 | | |
$ | - | | |
$ | 398,126 | | |
| - | |
Buildings and improvements | |
| 1,523,029 | | |
| 225,115 | | |
| 1,297,914 | | |
| 1,520,447 | | |
| 204,350 | | |
| 1,316,097 | | |
| 39 | |
Greenhouse | |
| 965,388 | | |
| 144,138 | | |
| 821,250 | | |
| 965,388 | | |
| 130,647 | | |
| 834,741 | | |
| 39 | |
Fencing and irrigation | |
| 203,793 | | |
| 107,659 | | |
| 96,134 | | |
| 203,793 | | |
| 97,740 | | |
| 106,053 | | |
| 15 | |
Machinery and equipment | |
| 2,212,562 | | |
| 1,330,289 | | |
| 882,273 | | |
| 2,337,950 | | |
| 1,229,585 | | |
| 1,108,365 | | |
| 7 | |
Furniture and fixtures | |
| 230,347 | | |
| 182,345 | | |
| 48,002 | | |
| 230,347 | | |
| 165,892 | | |
| 64,455 | | |
| 7 | |
Computer equipment | |
| 22,038 | | |
| 20,124 | | |
| 1,914 | | |
| 22,038 | | |
| 19,681 | | |
| 2,357 | | |
| 5 | |
Vehicles | |
| 56,058 | | |
| 33,127 | | |
| 22,931 | | |
| 56,058 | | |
| 28,031 | | |
| 28,027 | | |
| 5 | |
Total | |
$ | 5,611,341 | | |
$ | 2,042,797 | | |
$ | 3,568,544 | | |
$ | 5,734,147 | | |
$ | 1,875,926 | | |
$ | 3,858,221 | | |
| | |
Total
depreciation expense was $237,980 and $261,528 for the six month periods ending June 30, 2022 and June 30, 2021, respectively. Total
depreciation expense was $117,943 and $132,586 for the three month periods ending June 30, 2022 and June 30, 2021, respectively.
NOTE
5: NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
The
following tables summarize the notes payable and convertible notes payable outstanding as of June 30, 2022.
| |
| |
| |
| | |
| | |
Non related party | | |
Related party | |
| |
| |
| |
| | |
Ending | | |
| | |
| | |
| | |
| |
Description | |
Origination
date | |
Maturity
date | |
Interest
rate | | |
principal
June 30,
2022 | | |
Current | | |
Long
term | | |
Current | | |
Long
term | |
Note Payable | |
11/29/2018 | |
12/1/2022 | |
| 9 | % | |
$ | 19,157 | | |
$ | 19,157 | | |
$ | - | | |
$ | - | | |
$ | - | |
Note Payable | |
5/10/2019 | |
5/10/2023 | |
| 9 | % | |
| 7,032 | | |
| 7,032 | | |
| - | | |
| - | | |
| - | |
Economic Injury Disaster Loan | |
6/24/2020 | |
6/24/2050 | |
| 4 | % | |
| 150,000 | | |
| - | | |
| 150,000 | | |
| - | | |
| - | |
Total | |
| |
| |
| | | |
$ | 176,189 | | |
$ | 26,189 | | |
$ | 150,000 | | |
$ | - | | |
$ | - | |
| |
| |
| |
| | | |
| | | |
| Non related party | | |
| Related party | |
| |
| |
| |
| | | |
| Ending | | |
| | | |
| | | |
| | | |
| | |
Description | |
Origination
date | |
Maturity
date | |
| Interest
rate | | |
| principal
June 30,
2022 | | |
| Current | | |
| Long
term | | |
| Current | | |
| Long
term | |
Convertible Promissory Note Payable | |
3/6/2020 | |
10/1/2022 | |
| 10 | % | |
$ | 200,000 | | |
$ | 200,000 | | |
$ | - | | |
$ | - | | |
$ | - | |
Secured Convertible Promissory Note Payable | |
10/12/2021 | |
10/1/2024 | |
| 10 | % | |
| 2,750,000 | | |
| - | | |
| - | | |
| - | | |
| 2,750,000 | |
Discount | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| (361,071 | ) |
Total | |
| |
| |
| | | |
$ | 2,950,000 | | |
$ | 200,000 | | |
$ | - | | |
$ | - | | |
$ | 2,388,929 | |
Future
principal payments for the next five years are as follows for the future years ended December 31:
2022 | |
$ | 222,921 | |
2023 | |
| 6,470 | |
2024 | |
| 2,753,324 | |
2025 | |
| 3,451 | |
2026 | |
| 3,582 | |
Thereafter | |
| 136,441 | |
Total | |
$ | 3,126,189 | |
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Paycheck
Protection Program
In
May 2020, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”),
the Company received a loan in the amount of $803,994 under U.S. Small Business Administration (“SBA”) Paycheck Protection
Program (“2020 PPP Loan”). In June 2021, the 2020 PPP Loan principal and all accrued interest totaling $822,837 was forgiven
in full.
In
February 2021, as part of the business incentives offered in the CARES Act, the Company received a second loan in the amount of $803,994
under the SBA Paycheck Protection Program (“2021 PPP Loan”). In April 2022, the 2021 PPP Loan principal and all accrued interest
totaling $812,981 was forgiven in full.
Economic
Injury Disaster Loan
In
June 2020, the Company received a loan in the amount of $150,000 from the SBA as an Economic Injury Disaster Loan (“EIDL”).
The EIDL accrues interest at the rate of three and three quarters percent (3.75%) per annum and has a term of 30 years. The first payment
due is deferred two and a half years. The principal balance of the EIDL as of June 30, 2022 has been classified as a long-term liability
in notes payable.
8%
Secured Convertible Promissory Notes Payable
On
April 19, 2021, the Company issued a secured convertible promissory note in the principal amount of $25,000 to our Chairman of the Board,
Thomas E. Vickers (“Mr. Vickers”). The note carried an interest rate of eight percent (8%) per annum and had a maturity date
of May 19, 2021. On May 19, 2021, the Company and Mr. Vickers extended the maturity date of the note to October 1, 2021. On
September 1, 2021, Mr. Vickers converted the outstanding $25,000 in principal in accordance with the note’s terms and $25,000 in
additional cash consideration in exchange for 50,000 shares of the Company’s Series A Convertible Preferred Stock (“Series
A Preferred Shares”).
On
July 22, 2021, the Company issued secured convertible promissory notes in the aggregate principal amount of $1,075,000 in exchange for
an aggregate amount of $1,075,000, which secured convertible promissory notes were issued to the Cornelis F. Wit Revocable Living Trust,
of which Cornelis F. Wit is trustee (“Wit Trust”), a principal shareholder who holds securities of the Company that constitute
a majority of the voting securities of the Company, in the amount of $1,000,000, Stephen E. Johnson, our former Chief Executive Officer
and President of the Company (“Mr. Johnson”), in the amount of $50,000, and Ramon A. Pino, Chief Financial Officer of the
Company (“Mr. Pino”), in the amount of $25,000. These secured convertible promissory notes accrued interest at eight percent
(8%) per annum and had a maturity date of (i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted the outstanding
$25,000 in principal in accordance with the note’s terms in exchange for 25,000 Series A Preferred Shares. On September 7, 2021,
Mr. Johnson converted the outstanding $50,000 in principal in accordance with the note’s terms in exchange for 50,000 Series A
Preferred Shares. On September 30, 2021, the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series
A Preferred Shares.
On
August 30, 2021, the Company issued a secured convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust.
The note carried an interest rate of eight percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the
Wit Trust converted the outstanding $500,000 in principal in accordance with the note’s terms in exchange for 500,000 Series A
Preferred Shares.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
10%
Convertible Promissory Note Payable
In
March 2020, the Company received a $200,000 loan from a single investor, evidenced by a one-year convertible promissory note (“Convertible
Note”). The Convertible Note bears interest at the rate of ten percent (10%) per annum, which accrues and is payable together with
principal at maturity. Principal and accrued interest under the Convertible Note may, at the option of the holder, be converted in its
entirety into shares of our common stock at a conversion price of $0.40 per share, subject to adjustment for stock splits, stock dividends
and similar recapitalization transactions. On May 14, 2021, the Company paid $20,000 in accrued interest to the holder, and the Company
and the investor extended the maturity date of the Convertible Note to September 6, 2021. In September 2021, the Company and the
investor further extended the maturity date of the Convertible Note to October 1, 2022.
The
Company determined that there was a beneficial conversion feature of $95,000 relating to the Convertible Note which is being amortized
over the life of the note, using the effective interest method. The note is presented net of a discount of $0 as of June 30, 2022 and
$0 as of December 31, 2021 on the accompanying balance sheet with amortization to interest expense of $0 and $23,750 for the six month
periods ended June 30, 2022 and June 30, 2021, respectively.
10%
Secured Convertible Promissory Note Payable
On
October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 (“Secured
Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company
amended the Secured Convertible Promissory Note originally dated October 12, 2021 to increase the total available principal balance to
$3,000,000. The Secured Convertible Promissory Note is secured by the Company’s assets and contains certain covenants and customary
events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible
Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible
Promissory Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price
of $0.05 per share. The Secured Convertible Promissory Note will accrue interest on the aggregate amount loaned at a rate of ten
percent (10%) per annum. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the
Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible
Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default. The Company determined that there was a
beneficial conversion feature of $475,000 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 $361,071 on the accompanying balance sheet with amortization to
interest expense of $80,238 and $0 for the six month periods ended June 30, 2022 and June 30, 2021, respectively. At June 30, 2022, $2,750,000
was outstanding on the Secured Convertible Promissory Note.
NOTE
6: STOCK-BASED COMPENSATION
The
Company approved its 2017 Stock Incentive Plan on September 27, 2017 (“Incentive Plan”) which authorizes the Company to grant
or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and
other equity awards up to a total of 6,867,747 shares of common stock. Under the terms of the Incentive Plan, awards may be granted to
our employees, directors or consultants. Awards issued under the Incentive Plan vest as determined at the time of grant by the Board
of Directors or any 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. The Company’s time-based share awards
typically vest in thirty three and a third percent (33.3%) increments on each of the three anniversary dates of the date of grant.
On
May 12, 2021, the Company granted four non-employee directors with an annual grant of stock options under the Incentive Plan to purchase
100,000 shares of common stock each, at a per share exercise price of $0.16 with a term of ten (10) years, with twenty five percent (25%)
of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company.
On May 12, 2021, the Company also granted (i) Mr. Johnson stock options under the Incentive Plan to purchase 450,000 shares of common
stock, at a per share exercise price of $0.16 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries
of the grant date subject to Mr. Johnson’s continuous service to the Company and (ii) Mr. Pino stock options under the Incentive
Plan to purchase 385,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years. The stock options
will vest ratably on the first three anniversaries of the grant date subject to Mr. Pino’s continuous service to the Company. In
addition the Company also granted 150,000 stock options to purchase shares of common stock at a per share exercise price of $0.38 and
100,000 stock options to purchase shares of common stock at a per share exercise price of $0.11 during the year ended December 31, 2021.
The aggregate fair value for all options granted for the year ended December 31, 2021 was $263,500.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On
January 1, 2022, the Company granted an aggregate 625,000 options to employees, including 300,000 options to Dave Smith, our former Chief
Operating Officer under the Incentive Plan, at a per share exercise price of $0.049 with a term of ten (10) years. The stock options
will vest ratably on the first three anniversaries of the grant date subject to the employee’s continuous service to the Company.
On
June 30, 2022, the Company granted an aggregate 950,000 options to employees and directors, including five non-employee directors with
an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price
of $0.031 with a term of ten (10) years, with twenty five percent (25%) of the options vesting every ninety (90) days following the grant
date subject to the director’s continuous service to the Company. The employee stock options will vest ratably on the first three
anniversaries of the grant date subject to the employee’s continuous service to the Company. The aggregate fair value for all options
granted for the six months ended June 30, 2022 was $58,767.
Total
stock based compensation expense was $90,070 and $54,013 for the six month periods ending June 30, 2022 and June 30, 2021, respectively. Total
stock based compensation expense was $62,399 and $601 for the three month periods ending June 30, 2022 and June 30, 2021, respectively.
The
following table summarizes the stock option activity for the Company’s Incentive Plan:
| |
Number of options | | |
Weighted average exercise price (per share) | | |
Weighted average remaining contractual term (in years) | |
| |
| | |
| | |
| |
Outstanding at December 31, 2020 | |
| 4,193,750 | | |
$ | 1.11 | | |
| 8.03 | |
Granted | |
| 1,485,000 | | |
| 0.18 | | |
| 9.31 | |
Exercised | |
| - | | |
| - | | |
| | |
Forfeited/cancelled/expired | |
| (489,583 | ) | |
| 1.04 | | |
| | |
Outstanding at December 31, 2021 | |
| 5,189,167 | | |
| 0.86 | | |
| 7.71 | |
Granted | |
| 1,575,000 | | |
| 0.04 | | |
| 9.80 | |
Exercised | |
| - | | |
| - | | |
| | |
Forfeited/cancelled/expired | |
| (41,667 | ) | |
| 2.09 | | |
| | |
Outstanding at June 30, 2022 | |
| 6,722,500 | | |
$ | 0.66 | | |
| 7.82 | |
| |
| | | |
| | | |
| | |
Vested and exercisable at June 30, 2022 | |
| 4,605,417 | | |
$ | 0.93 | | |
| 7.03 | |
Below
are the assumptions for the fair value of share-based payments for the six month period ended June 30, 2022 and the year ended December
31, 2021.
| |
Stock option assumptions for the period ended | |
Stock option assumptions | |
June 30,
2022 | | |
December 31,
2021 | |
Risk-free interest rate | |
| 2.80 | % | |
| 1.20 | % |
Expected dividend yield | |
| 0.0 | % | |
| 0.0 | % |
Expected volatility | |
| 170.0 | % | |
| 183.8 | % |
Expected life of options (in years) | |
| 10 | | |
| 10 | |
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
NOTE
7: LEASES
On
June 22, 2018, the Company entered into a sublease agreement with EDSA Inc. for the lease of principal executive offices for the Company
in Fort Lauderdale, Florida. The lease contained annual escalators and charged Florida sales tax. The lease went into effect as of July
1, 2018 and expired pursuant to the terms of the lease on August 31, 2021.
On
December 2, 2019, the Company entered into a 61 month lease with Majestic Commercenter Phase 9, LLC. (“Majestic”), for warehousing,
distribution and related administration office in Aurora, Colorado. The lease allowed for an abated first month of rent. The lease contained
annual escalators in addition to other periodic payments pertaining to taxes, utilities, insurance and common area costs. On February
10, 2021, the Company entered into a conditional lease termination agreement with Majestic pursuant to which the Company terminated the
lease with Majestic (“Majestic Termination Agreement”). Pursuant to the terms of the Majestic Termination Agreement, the
Company made a payment of $125,000 on February 23, 2021 and a final payment of $125,000 on April 30, 2021, upon which both parties were
released from all further obligations to each other. The net expense on the termination of the lease was $244,840. The expense was reported
as Other income/(expense), loss on lease termination.
On
February 11, 2021, the Company entered into a three year lease with Cheyenne Avenue Holdings, LLC for warehouse and distribution facilities.
The lease contains annual escalators. The Company analyzed the classification of the lease under ASC 842, Leases (“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 ROU asset and lease liability values at inception by calculating the present value of all future lease payments for the lease term,
using an incremental borrowing rate of five percent (5%). The ROU 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.
On
September 8, 2021, the Company entered into a thirty nine month lease with 1815 Building Company, for the lease of the Company’s
principal executive offices in Dania Beach, Florida. The lease contains annual escalators and charges Florida sales tax. The lease commenced
into effect on October 12, 2021 and expires on January 31, 2025. 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 ROU asset and lease liability values at inception by calculating the present value of all future lease payments for the lease term,
using an incremental borrowing rate of five percent (5%). The ROU asset value was $298,364 and the liability was $298,364. The lease
liability will be expensed each month, on a straight-line basis, over the life of the lease.
Total
lease amortization expense was $79,668 and $83,038 for the six month periods ending June 30, 2022 and June 30, 2021, respectively. Total
lease amortization expense was $40,069 and $49,353 for the three month periods ending June 30, 2022 and June 30, 2021, respectively.
As
of June 30, 2022, and December 31, 2021, operating leases have no minimum rental commitments.
NOTE
8: SHAREHOLDERS’ (DEFICIT)
Our
authorized capital stock consists of 200,000,000 shares of common stock, $0.001 par value per share and 5,000,000 shares of preferred
stock, par value $0.001 per share, of which 4,000,000 shares of preferred stock have been designated as Series A Convertible Preferred
Stock and 1,000,000 shares of preferred stock have been designated as Series B Convertible Preferred Stock.
As
of June 30, 2022 we had the following issued and outstanding securities:
|
● |
41,625,331 shares
of common stock; |
|
● |
4,000,000
shares of Series A Convertible Preferred Stock; |
|
● |
1,000,000
shares of Series B Convertible Preferred Stock; |
|
● |
2,595,270
warrants to purchase shares of our common stock; |
|
● |
6,722,500
options to purchase shares of our common stock; and |
| ● | $2,950,000 principal amount of convertible promissory notes convertible into 55,500,000 shares of common stock. |
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Common
Stock
In
September 2020, the Company commenced a $4.0 million private offering of up to 8,000,000 Units (“Units”) at a price of $0.50
per Unit, which private offering ended April 30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling
the holder to purchase one share of our common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December
31, 2020, the Company sold 2,080,000 Units in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting
in net proceeds of $885,035. From January 1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds
of $100,000 with offering costs of $13,105 resulting in net proceeds of $86,895. The terms of this offering provided that, if during
the one-year period from the final closing of the offering, the Company undertakes a subsequent private offering of its equity, equity
equivalent or debt securities (“Subsequent Offering”), the investor will be entitled to exchange their Units purchased in
the offering for an equivalent dollar amount of securities sold in the Subsequent Offering (based on the respective offering prices).
The Company also entered into a registration rights agreement with the investors which states, among other things, that the Company shall
use commercially reasonable efforts to prepare and file with the SEC a registration statement covering, among other things, the resale
of all or such portion of the registrable securities that are not then registered on an effective registration statement. As of September
30, 2021, all Unit holders converted their Units into Series A Preferred Shares.
Preferred
Stock
On
October 13, 2017, the Company filed Amended and Restated Articles of Incorporation of the Company which authorized preferred stock consisting
of 5,000,000 shares, par value $0.001 per share, issuable from time to time in one or more series. On May 10, 2021, the Company filed
a Certificate of Amendment to the Articles of Incorporation designating 4,000,000 shares of preferred stock as Series A Convertible Preferred
Stock and 1,000,000 shares of preferred stock as Series B Convertible Preferred Stock.
On
May 11, 2021, the Company entered into a Securities Purchase Agreement with the Wit Trust, pursuant to which the Company contemporaneously
sold to the Wit Trust an aggregate of (a) 2,000,000 Series A Preferred Shares; and (b) 1,000,000 shares of its Series B Convertible Preferred
Stock (“Series B Preferred Shares”) in exchange for (i) the payment of $2,000,000 (including $302,500 principal plus accrued
but unpaid interest in bridge financing provided by the Wit Trust to the Company during April 2021); and (ii) the surrender by the Wit
Trust to the Company of 2,000,000 Units, in accordance with the terms of the subscription agreements for the purchase of the Units entered
into by the Wit Trust and the Company in September and October 2020. As a result of the transaction and the voting rights accorded the
Series A Preferred Shares and Series B Preferred Shares as set forth below, the Wit Trust then held approximately eighty eight percent
(88%) of the voting power of the Company and accordingly, a “Change in Control” occurred.
On
September 30, 2021, the Company completed a private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain
investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share
(“2021 Private Placement”) in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued
but unpaid interest in bridge financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’
secured convertible promissory notes, and conversion of an account payable); and (ii) the surrender of 280,000 Units, in accordance with
the terms of the subscription agreements for the purchase of the Units entered into by certain investors and the Company in February
through April 2021. The investors in the 2021 Private Placement included: Mr. Johnson upon the conversion of $50,000 promissory note;
Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000 promissory note and accounts payable;
Kuno van der Post, a member of the Board of Directors of the Company (“Dr. van der Post”), in the amount of $50,000, and;
the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued
and unpaid interest.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Series
A Convertible Preferred Stock
The
Series A Preferred Shares have a stated value of $1.00 per share. Each Series A Preferred Share is convertible into the Company’s
common stock 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 Preferred Shares; and (b) senior to (i) the Company’s common stock and any
other class or series of stock (including other series of Preferred Stock) of the Company (collectively, “Junior Stock”).
From and after the date of the issuance of Series A Preferred Shares, dividends at the rate per annum of eight percent (8%), compounded
annually, accrue daily on the stated value (“Series A Accruing Dividends”). Series A Accruing Dividends shall accrue from
day to day, whether or not declared, and shall be cumulative; provided, however, such Series A 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 Series A 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 Series A Accruing Dividends then
accrued on such Series A Preferred Shares and not previously paid; and (b) (i) in the case of a dividend on common stock or any class
or series that is convertible into common stock, that dividend per Series A Preferred Share as would equal the product of (A) the dividend
payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted
into common stock; and (B) the number of shares of common stock issuable upon conversion of a Series A Preferred Share, in each case
calculated on the record date for determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any
class or series that is not convertible into common stock, at a rate per Series A Preferred Share determined by (A) dividing the amount
of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series
of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization
with respect to such class or series); and (B) multiplying such fraction by an amount equal to the stated value of the Series A Preferred
Shares; provided, that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class
or series of capital stock of the Company, the dividend payable to the holders of Series A Preferred Shares shall be calculated based
upon the dividend on the class or series of capital stock that would result in the highest Series A Preferred Share dividend. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation event, (collectively,
a “Liquidation Event”), the holders of Series A Preferred Shares shall be entitled to receive, after payment to all holders
of Series B Preferred Shares of a liquidation preference equal to the aggregate amount of one hundred fifty percent (150%) of the stated
value of the Series B Preferred Shares and the amount of the accrued but unpaid dividends on the Series B Preferred Shares, but prior
and in preference to any distribution of any of the assets of the Company to the holders of Junior Stock by reason of their ownership
thereof, an aggregate amount per share equal to the stated value of the Series A Preferred Shares and the accrued but unpaid dividends
thereon. After the payment to all holders of Series B Preferred Shares of a liquidation preference equal to the aggregate amount of one
hundred fifty percent (150%) of the stated value of the Series B Preferred Shares and the amount of the accrued but unpaid dividends
on the Series B Preferred Shares and to all holders of the Series A Preferred Shares the full liquidation preference hereunder, the remaining
assets of the Company available for distribution to its shareholders shall be distributed among the holders of the shares of Series B
Preferred Shares and Junior Stock, pro rata, on an “as converted basis,” determined immediately prior to such Liquidation
Event, and the Series A Preferred Shares shall not be entitled to participate in such distribution of the remaining assets of the Company. The
Series A Preferred Shares shall vote together with holders of Series B Preferred Shares and holders of common stock as a single class
on all matters brought to a vote of shareholders. Each Series A Preferred Share shall entitle the holder thereof to such number of votes
as equal the number of shares of common stock then issuable upon conversion of the Series A Preferred Share. The Series A Preferred Shares
also contain protective provisions which provide that the Company shall not undertake certain transactions without the prior approval
of the holder(s) of a majority of the Series A Preferred Shares.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Series
B Convertible Preferred Stock
The
Series B Preferred Shares have a stated value of $1.00 per share. Each Series B Preferred Share is convertible into common stock at the
option of the holder thereof at a conversion rate of $0.20 per share of common stock. The conversion rate is subject to adjustment in
the event of stock splits, stock dividends, other recapitalizations and similar events, as well as in the event of issuance by the Company
of shares of common stock or securities exercisable for, convertible into or exchangeable for common stock at an effective price per
share less than the conversion rate then in effect (other than certain customary exceptions). In respect of rights to the payment of
dividends and the distribution of assets in the event of any liquidation, dissolution or winding-up of the Company, the Series B Preferred
Shares rank senior to the (a) Series A Preferred Shares; (b) the Company’s common stock and any other class or series of Junior
Stock. From and after the date of the issuance of Series B Preferred Shares, dividends at the rate per annum of eight percent (8%), compounded
annually, accrue daily on the stated value (“Series B Accruing Dividends”). Series B Accruing Dividends shall accrue from
day to day, whether or not declared, and shall be cumulative; provided, however, such Series B 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 Series B 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 Series B Accruing Dividends then
accrued on such Series B Preferred Shares and not previously paid; and (b) (i) in the case of a dividend on common stock or any class
or series that is convertible into common stock, that dividend per Series B Preferred Share as would equal the product of (A) the dividend
payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted
into common stock; and (B) the number of shares of common stock issuable upon conversion of a Series B Preferred Share, in each case
calculated on the record date for determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any
class or series that is not convertible into common stock, at a rate per Series B Preferred Share determined by (A) dividing the amount
of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series
of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization
with respect to such class or series); and (B) multiplying such fraction by an amount equal to the stated value of the Series B Preferred
Shares; provided, that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class
or series of capital stock of the Company, the dividend payable to the holders of Series B Preferred Shares shall be calculated based
upon the dividend on the class or series of capital stock that would result in the highest Series B Preferred Share dividend. In the
event of a Liquidation Event, the holders of Series B Preferred Shares shall be entitled to receive, prior and in preference to any distribution
of any of the assets of the Company to the holders of Junior Stock (including Series A Preferred Shares), a liquidation preference equal
to the aggregate amount of one hundred fifty percent (150%) of the stated value of the Series B Preferred Shares and the amount of the
accrued but unpaid dividends on the Series B Preferred Shares. After the payment to all holders of Series B Preferred Shares of such
liquidation preference and to all holders of the Series A Preferred Shares their full liquidation preference, the remaining assets of
the Company available for distribution to its shareholders shall be distributed among the holders of the shares of Series B Preferred
Shares and Junior Stock other than Series A Preferred Shares, pro rata, on an “as converted basis,” as applicable. The Series
B Preferred Shares shall vote together with holders of Series A Preferred Shares and holders of common stock as a single class on all
matters brought to a vote of shareholders. Each Series B Preferred Share shall entitle the holder thereof to such number of votes as
equal the number of shares of common stock then issuable upon conversion of the Series B Preferred Share multiplied by 50. The Series
B Preferred Shares also contain protective provisions which provide that the Company shall not undertake certain transactions without
the prior approval of the holder of the Series B Preferred Shares.
Preferred
Stock Dividends
The
following table presents undeclared preferred stock dividends for the six month and three month periods ended June 30, 2022 and June
30, 2021, respectively.
| |
Undeclared dividends | | |
Undeclared dividends | |
| |
For the six months ended | | |
For the three months ended | |
| |
June 30, | | |
June 30, | |
Series of preferred stock | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Series A preferred stock dividends | |
$ | 158,685 | | |
$ | 21,479 | | |
$ | 79,781 | | |
$ | 21,479 | |
Series B preferred stock dividends | |
| 39,671 | | |
| 10,740 | | |
| 19,945 | | |
| 10,740 | |
Total undeclared preferred stock dividends | |
$ | 198,356 | | |
$ | 32,219 | | |
$ | 99,726 | | |
$ | 32,219 | |
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following table presents the cumulative undeclared dividends by class of preferred stock as of June 30, 2022 and June 30, 2021, respectively.
These cumulative undeclared dividends are recorded in Dividends payable on our balance sheet as of June 30, 2022 and June 30, 2021.
| |
Cumulative undeclared dividends as of | |
| |
June 30, | |
Series of preferred stock | |
2022 | | |
2021 | |
Series A preferred stock | |
$ | 303,446 | | |
$ | 21,479 | |
Series B preferred stock | |
| 90,740 | | |
| 10,740 | |
Cumulative undeclared preferred stock dividends | |
$ | 394,186 | | |
$ | 32,219 | |
NOTE
9: CONCENTRATIONS
The
Company had one customer for the six months ended June 30, 2022 that accounted for 10% of sales. For the six months ended June 30, 2021,
no single customer accounted for more than 10% of sales.
The
Company had three customers at June 30, 2022 accounting for 34%, 24% and 11% of relative total accounts receivable. At December 31, 2021,
the Company had two customers accounting for 30% and 29% of relative total accounts receivable.
NOTE
10: RELATED PARTY
A
law firm owned by the brother of Alexander M. Salgado, our former Chief Executive Officer, rendered legal services to the Company. The
Company incurred expenses in aggregate of $0 and $20,020 for such services during the six month periods ended June 30, 2022 and June
30, 2021, respectively.
On
April 19, 2021, the Company issued a secured convertible promissory note in the principal amount of $25,000 to Mr. Vickers. The note
carried an interest rate of eight percent (8%) per annum and had a maturity date of May 19, 2021. On May 19, 2021, the Company
and Mr. Vickers extended the maturity date of the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding
$25,000 in principal and $25,000 in additional consideration in exchange for 50,000 Series A Preferred Shares.
On
July 22, 2021, the Company issued secured convertible promissory notes in the aggregate principal amount of $1,075,000 in exchange for
an aggregate amount of $1,075,000, which secured convertible promissory notes were issued to the Wit Trust, in the amount of $1,000,000,
Mr. Johnson in the amount of $50,000, and Mr. Pino in the amount of $25,000. The secured convertible promissory notes accrued interest
at eight percent (8%) per annum and had a maturity date of (i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted
the outstanding $25,000 in principal in exchange for 25,000 Series A Preferred Shares. On September 7, 2021, Mr. Johnson converted the
outstanding $50,000 in principal in exchange for 50,000 Series A Preferred Shares. On September 30, 2021 the Wit Trust converted the
outstanding $1,000,000 in principal in exchange for 1,000,000 Series A Preferred Shares.
On
August 30, 2021, the Company issued a secured convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust.
The note carried an interest rate of eight percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the
Wit Trust converted the outstanding $500,000 in principal in exchange for 500,000 Series A Preferred Shares.
On
September 30, 2021, the Company completed the 2021 Private Placement which commenced on August 5, 2021 of Series A Preferred Shares to
certain investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00
per share in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge
financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’ secured convertible
promissory notes, and the conversion of an account payable); and (ii) the surrender of 280,000 Units. The investors in the 2021 Private
Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note;
Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Dr. van der Post, a member of the Board of Directors of
the Company, in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible
promissory notes and $19,068.49 in accrued and unpaid interest. As a result of the 2021 Private Placement and the voting rights accorded
the Series A Preferred Shares and Series B Preferred Shares, the Wit Trust holds approximately eighty eight percent (88%) of the voting
power of the Company.
Veritas
Farms, Inc. and Subsidiary
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On
October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 which
Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company amended the Secured Convertible Promissory
Note originally dated October 12, 2021 to increase the total available principal balance to $3,000,000. The Secured Convertible Promissory
Note is secured by the Company’s assets and contain certain covenants and customary events of default, the occurrence of which
could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as
follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option
of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured
Convertible Promissory Note will accrue interest on the aggregate amount loaned at a rate of ten percent (10%) per annum. All unpaid
principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Note,
is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of
(i) October 1, 2024, or (ii) following an event of default. The Company determined that there was a beneficial conversion feature of
$475,000 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 $361,071 on the accompanying balance sheet with amortization to interest expense of $80,238 and
$0 for the six month periods ended June 30, 2022 and June 30, 2021, respectively. At June 30, 2022, $2,750,000 was outstanding on the
Secured Convertible Promissory Note.
For
the six month period ended June 30, 2022 we incurred $164,827 in interest expense payable to related parties and $1,661 in
interest expense payable to related parties for the six month period ended June 30, 2021. For the three month period ended June 30, 2022
we incurred $96,215 in interest expense payable to related parties and $1,661 in interest expense payable to related parties
for the three month period ended June 30, 2021.
NOTE
11: COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
As
of June 30, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results
of our operations.
Employment
Agreements
We
have employment agreements in place with the following members of our executive management team:
Stephen
E. Johnson, Chief Executive Officer
Ramon
A. Pino, Chief Financial Officer
The employment
agreements provide, among other things, for participation in employee benefits available to employees and executives. Each of the agreements
will renew for successive one-year terms unless the agreement is expressly terminated by either the employee or the Company prior to
the end of the then current term as provided for in the employment agreement. Under the terms of the agreement, we may terminate the
employee’s employment upon 30 or 60 days notice of a material breach and the employee may terminate the agreement under the same
terms and conditions. The employment agreements contain non-disclosure provisions, as well as non-compete clauses. The agreement for Mr.
Pino contains severance provisions which entitles the employee to severance pay equal to one (1) year’s salary and benefits
in the event of (i) the employee’s termination by the Company for any reason other than for cause, as described in the employment
agreement, (ii) termination by the employee pursuant to a material breach of the agreement by the Company or for good reason in
connection with a change of control, or (iii) non-renewal of the employment agreement by the Company.
Mr. Johnson’s employment agreement was terminated
pursuant to the separation agreement by and between the Company and Mr. Johnson dated July 25, 2022 as discussed in Note 12: Subsequent
Events
NOTE
12: SUBSEQUENT EVENTS
Subsequent
to June 30, 2022 the Company received an additional $250,000 from the Secured Convertible Promissory Note.
On
July 25, 2022, the Board of Directors of the Company appointed Alessandro M. Annoscia to serve as the Company’s Chief Executive
Officer and President to assume the duties of principal executive officer and as a Board member effective July 25, 2022. The Company’s
former Chief Executive Officer, Stephen E. Johnson, stepped down as Chief Executive Officer, President, and a director of the Company,
and from any and all other positions he holds with the Company and its subsidiary as of July 25, 2022.
On
August 2, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange
for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.