UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from _____________ to _____________
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(Exact name of registrant as specified in its charter)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
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Indicate by check mark whether the registrant has submitted electronically
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
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The number of shares outstanding of the registrant’s
common stock, $0.001 par value, as of November 13, 2023 was
VERITAS FARMS, INC.
Quarterly Report on Form 10-Q for the nine month period ended September 30, 2023
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, certain information in this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. You can identify these forward-looking statements by the words “believes,” “intends,” “expects,” “might,” “may,” “will,” “should,” “plans,” “projects,” “contemplates,” “intends,” “budgets,” “potential,” “predicts,” “estimates,” “anticipates,” “future,” “goal” and variations of such words or similar expressions. These statements are based on our beliefs, as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties and assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual future results may differ materially from what is expressed in or indicated by the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, under the heading “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), and under “Part II, Item 1A., Risk Factors” in this Quarterly Report on Form 10-Q, if and as such risk factors may be updated from time to time in our periodic filings with the SEC. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and a reader, whether investing in our common stock or not, should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date of this Quarterly Report on Form 10-Q or as of the date they were made or as otherwise specified herein. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Investors and others should note that we use our website (https://theveritasfarms.com), as well as social media, press releases and SEC filings, as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases and SEC filings. The contents of our website and social media posts, however, are not incorporated by reference into this Quarterly Report on Form 10-Q. Further, our references to website URLs in this filing are intended to be inactive textual references only.
ii
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Inventories | ||||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Employee retention credit receivable | ||||||||
| Assets held for sale | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation | ||||||||
| Goodwill | ||||||||
| Intangible assets, net of accumulated amortization | ||||||||
| Right of use assets, net of accumulated amortization | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued interest | ||||||||
| Dividends payable | ||||||||
| Convertible notes payable | ||||||||
| Contract liability | ||||||||
| Operating lease liability | ||||||||
| Notes payable, current portion | ||||||||
| Total current liabilities | ||||||||
| LONG TERM LIABILITIES | ||||||||
| Notes payable, long term, net of current portion | ||||||||
| Related party convertible notes payable, long term, net of discount | ||||||||
| Operating lease liability, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 12) | ||||||||
| SHAREHOLDERS’ EQUITY/(DEFICIT) | ||||||||
| Preferred stock, | ||||||||
| Series A convertible preferred stock, | ||||||||
| Series B convertible preferred stock, | ||||||||
| Common stock, | ||||||||
| Additional paid in capital | ||||||||
| Accumulated (deficit) | ( | ) | ( | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY/(DEFICIT) | ( | ) | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT) | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
1
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Inventory write-down | ||||||||||||||||
| Total cost of goods sold | ||||||||||||||||
| Gross margin/(expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense) | ||||||||||||||||
| Interest expense, related parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on loan forgiveness | ||||||||||||||||
| Gain/(loss) on disposal | ( | ) | ( | ) | ||||||||||||
| Total other income/(expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| (Loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax provision | ||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ||||||||||||||||
| Preferred stock dividends in arrears | ||||||||||||||||
| Series A preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Series B preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net (loss) per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
2
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY/(DEFICIT)
(unaudited)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2023
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Series A Preferred | Series B Preferred | Additional | Total | |||||||||||||||||||||||||||||||||
| Number of | $0.001 | Number of | $0.001 | Number of | $0.001 | paid in | Accumulated | shareholders’ | ||||||||||||||||||||||||||||
| shares | Par value | shares | Par value | shares | Par value | capital | (deficit) | equity/(deficit) | ||||||||||||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for purchase of Asystem assets | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2022
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Series A Preferred | Series B Preferred | Additional | Total | |||||||||||||||||||||||||||||||||
| Number of | $0.001 | Number of | $0.001 | Number of | $0.001 | paid in | Accumulated | shareholders’ | ||||||||||||||||||||||||||||
| shares | Par value | shares | Par value | shares | Par value | capital | (deficit) | equity/(deficit) | ||||||||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at June 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
VERITAS FARMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net income/(loss) to net cash provided by/(used in) operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Gain on loan forgiveness | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Gain/(loss) on disposal of property and equipment assets | ( | ) | ||||||
| Inventory write down | ||||||||
| Net change in operating lease assets and liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Accounts receivable | ( | ) | ||||||
| Employee retention credit receivable | ( | ) | ||||||
| Other assets | ||||||||
| Contract liability | ||||||||
| Accrued interest | ||||||||
| Accrued expenses | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | - | ( | ) | |||||
| Sale of property and equipment | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase/(decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Income taxes | $ | $ | ||||||
| Interest | $ | $ | ||||||
| Non-cash transactions: | ||||||||
| Common stock issued for the acquisition of Asystem assets | $ | $ | ||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
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.
Recent Developments
On August 25, 2023,
the Company acquired substantially all of the assets and business (the “Acquired Assets”) of Asystem Inc. (“Asystem”),
a Delaware corporation. The Acquired Assets include all of Asystem’s rights in its science-forward supplement brand. The Acquired
Assets were acquired by us under an Asset Transfer Agreement, dated August 25, 2023, between the Company, Asystem, Oliver Walsh (“Mr.
Walsh”) and Henry Simonds (“Mr. Simonds”) (the “Asset Transfer Agreement”). Pursuant to the Asset Transfer
Agreement, the Company acquired all of Asystem’s customer lists, customers, name, trademarks, internet domains and other things
necessary to carry on the business of Asystem. Acquisition expenses were approximately $
The consideration for
the Acquired Assets consisted of the issuance of
Assets and liabilities of all acquired companies are recorded at their estimated fair values at the dates of acquisition. Goodwill represents the potential new customers and future cash flows after the acquisition.
| Inventories | $ | |||
| Property and equipment, net of accumulated depreciation | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Accounts payable | ||||
| Notes payable, current portion | ||||
| Related party convertible notes payable, current portion | ||||
| Total liabilities assumed | ||||
| Total purchase price | $ |
5
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The summary below presents
pro forma unaudited consolidated results of operations for the nine months ended September 30, 2023 and 2022 as if the acquisition
of Acquired Assets occurred on January 1, 2022.
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Operating (loss) | $ | ( | ) | $ | ( | ) | ||
| Net (loss) | $ | ( | ) | $ | ( | ) | ||
| Net (loss) per share | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
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 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 September 30, 2023 and December 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the nine months ending September 30, 2023, 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, 2022.
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.
Correction of Previously Issued Financial Statements
The accompanying
unaudited condensed consolidated statement of operations for the nine months ended September 30, 2022 has been corrected for the following:
an adjustment to reclassify selling, general and administrative expenses of $
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 September 30, 2023, the Company had an accumulated deficit
of $
6
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
To satisfy our capital requirements, the Company may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to the Company on favorable terms or at all. If adequate funds are not available when needed, the Company may be required to delay, scale back or eliminate some or all of our marketing programs. If the Company is successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock or result in increased interest expense in future periods.
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, NET
| September 30, 2023 | December 31, 2022 | |||||||
| Hemp and oil | $ | $ | ||||||
| Finished goods | ||||||||
| Raw materials | ||||||||
| Inventories | $ | $ | ||||||
Inventory values include total inventory impairment
write-downs of $
NOTE 4: PROPERTY AND EQUIPMENT
| September 30, 2023 | December 31, 2022 | Estimated | ||||||||||||||||||||||||||
| Cost | Accumulated depreciation | Net book value | Cost | Accumulated depreciation | Net book value | useful life (years) | ||||||||||||||||||||||
| Land and land improvements | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Buildings and improvements | ||||||||||||||||||||||||||||
| Greenhouse | ||||||||||||||||||||||||||||
| Fencing and irrigation | ||||||||||||||||||||||||||||
| Machinery and equipment | ||||||||||||||||||||||||||||
| Furniture and fixtures | ||||||||||||||||||||||||||||
| Computer equipment | ||||||||||||||||||||||||||||
| Vehicles | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Total depreciation expense was $
As of December 31, 2022, there was $
7
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 5: NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
| Ending | Non related party | Related party | ||||||||||||||||||||||||||
| principal | ||||||||||||||||||||||||||||
| Description | Origination date | Maturity date | Interest rate | September 30, 2023 | Current | Long term | Current | Long term | ||||||||||||||||||||
| Economic Injury Disaster Loan | % | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Growth Line of Credit | % | - | - | - | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Non related party | Related party | |||||||||||||||||||||||||||||||||||
| Origination | Maturity | Interest | Ending principal September 30, | Long | Long | Long term,
net of | ||||||||||||||||||||||||||||||
| Description | date | date | rate | 2023 | Current | term | Current | term | Discount | discount | ||||||||||||||||||||||||||
| Convertible Promissory Note Payable | % | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 2021 Secured Convertible Promissory Note Payable | % | ( | ) | |||||||||||||||||||||||||||||||||
| 2023 Secured Convertible Promissory Note Payable | % | ( | ) | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total | $ |
Paycheck Protection Program
In February 2021, as part of the business incentives
offered in the Coronavirus Aid, Relief, and Economic Security Act, the Company received a loan in the amount of $
Economic Injury Disaster Loan
In June 2020, the Company received a loan in the
amount of $
8
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10% Convertible Promissory Note Payable
In March 2020, the Company received a $
The Company determined that there was a beneficial
conversion feature of $
10% Secured Convertible Promissory Notes Payable
On October 12, 2021, the Company issued a secured
convertible credit line promissory note in the principal amount for up to $
On August 2, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
On August 17, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
On September 6, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
9
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On October
11, 2022, the Company issued a secured convertible promissory note in the principal amount of $
On November
16, 2022, the Company issued a secured convertible promissory note in the principal amount of $
On January
3, 2023, the Company issued a secured convertible promissory note in the principal amount of $
On May 30,
2023, the Company issued a secured convertible promissory note in the principal amount of $
On June 7, 2023, the Company issued a secured
convertible credit line promissory note in the principal amount for up to $
On August 25, 2023, the Company assumed an aggregate outstanding notes payable balance of $
Growth Line of Credit
On August 25, 2023, the Company assumed an aggregate
outstanding note payable balance of $
NOTE 6: STOCK-BASED COMPENSATION
The Company approved its 2017 Stock Incentive
Plan on September 27, 2017 (“2017 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
The Company approved its 2023 Plan on March 31,
2023 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 to our employees, directors and independent contractors. The 2023 Plan initially
provides for the issuance of up to
10
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s outstanding stock options
typically have a
On January 1, 2022, the Company granted an aggregate
On June 30, 2022, the Company granted an aggregate
On December 8, 2022, the Company granted one
non-employee director with an annual grant of stock options under the 2017 Plan to purchase
On August 25, 2023, the Company issued an aggregate
The aggregate fair value for all options granted
for the nine months ended September 30, 2023 was $
The aggregate fair value for all restricted stock
granted for the nine months ended September 30, 2023 was $
Total stock based compensation expense was $
| Number of options | Weighted average exercise price (per share) | Weighted average remaining contractual term (in years) | ||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/cancelled/expired | ( | ) | ||||||||||
| Outstanding at December 31, 2022 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited/cancelled/expired | ( | ) | ||||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||
| Vested and exercisable at September 30, 2023 | $ | |||||||||||
11
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Stock option assumptions for the period ended | ||||||||
| Stock option assumptions | September 30, 2023 | December 31, 2022 | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life of options (in years) | ||||||||
NOTE 7: LEASES
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 Right of Use (“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 (
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
has an expiration date of
Total lease amortization expense was $
12
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 8: SHAREHOLDERS’ EQUITY/(DEFICIT)
Our authorized capital stock consists of
As of September 30, 2023 the Company had the following issued and outstanding securities:
| ● |
| ● |
| ● |
| ● |
| ● |
| ● | $ |
Common Stock
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of our voting securities do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up each outstanding share of common stock entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is outstanding. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
Effective March 31, 2023 the Company filed Amended
and Restated Articles of Incorporation of the Company which increased the number of authorized common stock from
Preferred Stock
Effective March 31, 2023 the Company filed Amended
and Restated Articles of Incorporation of the Company which increased the number of authorized preferred stock from
13
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 $
14
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 $
15
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Preferred Stock Dividends
| Undeclared dividends | Undeclared dividends | |||||||||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Series of preferred stock | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Series A preferred stock dividends | $ | $ | $ | $ | ||||||||||||
| Series B preferred stock dividends | ||||||||||||||||
| Total undeclared preferred stock dividends | $ | $ | $ | $ | ||||||||||||
The following table presents the cumulative undeclared
dividends by class of preferred stock as of September 30, 2023 and December 31, 2022, respectively.
| Cumulative undeclared dividends as of | ||||||||
| Series of preferred stock | September 30, 2023 | December 31, 2022 | ||||||
| Series A preferred stock | $ | $ | ||||||
| Series B preferred stock | ||||||||
| Cumulative undeclared preferred stock dividends | $ | $ | ||||||
NOTE 9: CHANNEL REPORTING
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.
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 wholesale 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. |
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Wholesale revenue | $ | $ | ( | ) | $ | $ | ||||||||||
| E-commerce revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
16
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 10: CONCENTRATIONS
The Company had no single customer for the nine
months ended September 30, 2023 that accounted for more than
The Company had two customers at September 30,
2023 accounting for
NOTE 11: RELATED PARTY
On October 12, 2021, the Company issued a secured convertible credit
line promissory note in the principal amount for up to $
On August 2, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
On August 17, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
On September 6, 2022, the Company issued a secured
convertible promissory note in the principal amount of $
17
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On October
11, 2022, the Company issued a secured convertible promissory note in the principal amount of $
On November
16, 2022, the Company issued a secured convertible promissory note in the principal amount of $
On January
3, 2023, the Company issued a secured convertible promissory note in the principal amount of $
On May 30,
2023, the Company issued a secured convertible promissory note in the principal amount of $
On June 7, 2023, the Company issued a secured convertible credit line
promissory note in the principal amount for up to $
On August 25, 2023, the Company assumed an
aggregate outstanding notes payable balance of $
For the nine month period ended September 30,
2023 the Company incurred $
On August 25, 2023, the Company entered into
a consulting agreement with Mr. Simonds, a director of the Company effective August 25, 2023. The consulting agreement is for an
initial term of
On August 30, 2023, the Company entered into an
Indemnification Agreement (the “Wit Indemnification Agreement”) with the Wit Trust. The Wit Indemnification Agreement provides
that the Wit Trust will, from private funds, indemnify any director or executive officer of the Company from any claims or expenses relating
to indemnifiable events (as defined in and pursuant to the terms and conditions of Indemnification Agreements entered into between the
Company and the directors and officers of the Company) for which the Company is obligated to indemnify the director or executive officer
but does not indemnify such officer or director, up to a total of
18
Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 12: COMMITMENTS AND CONTINGENCIES
Legal Matters and Routine Proceedings
As of September 30, 2023, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.
From time to time, the Company may be involved in and subject to disputes and legal proceedings, as well as demands, claims and threatened litigation that arise in the ordinary course of its business. These proceedings may include allegations involving business practices, infringement of intellectual property, employment or other matters. The ultimate outcome of any legal proceeding is often uncertain, there can be no assurance that the Company will be successful in any legal proceeding, and unfavorable outcomes could have a negative impact on our results of operations and financial condition. The Company records a liability in its financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews the status of each significant matter each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the Company’s financial statements. Gain contingencies are not recorded until they are realized. Legal costs related to any legal matters are expensed as incurred
Employment Agreements
The Company has an employment agreement in place with Ramon A. Pino, our Chief Financial Officer.
The employment agreement provides, among other things, for participation in employee benefits available to employees and executives. The agreement 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, the Company 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 agreement contains non-disclosure provisions, as well as non-compete clauses. The agreement 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.
NOTE 13: SUBSEQUENT EVENTS
On October
4, 2023 the Company received an additional $
On November
9, 2023 the Company received an additional $
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, references in this report to “the Company,” “Veritas Farms,” “Veritas,” “we,” “us” and “our” refer to Veritas Farms, Inc. and its wholly owned subsidiary.
Forward-Looking Statements
Certain statements made in this report are “forward-looking statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Business Overview
Veritas Farms, Inc. is an agribusiness focused on growing, producing, marketing and distributing superior quality, whole plant, full spectrum hemp oils and extracts containing naturally occurring phytocannabinoids (collectively, “CBD”). Veritas Farms owns a 140 acre farm in Pueblo, Colorado, capable of producing over 200,000 proprietary full spectrum hemp plants which can potentially yield a minimum annual harvest of 250,000 to 300,000 pounds of outdoor-grown industrial hemp. While part of the cannabis family, hemp, which contains less than 0.3% tetrahydrocannabinol (“THC”), the psychoactive compound that produces the “high” in marijuana, is distinguished from marijuana by its use, physical appearance and lower THC concentration (marijuana generally has a THC level of 10% or more). The Company also owns approximately 15,000 square feet of climate-controlled greenhouses to produce a consistent supply of year-round indoor-cultivated hemp. In addition, there is a 10,000 square foot onsite facility used for processing raw hemp, oil extraction, formulation laboratories and quality/purity testing. Veritas Farms is registered with the Colorado Department of Agriculture to grow industrial hemp and with the Colorado Department of Public Health and Environment to process hemp and manufacture hemp products in accordance with Colorado’s hemp program. The Company primarily conducts its business operations through its wholly-owned subsidiary, 271 Lake Davis Holdings, LLC, a Delaware limited liability company.
Veritas Farms meticulously processes its hemp crop to produce superior quality whole-plant hemp oil, extracts and derivatives which contain the entire full spectrum of cannabinoids extracted from the flowers and leaves of hemp plants. Veritas Farms employs the use of the cold ethanol extraction method to extract the whole plant hemp oil from its hemp crop. Whole-plant hemp oil is known to provide the essential phytocannabinoid “entourage effect” resulting from the synergistic absorption of the entire full spectrum of unique hemp cannabinoids by the receptors of the human endocannabinoid system. As a result, Veritas Farms believes that its products are premier quality cannabinoids and are highly sought after by consumers and manufacturers of premium hemp products.
Veritas Farms has developed a wide variety of formulated phytocannabinoid-rich hemp products containing CBD which are marketed and distributed by the Company under its Veritas Farms brand name. Our products are also available in bulk, white label and private label formulations for distributors and retailers. These types of products are in demand by health food markets, wellness centers, pet suppliers, physicians and other healthcare practitioners.
Veritas Farms products include capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews. All product applications come in various flavors and strength formulations, in addition to bulk volume sales. Many of the Company’s whole-plant hemp oil products and formulations are available for purchase online directly from the Company through its Veritas Farms website, www.theVeritasFarms.com, as well as through numerous other online retailers and “brick and mortar” retail outlets.
20
Recent Developments
Management Changes
Since June 2022 as previously reported in our Current Reports on Form 8-K, there have been significant changes to our executive officers and board of directors which includes the following: (1) on June 1, 2022, Kristen High (“Ms. High”) was elected and appointed as a director on the board of directors; (2) on June 30, 2022, Dave Smith, the Company’s Chief Operating Officer, resigned; (3) on July 25, 2022, (i) Stephen E. Johnson stepped down as Chief Executive Officer, President and a director, and (ii) Alessandro M. Annoscia (“Mr. Annoscia”) was appointed as Chief Executive Officer, President and a director on the board of directors, (4) on November 7, 2022, (i) Mr. Annoscia stepped down as Chief Executive Officer, President, and a director, and (ii) Thomas E. Vickers, chairman of the board of directors was appointed interim Chief Executive Officer and interim President, (5) on December 8, 2022, (i) Kellie Newton, Craig Fabel, and Ms. High were removed as directors on the board of directors, and (ii) Gary A. Shangold was elected and appointed as a director on the board of directors and (6) on August 25, 2023 (i) Henry Simonds (“Mr. Simonds”) was elected and appointed as a director on the board of directors, (ii) Marisa Cifre was appointed as Chief Revenue Officer and (iii) Thomas J. Krogh was appointed as Chief Operating Officer.
Recent Developments
On August 25, 2023, the Company acquired substantially all of the assets and business (the “Acquired Assets”) of Asystem Inc. (“Asystem”), a Delaware corporation. The Acquired Assets include all of Asystem’s rights in its science-forward supplement brand. The Acquired Assets were acquired by us under an Asset Transfer Agreement, dated August 25, 2023, between the Company, Asystem, Oliver Walsh and Mr. Simonds (the “Asset Transfer Agreement”). Pursuant to the Asset Transfer Agreement, the Company acquired all of Asystem’s customer lists, customers, name, trademarks, internet domains and other things necessary to carry on the business of Asystem. Acquisition expenses were approximately $48,000 and were included in SG&A expenses. The results of operations of the Acquired Assets have been included in the consolidated results of the Company from the date of acquisition.
The consideration for the Acquired Assets consisted of the issuance of 103,570,600 shares of our common stock, which were distributed to Asystem shareholders, and the assumption of certain liabilities of Asystem. The assumed liabilities included the assumption by the Company of notes payable by Asystem with an aggregate outstanding notes payable balance of $250,000 that are payable to the Cornelis F. Wit Revocable Living Trust, of which Cornelis F. Wit is the sole trustee (“Wit Trust”). The notes carry an interest rate of ten percent (10%) per annum and have a maturity date of April 1, 2024. On August 28, 2023 the notes were amended, replaced and superseded in their entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below. Assets and liabilities of all acquired companies are recorded at their estimated fair values at the dates of acquisition. Goodwill represents the potential new customers and future cash flows after the acquisition.
Corporate Information
The Company was incorporated in the state of Nevada on March 15, 2011 under the name Armeau Brands Inc. and changed its name to SanSal Wellness Holdings, Inc. on October 13, 2017. On January 31, 2019, the Company changed its name from SanSal Wellness Holdings, Inc. to Veritas Farms, Inc.
Our executive offices are located at 401 E. Las Olas Boulevard, Suite 1400, Fort Lauderdale, FL 33301 and our telephone number is (833) 691-4367. The Company’s year-end is December 31. Our corporate website is www.TheVeritasFarms.com. Information appearing on our website is not part of this Quarterly Report on Form 10-Q.
Current Economic Conditions, Challenges, and Risks
Macroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. In addition, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns. We also expect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our revenue growth rates. We expect some or all of these factors to continue to impact our operations in 2023.
Results of Operations
The nine months ended September 30, 2023 compared to the nine months ended September 30, 2022
Revenues. Revenues for the nine months ended September 30, 2023 decreased to $615,593, as compared to revenues of $795,044 for the nine months ended September 30, 2022. The decrease reflects a significant contraction of retail sales in 2023 from 2022, primarily as a result of increased competition and decreased acceptance in big box retail leading to reduced inventory turnover. The changes in consumer behavior due to macroeconomic factors make future sales somewhat challenging to predict. Revenues for the nine months ended September 30, 2023 include revenue generated from the Asystem Acquired Assets of $74,826. Sales include bulk oils for wholesale, capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews, all in various potency levels and flavors.
Cost of goods sold. All expenses incurred to grow, process and package the finished goods are included in our cost of goods sold. Cost of goods sold for the nine months ended September 30, 2023 decreased to $900,064 from $1,007,616 for the nine months ended September 30, 2022. The decrease in cost of sales can be attributed to the decrease in sales which was offset by the disposal of obsolete inventory during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Cost of goods sold for the nine months ended September 30, 2023 include cost of goods sold related to the Asystem Acquired Assets of $18,500.
21
Gross expense. We had gross expense of $284,471 for the nine months ended September 30, 2023, as compared to gross expense of $212,572 for the nine months ended September 30, 2022. The increase in gross expense can be attributed to the decrease in sales in addition to the disposal of obsolete inventory during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $2,493,368 for the nine months ended September 30, 2023, from $3,129,966 for the nine months ended September 30, 2022. The decrease to selling, general and administrative expenses is primarily due to reductions in total salary and related expenses. Selling, general and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.
Other income/(expense). Interest expense for the nine months ended September 30, 2023 was $727,400, as compared to $332,084 for the nine months ended September 30, 2022. Interest expense increased in the nine months ending September 30, 2023 compared to the nine months ending September 30, 2022 due to an increase in interest bearing notes payable.
Net loss. As a result of all the foregoing, net loss for the nine months ended September 30, 2023, increased to $3,476,584 or $0.06 per share based on 57,746,809 weighted average shares outstanding, from $2,868,311 or $0.07 per share for the nine months ended September 30, 2022, based on 41,625,331 weighted average shares outstanding.
The three months ended September 30, 2023 compared to the three months ended September 30, 2022
Revenues. Revenues for the three months ended September 30, 2023 increased to $235,941, as compared to revenues of $100,205 for the three months ended September 30, 2022. The increase is driven by an increase in ecommerce sales as compared to wholesale sales for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The changes in consumer behavior due to macroeconomic factors make future sales somewhat challenging to predict. Revenues for the three months ended September 30, 2023 include revenue generated from the Asystem Acquired Assets of $74,826. Sales include bulk oils for wholesale, capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews, all in various potency levels and flavors.
Cost of goods sold. All expenses incurred to grow, process and package the finished goods are included in our cost of goods sold. Cost of goods sold for the three months ended September 30, 2023 decreased to $183,220 from $363,975 for the three months ended September 30, 2022. The decrease in cost of sales can be attributed to the reduction of cost of goods sold overheads during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Cost of goods sold for the three months ended September 30, 2023 include cost of goods sold related to the Asystem Acquired Assets of $18,500.
Gross margin/expense. We had gross margin of $52,721 for the three months ended September 30, 2023, as compared to gross expense of $263,770 for the three months ended September 30, 2022. The increase in gross margin can be attributed to the decrease in cost of goods sold during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to $892,458 for the three months ended September 30, 2023, from $560,038 for the three months ended September 30, 2022. The increase to selling, general and administrative expenses is primarily due to increases in total salary and related expenses associated with the employee retention credit recorded during the three months ended September 30, 2022. Selling, general and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.
Other income/(expense). Interest expense for the three months ended September 30, 2023 was $353,853, as compared to $134,569 for the three months ended September 30, 2022. Interest expense increased in the three months ending September 30, 2023 compared to the three months ending September 30, 2022 due to an increase in interest bearing notes payable.
Net loss. As a result of all the foregoing, net loss for the three months ended September 30, 2023, increased to $1,134,821 or $0.01 per share based on 89,464,064 weighted average shares outstanding, from $979,232 or $0.02 per share for the three months ended September 30, 2022, based on 41,625,331 weighted average shares outstanding.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. We have historically experienced negative cash flows and have relied on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary related expenses. At September 30, 2023, we had working capital deficit of $1,554,689.
Cash increased to $58,787 at September 30, 2023 from $55,273 at December 31, 2022. The increase was primarily due to the collection of our employee retention credit receivable.
As of September 30, 2023, total assets were $8,319,163 as compared to $6,794,471 at December 31, 2022. The increase in assets is primarily due to the Asystem Acquired Assets.
22
Total current liabilities as of September 30, 2023 were $4,467,551, as compared to $3,167,451 at December 31, 2022. The increase was mainly due to increases in accounts payable, accrued interest, dividends payable and accrued expenses.
Net cash used in operating activities was $1,364,811 for the nine months ended September 30, 2023, as compared to net cash used in operating activities of $3,297,146 for the nine months ended September 30, 2022. The decrease is largely attributable to the collection of our employee retention credit receivable.
Net cash provided by investing activities was $24,390 for the nine months ended September 30, 2023 as compared to net cash provided by investing activities of $23,621 for the nine months ended September 30, 2022, reflecting a increase in capital income in 2023.
Net cash provided by financing activities was $1,343,935 for the nine months ended September 30, 2023 as compared to $2,916,511 for the nine months ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2023 included net proceeds of $1,250,000 from convertible note payables received from the Wit Trust. Net cash provided by financing activities for the nine months ended September 30, 2022 included net proceeds of $3,000,000 from convertible note payables received from the Wit Trust.
Contractual Obligations
The following table sets forth our contractual obligations as of September 30, 2023:
| Contractual obligation | Payments due by period | |||||||||||||||||||
| Total | Less than 1 year | 1-2 Years | 2-3 Years | 3+ Years | ||||||||||||||||
| Promissory notes(1) | $ | 247,213 | $ | 100,477 | $ | 3,389 | $ | 3,518 | $ | 139,829 | ||||||||||
| Convertible notes(1) | 5,700,000 | 200,000 | (2) | 3,000,000 | (3) | - | 2,500,000 | (4) | ||||||||||||
| Total | $ | 5,947,213 | $ | 300,477 | $ | 3,003,389 | $ | 3,518 | $ | 2,639,829 | ||||||||||
| (1) Amounts do not include interest to be paid. |
| (2) Includes $200,000 of 10% convertible notes payable that matured in October 2022. |
| (3) Includes $3,000,000 of 10% convertible notes payable that mature in October 2024. |
| (4) Includes $2,500,000 of 10% convertible notes payable that mature in October 2026. |
Sources of Liquidity and Capital Resources; Debt Obligations
Our primary sources of capital to develop and implement our business plan and expand our operations have been the proceeds from private offerings of our debt and equity securities and notes 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. From October 2, 2022 until the present we are in default in the payment of principal. This default does not trigger any other default events for any other notes payable.
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On October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 (“2021 Secured Convertible Promissory Note”), which 2021 Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company amended the 2021 Secured Convertible Promissory Note originally dated October 12, 2021 to increase the total available principal balance to $3,000,000. The 2021 Secured Convertible Promissory Note is secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the 2021 Secured Convertible Promissory Note. The 2021 Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the 2021 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 2021 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 2021 Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions of the 2021 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 effective interest method. The note is presented net of a discount of $160,476 on the accompanying balance sheet with amortization to interest expense of $120,357 and $120,357 for the nine month periods ended September 30, 2023 and September 30, 2022, respectively. At September 30, 2023, $3,000,000 was outstanding on the 2021 Secured Convertible Promissory Note.
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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On August 17, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On September 6, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On October 11, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On November 16, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On January 3, 2023, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
On May 30, 2023, 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 carried an interest rate of ten percent (10%) per annum and had a maturity date of October 1, 2024. On June 7, 2023 the secured convertible promissory note was amended, replaced and superseded in its entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described below.
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On June 7, 2023, the Company issued a secured convertible credit line promissory note in the principal amount for up to $3,000,000 (“2023 Secured Convertible Promissory Note”), which 2023 Secured Convertible Promissory Note was issued to the Wit Trust. The 2023 Secured Convertible Promissory Note includes and evidences an aggregate of $1,750,000 of outstanding indebtedness of the Company to the Wit Trust under previously executed and delivered secured convertible promissory notes as described above. The 2023 Secured Convertible Promissory Note is secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the 2023 Secured Convertible Promissory Note. The 2023 Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the 2023 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 $0.02 per share. The 2023 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 2023 Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions of the 2023 Secured Convertible Promissory Note on the earlier of (i) October 1, 2026, or (ii) following an event of default. The Company determined that there was a beneficial conversion feature of $2,037,500 relating to this 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 $1,845,374 on the accompanying balance sheet with amortization to interest expense of $192,176 and $0 for the nine month periods ended September 30, 2023 and September 30, 2022, respectively. At September 30, 2023, $2,500,000 was outstanding on the 2023 Secured Convertible Promissory Note.
On August 25, 2023, the Company assumed an aggregate outstanding notes payable balance of $250,000 that is payable to the Wit Trust as part of the consideration for the Acquired Assets from Asystem. The notes carry an interest rate of ten percent (10%) per annum and have a maturity date of April 1, 2024. On August 28, 2023 the notes were amended, replaced and superseded in their entirety, and included in and part of the 2023 Secured Convertible Promissory Note as further described above.
On August 25, 2023, the Company assumed an aggregate outstanding note payable balance of $123,896 as part of the consideration for the Acquired Assets from Asystem. The note carries an interest rate of fifteen percent (15%) per annum and has a maturity date of October 21, 2024. At September 30, 2023, $97,213 was outstanding on the Growth Line of Credit.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), 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 September 30, 2023, the Company had an accumulated deficit of $43,250,384 and a net loss attributable to common shareholders of $3,775,762. 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 until we can achieve a level of operational profitability, though there is no assurance of success.
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. While we believe additional financing will be available to us as needed, there can be no assurance that such financing will be available on commercially reasonable terms or otherwise, when needed. Moreover, any such additional financing may dilute the interests of existing shareholders. The absence of additional financing, when needed, could substantially harm the Company, its business, results of operations and financial condition.
Capital Expenditures
Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future.
Presently, we have approximately $20,000 planned for capital expenditures to further develop the Company’s infrastructure to allow for growth in our operations over the next 12 months. We expect to fund these capital expenditure needs through a combination of vendor provided financing, the use of operating or capital equipment leases and cash provided from operations.
Factors Affecting Future Performance
Item 1A of our 2022 Form 10-K sets forth risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.
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Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Note 1: Nature of Business and Summary of Significant Accounting Policies of the Notes to our unaudited condensed consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2022 Form 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
As a “smaller reporting company,” we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer), to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our Company’s assets that could have a material effect on our unaudited condensed consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our unaudited condensed consolidated financial statements would be prevented or detected.
Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer) conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2023 in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control — Integrated Framework (2013). Based on this assessment, our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer) identified the following two material weaknesses that have caused management to conclude that, as of September 30, 2023, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level in that:
| (a) | We do not have written documentation of our internal control policies and procedures. Our Chief Executive Officer and our Chief Financial Officer evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
| (b) | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Documentation of our controls and the continued changes to assure segregation of duties are being performed. Our Chief Executive Officer and our Chief Financial Officer evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
To address these material weaknesses, our Chief Executive Officer and our Chief Financial Officer performed additional analyses and other procedures to ensure that our unaudited condensed consolidated financial statements included in this report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that our unaudited condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. We intend to take further steps to rectify these material weaknesses, subject to the availability of working capital to fund the costs thereof.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
As a result of the COVID-19 pandemic that commenced in early spring of 2020, our workforce continued to operate primarily in a work from home environment for the quarter ended September 30, 2023 and we are monitoring our control environment with increased vigilance to ensure changes as a result of our employees working remotely are addressed and all increased risks are mitigated.
On August 25, 2023, we acquired the Asystem Acquired Assets. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, management has not assessed Asystem’s internal control over financial reporting as of September 30, 2023.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There is no material legal proceeding, arbitration or governmental proceeding currently pending against us or any members of our management team in their capacity as such. From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
Item 1A. Risk Factors.
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the 2022 Form 10-K, under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. There have been no material changes to the Company’s risk factors since the 2022 Form 10-K, except for the following:
The anticipated benefits of the acquisition of the assets of Asystem may not come to fruition.
On August 25, 2023, we acquired substantially all of the assets and business of Asystem, which includes all of Asystem’s rights in its science-forward supplement brand. Pursuant to our Asset Transfer Agreement with Asystem, we acquired all of Asystem’s customer lists, customers, name, trademarks, internet domains and other things necessary to carry on the business of Asystem. Our ability to receive the anticipated benefits of the Asystem asset acquisition will depend on our ability to integrate those assets into our operations, and the transaction may not result in the benefits or growth originally anticipated from such acquisition, and our operations could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Filed as an exhibit to the registrant’s Current Report on Form 8-K dated August 31, 2023 and incorporated herein by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VERITAS FARMS, INC. | ||
| Dated: November 14, 2023 | By: | /s/ Thomas E. Vickers |
| Thomas E. Vickers, Interim Chief Executive Officer and Interim President | ||
| (Principal Executive Officer) | ||
| Dated: November 14, 2023 | By: | /s/ Ramon A. Pino |
| Ramon A. Pino, Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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