VFRM Veritas Farms Inc (CE)

VERITAS FARMS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

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 March 31, 2023 and March 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three months ending March 31, 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.

Revenue Recognition

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:

The following table represents a disaggregation of revenue by sales channel:

Correction of Previously Issued Financial Statements

The accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2022 has been corrected for the following: an adjustment to reclassify selling, general and administrative expenses of $61,179 as a reduction of revenue as such amounts were related to consideration payable to a customer which the Company determined was not for distinct goods or services received.  The Company assessed the materiality of the misstatement quantitatively and qualitatively and has concluded that the correction of the classification error is immaterial to the consolidated financials taken as a whole.  As a result of the correction, revenue decreased from $482,086 to $420,907 with a corresponding decrease of gross margin from $163,258 to $102,079 and selling, general and administrative expenses decreased from $1,356,093 to $1,294,914. The correction had no impact on total operating loss and net loss.

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 March 31, 2023, the Company had an accumulated deficit of $40,494,483, and a net loss attributable to common shareholders of $1,019,861. 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.

To satisfy our capital requirements, we may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our marketing programs. If we are 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.

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Inventory values include total inventory impairment write-downs of $0 for the period ended March 31, 2023 and total inventory impairment write-downs of $802,493 which include reductions of $90,564 to finished goods and $711,929 to hemp and oil for the year ended December 31, 2022.

Total depreciation expense was $50,379 and $120,037 for the three month periods ending March 31, 2023 and March 31, 2022, respectively.

As of March 31, 2023, there was $502,709 in assets held for sale previously classified as property and equipment, and it is the Company’s intention to complete the sales of these assets within the twelve months following the end of the period.

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Future principal payments for the next five years are as follows for the future years ended December 31:

Paycheck Protection Program

In February 2021, 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 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 EIDL is secured by the Company’s assets. The first payment due was deferred two and a half years and came due in December 2022. The principal balance of the EIDL as of March 31, 2023 has been classified as a long-term liability in notes payable.

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. As of March 31, 2023 we are in default in the payment of principal. This default does not trigger any other default events for any other notes payable.

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 March 31, 2023 and $0 as of December 31, 2022 on the accompanying balance sheet.

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 $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 non-financial 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 $240,714 on the accompanying balance sheet with amortization to interest expense of $40,119 and $40,119 for the three month periods ended March 31, 2023 and March 31, 2022, respectively. At March 31, 2023, $3,000,000 was outstanding on the 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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 $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.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

The secured convertible promissory notes are 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 secured convertible promissory notes. These secured convertible promissory notes are convertible as follows: prior to the Company closing a financing through the sale and issuance of the Company’s equity securities, debt, convertible debt, a combination of the foregoing or otherwise (“Conversion Securities”), on or prior to the maturity date, (the “Financing”), the holder of the note has the right to convert (A) all or a partial amount of the principal, and (B) all or a partial amount of the accrued but unpaid interest thereon through and as of the date of the closing of the Financing, into the identical Conversion Securities issued at such Financing.

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 6,867,747 shares of common stock. Under the terms of the 2017 Plan, awards may be granted to our employees, directors or independent contractors. Awards issued under the 2017 Plan vest as determined at the time of grant by the Board of Directors or any committees appointed under the 2017 Plan. On March 31, 2023, the 2017 Plan terminated upon the approval of the 2023 Equity Incentive Plan (“2023 Plan”).

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 up to a total of 40,000,000 shares of common stock. Under the terms of the 2023 Plan, awards may be granted to our employees, directors or independent contractors. Awards issued under the 2023 Plan vest as determined at the time of grant by the Board of Directors or any committees appointed under the 2023 Plan. The 2023 Plan is a successor to the Company’s 2017 Plan and, accordingly, no new grants will be made under the 2017 Plan from and after the effective date of the 2023 Plan.

The Company’s outstanding stock options typically have a 10-year term. Outstanding non-qualified stock options granted to employees and independent contractors 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.

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 2017 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 2017 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.

On December 8, 2022, the Company granted one non-employee directors with an annual grant of stock options under the 2017 Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.019 with a term of ten (10) years, with 25% of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company.

The aggregate fair value for all options granted for the three months ended March 31, 2023 was $0.

Total stock based compensation expense was $4,820 and $27,671 for the three month periods ending March 31, 2023 and March 31, 2022, respectively.

The following table summarizes the stock option activity for the Company’s 2017 Plan:

Below are the assumptions for the fair value of share-based payments for the three month period ended March 31, 2023 and the year ended December 31, 2022.

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 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 $39,552 and $39,599 for the three month periods ending March 31, 2023 and March 31, 2022, respectively.

As of March 31, 2023, and December 31, 2022, operating leases have no minimum rental commitments.

NOTE 8: SHAREHOLDERS’ (DEFICIT)

Our authorized capital stock consists of 800,000,000 shares of common stock, $0.001 par value per share and 20,000,000 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 March 31, 2023 we had the following issued and outstanding securities:

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 200,000,000 shares to 800,000,000 shares, par value $0.001 per share.

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 5,000,000 shares to 20,000,000 shares, par value $0.001 per share.

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.

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 March 31, 2023 and December 31, 2022, respectively. These cumulative undeclared dividends are recorded in Dividends payable on our balance sheet as of March 31, 2023 and December 31, 2022.

NOTE 9: CONCENTRATIONS

The Company had no single customer for the three months ended March 31, 2023 that accounted for more than 10% of sales. For the three months ended March 31, 2022, one customer accounted for 18% of sales.

The Company had three customers at March 31, 2023 accounting for 34%, 16% and 10% of total accounts receivable. At December 31, 2022, the Company had three customers accounting for 33%, 16% and 10% of total accounts receivable.

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 10: RELATED PARTY

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 non-financial 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 $240,714 on the accompanying balance sheet with amortization to interest expense of $40,119 and $40,119 for the three month periods ended March 31, 2023 and March 31, 2022, respectively. At March 31, 2023, $3,000,000 was outstanding on the 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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

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 carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

The secured convertible promissory notes are 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 secured convertible promissory notes. These secured convertible promissory notes are convertible into Conversion Securities as described in Note 5 above.

For the three month period ended March 31, 2023 we incurred $150,872 in interest expense to related parties and $68,612 in interest expense to related parties for the three month period ended March 31, 2022.

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 11: COMMITMENTS AND CONTINGENCIES

Legal Matters and Routine Proceedings

As of March 31, 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

We have an employment agreement in place with Mr. 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, 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 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.