Veritas Farms, Inc. - Annual Report: 2022 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to ________.

Commission file number: 333-210190

VERITAS FARMS, INC.

(Exact name of registrant as specified in its charter)

401 E. Las Olas Boulevard, Suite 1400, Fort Lauderdale, FL 33301

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (833) 691-4367

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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.:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the last reported sale price of the common stock quoted on the OTCQB, operated by OTC Markets Group, Inc., as of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,146,285.

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of April 14, 2023 was 41,625,331 shares.

VERITAS FARMS, INC

Annual Report on Form 10-K for the year ended December 31, 2022

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this report are “forward-looking statements” regarding the plans and objectives of management for future operations. All statements other than statements of historical facts contained or incorporated by reference in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “will,” “may,” “future,” “plan,” “intend” and “expect” and similar expressions generally identify forward-looking statements. Such statements involve known and unknown risks, uncertainties, assumptions 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. Particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: our history of losses; our inability to receive regulatory approval for our products; later discovery of previously unknown problems; reliance on third parties; competition between us and other companies in the industry; delays in the development of products; our ability to raise additional capital; continued services of our executive management team; and statements of assumption underlying any of the foregoing, as well as other factors set forth under the caption “Risk Factors” on page 10 of this report. 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. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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 subsidiary. All share and per share information in this report gives pro forma effect to the implementation of a one for four reverse stock split effective September 20, 2019.

PART I

Item 1. Business.

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 and operates 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 operates 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 (“271 Lake Davis”).

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 naturally occurring phytocannabinoids 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 custom formulations for distributors and retailers. These types of products are in high 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.

Our Mission

Veritas Farms is a pioneer in quality CBD products and organic farming methods. It is committed to serving the global community by uncompromising on our quality and continuing the pursuit of cutting-edge, ethical innovation.

Veritas Farms is different from the majority of our competitors. We produce pure natural hemp derivatives, pesticide residual and solvent free, with whole plant phytocannabinoids. We achieve the highest potency and purity in the derivative products from our oils.

Veritas Farms is committed to the research and development of improved proprietary hemp genetics cultivation and innovation in order to provide the global community with uncompromised quality hemp products, containing the highest quality, quantity and consistency in the industry.

Our commitment to enhancing the symbiotic relationship between healthy plants and healthy people ensures that we provide whole-plant, broad spectrum cannabinoid-rich hemp products while using only natural protocols and sustainable farming methods.

Our philosophy is to practice strict natural protocols for hemp cultivation and utilize the latest technology to assist our sustainable, environmentally sound farming practices to ensure pure, pesticide free, and high-quality consistent products.

Why Cannabinoids?

Cannabinoid-rich hemp oil is made from the stalks and leaves of the cannabis sativa plant. Like THC, cannabinoid-rich hemp is an active cannabinoid found in cannabis plants. Unlike THC, however, cannabinoid-rich hemp has no psychoactive properties and its health benefits may be even more profound than those of THC.

What are cannabinoids? They are chemical compounds secreted by the flowers of the cannabis plant. Our brains have receptors that respond pharmacologically to them. THC is the psychoactive cannabinoid, which binds to receptors in the brain, while cannabinoid-rich hemp binds to receptors throughout the body. Whole-plant hemp extracts are known to provide the essential phytocannabinoid “entourage effect” resulting from the synergistic absorption of the entire broad spectrum of unique hemp cannabinoids by the receptors of the human endocannabinoid system.

Through our body’s endocannabinoid receptors, cannabinoid-rich hemp oil can mitigate both pain, swelling and inflammation associated with it. Science has long known about cannabinoid’s analgesic properties, which is why we now have a number of cannabinoid-rich hemp-infused topical creams and salves designed for direct application to skin.

There seems to be no end to the painful conditions for which cannabinoid-rich hemp oil could mean a measure of localized relief. Enthusiasts commonly cite arthritis, menstrual cramps, headaches, and even plain old muscle soreness or the itchiness from psoriasis and dermatitis as potential targets for the cannabis compound.

Current Industry Factors and Market Opportunity

Typical Cannabinoid Company Profile. The majority of cannabinoid companies are either farmers/extractors, manufacturers, or retail brands. Farmers often grow and extract their oil, sometimes selling their oil wholesale to product manufacturers and sometimes manufacturing their own products and then selling them in bulk to brands that use them for private label products. Retail brands are forced into a state of constant supply search and often have to order from multiple farmers/extractors in order to ensure their demand is met. This can cause inconsistency in product potency and quality, often leading to products that do not have an accurate Certificate of Analysis or additional contaminate tests.

Poor Quality Products, Morally Questionable Companies. As with any burgeoning new market, opportunistic entrepreneurs and entities have surfaced selling inferior products that are often misrepresented and mislabeled. These products may contain little to no active cannabinoid compounds, or contaminated cannabinoid compounds. These entities often seek a quick payday for the company’s founders and take advantage of the lack of consumer education about the industry.

Lack of Consumer Knowledge/Confusion in Market Place. New markets and products are often rife with miseducation and misunderstanding. Cannabinoid products are just beginning to be absorbed by the mainstream public, who may be unaware of the implications of the lack of quality control, proper application, dosing and uses.

The industrial hemp market is projected to grow at a compound annual growth rate of 40% from $4.7 billion in 2021 to $12.0 billion by 2026. The growth of this market is attributed to the increased consumption of hemp-based products. Our goal is to secure as large a share of the growing market for CBD products as possible, by taking advantage of the fractured nature of the industry, the poor quality products offered by some competitors and the lack of knowledge of the potential benefits of CBD by means of:

Our Products

Veritas Farms has developed a wide variety of formulated phytocannabinoid-rich hemp products containing naturally occurring phytocannabinoids 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 custom formulations for distributors and retailers. These types of products are in high 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.

Our primary products are made as:

All Veritas Farms products are of the highest-quality and are third-party laboratory tested for strength/purity, bio-contaminants, heavy metals, pesticides, and solvents. Our core product lines pipeline include:

Adoption of a Functional Product Line

Since inception, Veritas Farms has offered a variety of full-spectrum hemp oil products designed to improve the general health and wellness of our consumers. However, due to the recent COVID-19 pandemic and evolving needs of our consumers, Veritas launched a new purpose-built product line in the second quarter of 2022 designed to target a wider variety of common health conditions, supported with additional dietary supplements.

According to data insights from New Frontier Data, 82% of consumers that purchase CBD products do so for a specific need. Only 18% of consumers purchase CBD for general health and wellness. By modifying the cannabinoid potency levels (CBD, CBG, CBN, etc.) and adding in additional natural botanicals and adaptogens that have a proven benefit for certain health conditions, Veritas has been able to scientifically design a functional line of products that is specific to the needs of consumers. The new line consists of six products including Sleep Support, Stress Relief, Muscle & Joint Relief, Immunity Boost, Heart Health, and Energy Boost.

Production

Hemp growth, extraction, processing, formulation and product manufacturing takes place at our facilities located on our 140-acre farm in Pueblo Colorado. Our farm is capable of producing over 200,000 plants potentially yielding a minimum annual harvest of 250,000 to 300,000 pounds of outdoor grown hemp.

In addition, the Company’s 15,000 square feet of climate-controlled greenhouses are capable of producing a consistent supply of approximately 25,000 pounds per year of indoor cultivated hemp over 4-6 individual harvests.

There is an additional 10,000 square foot on-site facility used for plant processing and oil extraction, in addition to housing Veritas Farms’ testing and formulation laboratories, wherein GMP (good manufacturing practices) are strictly maintained.

The production process starts in the ground, with our cultivation team. Veritas Farms is fortunate to have a team of dedicated, experienced, and passionate farming experts that nurture our plants with individual care, much like the care and attention paid to vines in a vineyard.

After harvest, our in-house laboratory chemists and extraction technicians produce varieties of high quality, pure hemp derivative oils while constantly finding methods to improve processes and improve our products.

Veritas Farms uses advanced, strict natural protocols to cultivate its cannabinoid-rich hemp oil yield from its plants. After naturally air drying, only the leaves and flowers richly coated with trichomes are processed with our advanced ethanol spray evaporation extractors according to the planned uses for the cannabinoid-rich hemp extracts. Whole-plant full spectrum cannabinoid-rich hemp extracts are then further processed using chromatography and other techniques yielding pure distillates and other derivatives exceeding 80% cannabinoid-rich hemp with 0.3% or less THC.

Marketing and Sales

Overview

The primary target customers and markets for Veritas Farms products are:

The Veritas Farms product line is expected to continually expand to offer additional products and applications.

Currently, Veritas Farms has implemented a marketing plan to compete in the cannabinoid industry. To become a market leader in the industry, the Company plans to use three primary channels to market its products, web-based marketing, traditional marketing and medical marketing.

Web-Based Marketing

General. Veritas Farms’ expanded e-commerce retail platform is designed to offer for sale the Company’s premium phytocannabinoid-rich extract products directly to consumers under the Veritas Farms brand. The site gives us the ability to quickly adapt to a rapidly evolving market and to position our branded product lines as a leader in the industry. In addition to our e-commerce platform, Veritas Farms is pursuing distribution with leading third-party online retailers.

Content Marketing via Blogs and Social Media. We believe that content marketing offers a cost-effective marketing strategy. The core components to Veritas Farms’ content marketing strategy are blogs and social media posts. Veritas Farms launched an engaging social media campaign to promote an overall vision of quality and transparent phytocannabinoid products.

Influencer Campaigns. Influencer marketing is a type of marketing that focuses on using online leaders to drive the brand’s message to the larger market. Rather than market directly to a large group of consumers, Veritas Farms will partner with influencers to utilize their personal social channels to spread the word about the brand. Influencers are celebrities, high-quality content creators, buzz builders and promoters and natural health advocates. Extensive tracking methods will be implemented to determine the effectiveness of the influencer campaigns.

Affiliate Marketing, Affiliate marketing leverages partners or affiliates that earn a commission for marketing our products. The affiliates are allowed to pick which products they enjoy selling the most, preferably products they use and find effective, then promote that product to their followers and earn a piece of the profit. The sales are tracked via affiliate links from their website to ours.

Search Engine Optimization, (“SEO”). SEO is important for establishing and creating an online presence. Most online interaction starts with key words manually entered into a search engine, in relevant website options for the user. The Veritas Farms SEO marketing plan contemplates a monthly campaign to ensure the website ranks in top relevance for industry-related searches on major search engines such as Google, Bing and Yahoo.

Business Development

Our business strategy is to create long-term sustainable growth, developing and selling our CBD products that address customer needs. We have embarked on a strategy to grow the Company by supplementing our organic innovation efforts with key joint ventures, partnerships, and strategic alliances that are within or adjacent to our core areas of focus to capitalize on current and next-generation market opportunities. We are looking to maximize shareholder value and improve our financial position by looking at ‘business-2-business’ (B2B) and ‘business-2-consumer’ (B2C) companies to explore synergies for potential strategic alternatives and or M&A activity within the health, wellness, and pet industries. Some examples are CBD companies that sell direct to consumer, ancillary companies for the hemp/CBD industry, ancillary companies for the mushroom/nootropics industry, mushroom/nootropic direct to consumer brands, natural supplement brands, and pet brands.

Intellectual Property

We do not currently have any patents or copyrights. We currently own trademark registrations for the marks “VERITAS FARMS”, and “Veritas | Farms”, and a pending trademark application for the mark “VERITAS FARMS V BE TRULY HEALTHY”.

We rely on a combination of trade secret, including federal, state and common law rights in the United States, nondisclosure agreements, and other measures to protect our intellectual property. We require our employees, consultants, and advisors to execute confidentiality agreements and to agree to disclose and assign to us all inventions conceived under their respective employment, consultant, or advisor agreement, using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Our business is affected by our ability to protect against misappropriation and infringement of our intellectual property, including our trademarks, service marks, domain names, and other proprietary rights.

Government Regulation

We operate our business in markets that are both highly regulated and rapidly evolving. We are subject to numerous federal, state, local, and foreign laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Company’s activities in areas including, but not limited to, the hemp business in the United States, the consumer products and nutritional supplement markets in the United States, consumer protection, labor, intellectual property ownership and infringement, interstate commerce and taxation, federal and state healthcare, environmental and safety. The successful execution of our business objectives will be contingent upon our compliance with all applicable laws and regulations and obtaining all necessary regulatory approvals, permits and registrations, which may be onerous and expensive.

The federal Agricultural Improvement Act of 2018 (“Farm Bill”), signed into law on December 20, 2019, along with the Agricultural Act of 2014, the corresponding Consolidated Appropriations Act of 2016 provisions (as extended by resolution into 2019) and Colorado’s Industrial Hemp Regulatory Program and related state law, permit the cultivation of hemp, and the processing and manufacturing of hemp products, as part of agricultural pilot programs and/or state plans adopted by individual states, including Colorado (pursuant to which we operate). However, there can be no assurance that new legislation or regulations may be introduced at either the federal and/or state level which, if passed, would impose new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products. New legislation or regulations may require the reformulation, elimination or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials and it is possible that the costs of complying with these new regulatory requirements could be material.

The U.S. Food and Drug Administration (“FDA”), Federal Trade Commission (“FTC”) and their state-level equivalents, possess broad authority to enforce the provisions of federal and state law, respectively, applicable to consumer products. These regulations provide consumer safeguards for foods, dietary supplements and cosmetics, and give the power to these agencies to issue a public warning or notice of violation letter to a company, publicize information about illegal products, detain illegal products intended for import or export (in conjunction with U.S. Customs and Boarder Protection), require a recall of illegal products from the market, and request the Department of Justice, or the state-level equivalent, to initiate a seizure action, an injunction action, or a criminal prosecution in federal. or state courts. The initiation of any regulatory action towards industrial hemp or hemp derivatives by the FDA, FTC or any other related federal or state agency, could result in greater legal cost to Veritas Farms, may result in substantial financial penalties and enjoinment from certain business-related activities, and if such actions were publicly reported, they may have a materially adverse effect on the Company, its business and its results of operations.

Competition

The industrial hemp cultivation and derivative products industry is relatively new and evolving. Brand recognition, quality, performance, availability, and price are some of the factors that impact consumers’ choices among competing products and brands. Advertising, promotion, merchandising and the pace and timing of new product introductions also have a significant impact on consumers’ buying decisions. While we believe that the industry is fragmented at the present time, there is vigorous competition within each market where our products are sold, and there are numerous competitors, including Green Roads, Charlotte’s Web, cbdMD, Medterra and CV Sciences, some of whom are larger and have a longer operating history and greater financial resources than does the Company. Moreover, we may also face competition with larger firms in the consumer products manufacturing and distribution industry, who elect to enter the market given the relatively low barriers to entry. Veritas Farms believes that it competes effectively with these companies because of its vertical integration through the cultivation, extraction, formulation, manufacturing and distribution processes, the quality of its products and customer service. However, no assurance can be given that Veritas Farms will effectively compete with its existing or future competitors.

Human Capital Resources

We strive to create a high-performance culture that embraces diversity, inclusion, diverse perspectives and experiences, to ensure that employees have opportunities to develop the skills they need to grow and excel in their fields. Human capital management is a priority for our executives and board of directors. We are committed to identifying and developing the talent necessary for our long-term success. We have a robust talent and succession planning process and have established programs to support the development of our talent pipeline for critical roles in our organization. Annually, we conduct a robust review with the leadership team focusing on high performing and high potential talent, diverse talent and succession for our critical roles.

We also recognize that it is important to develop our future leaders. We provide a variety of resources to help our employees build and develop their skills, including online development resources as well as individual development opportunities and projects for key talent. Additionally, we have leadership development resources for our future leaders as they continue to develop their skills.

We also foster a strong corporate culture that promotes high standards of ethics and compliance for our business, including policies that set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our employees, officers, directors, or vendors.

As of December 31, 2022 we employed 17 full time employees and consultants Company-wide, including nine of whom are based in Florida and eight of whom are based in Colorado. We believe that relations with our employees are good. None of our employees are represented by a collective bargaining agreement.

Our principal office is located in Fort Lauderdale, Florida and our cultivation, production, warehouse and distribution facilities are located in Colorado. A majority of our personnel are currently working remotely as a result of the COVID-19 pandemic, and in 2022 we adopted a practice for our employees to work remotely on a regular basis, unless the job function requires the employee to be physically onsite, and in the long term, we expect that a majority of our personnel will continue to work remotely on a regular basis.

We offer competitive compensation to attract and retain the best people, and we help care for our people so they can focus on our mission. We offer our employees a wide array of benefits such as life and health (medical, dental, and vision) insurance, and paid time off, as well as emotional well-being services through our health insurance program. Our employees’ total compensation package includes market-competitive salary, bonuses or sales commissions, and equity. We generally offer equity grants to certain full-time employees, primarily management, after their one-year anniversary of hire and through annual equity grants because we want them to be owners of the Company and committed to our long-term success. We have conducted an annual pay equity analysis, and continue to be committed to pay equity.

Our Background

Veritas Farms 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.”

On September 27, 2017, the Company entered into a Securities Exchange Agreement with all the members of 271 Lake Davis, pursuant to which 271 Lake Davis became a wholly-owned subsidiary of the Company (the “271 Lake Davis Holdings, LLC Acquisition”). 271 Lake Davis was founded in February 2015 to produce natural rich-hemp products.

On May 11, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with the Cornelis F. Wit Revocable Living Trust, of which Cornelis F. Wit is the trustee (“Wit Trust”), an existing shareholder, pursuant to which the Company contemporaneously sold to the Wit Trust an aggregate of (a) 2,000,000 shares of its Series A Convertible Preferred Stock (“Series A Preferred Shares”); and (b) 1,000,000 shares of its Series B Convertible Preferred Stock (“Series B Preferred Shares,” and together with the Series A Preferred Shares, collectively, “Preferred Shares”) in exchange for (i) the payment of $2,000,000 (including $302,500 principal plus accrued but unpaid interest in bridge financing provided by the Wit Trust to the Company during April 2021); and (ii) the surrender of 2,000,000 units (“Units”), each Unit consisting of two shares of common stock and one warrant to purchase an additional share of common stock in accordance with the terms of the subscription agreements for the purchase of the Units entered into by the Wit Trust and the Company in September and October 2020. As a result of the transaction and the voting rights accorded the Preferred Shares, the Wit Trust then held approximately 88% of the voting power of the Company and accordingly, a “Change in Control” occurred.

Since May 2021 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 May 12, 2021, in accordance with the terms of a SPA (i) Bao T. Doan and Marc J. Horowitz stepped down from the board of directors, (ii) Alexander M. Salgado stepped down as Chief Executive Officer and a director of the Company, (iii) Michael Pelletier stepped down as an employee of the Company, except pursuant to a consulting agreement entered into with Mr. Pelletier on the same date, he continued to serve as Chief Financial Officer until August 11, 2021, (iv) Stephen E. Johnson (“Mr. Johnson”), Kuno van der Post (“Dr. van der Post”) and Craig Fabel (“Mr. Fabel”) were elected and appointed as directors on the board of directors, (v) Thomas E. Vickers (Mr. Vickers”), an incumbent director, was appointed as Chairperson of the Board, (vi) Mr. Johnson was appointed as Chief Executive Officer and President of the Company, and (vii) Ramon A. Pino was appointed as Executive Vice President of Finance, Treasurer and Secretary of the Company, and who was subsequently appointed as Chief Financial Officer on August 11, 2021; (2) on June 1, 2022, Kristen High (“Ms. High”) was elected and appointed as a director on the board of directors; (3) on June 30, 2022, Dave Smith, the Company’s COO, resigned; (4) on July 25, 2022, (i) Mr. 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, (5) on November 7, 2022, (i) Mr. Annoscia stepped down as Chief Executive Officer, President, and a director, and (ii) Mr. Vickers was appointed interim Chief Executive Officer and interim President, and (6) on December 8, 2022, (i) Kellie Newton, Mr. Fabel, and Ms. High were removed as directors on the board of directors, and (ii) Gary A. Shangold (“Dr. Shangold”) was elected and appointed as a director on the board of directors.

Available Information

Our website address is www.theVeritasFarms.com. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into this report or any other filings we make with the Securities and Exchange Commission (“SEC”). We file annual, quarterly, and current reports with the SEC. Our SEC filings, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”) are available free of charge over the Internet at the SEC’s web site at www.sec.gov. Our SEC filings are not posted on our website.

Item 1A. Risk Factors.

An investment in our securities is speculative in nature and involves a high degree of risk. In addition to the other information contained in this report, our stockholders and prospective investors should carefully consider the following risk factors in evaluating us and our business, any of which could materially adversely affect our business, financial condition, or operating results and could result in a loss of your investment.

We have a history of losses, a large accumulated deficit and may incur future losses. We may be unable to achieve or maintain profitability in the future.

The Company commenced operations in 2016 and began generating commercial revenues in 2017. The Company incurred net losses of $5,543,908, $7,263,567 and $7,592,539 for the years ended December 31, 2022, 2021, and 2020, respectively. At December 31, 2022, we had an accumulated deficit of $39,474,622. We are subject to all the problems, expenses, difficulties, complications and delays encountered in establishing a new business. The Company does not know if it will become commercially viable and ever generate significant revenues or operate at a profit.

We have incurred a material amount of indebtedness to fund our operations, the terms of which have required us to pledge substantially all of our assets as security. Our ability to conduct our business could be materially affected if we were unable to repay or extend the maturity dates of our outstanding indebtedness.

As of the filing date of this report, we had outstanding borrowings of $4,603,278 of principal amount, of which:

Further, in connection with the Credit Line which is for an amount up to $3,000,000 by the Wit Trust, we have granted the trust a security interest in our assets, such that all of our tangible and intangible assets are subject to a lien held by the trust.

The debt instruments include events of default, including, among other things, payment defaults, any breach by us of representations, warranties or covenants, certain bankruptcy events and, and in connection with the Credit Line, if any lawsuit, money judgment, writ or similar process is entered or filed against us or our subsidiary or any of our assets for more than $100,000. If an event of default were to occur under any of the debt instruments and we were unable to obtain a waiver for the default or extend the maturity dates of the debt instruments, the counterparties could, among other remedies, accelerate our obligations under the debt instrument, and in connection with the Credit Line exercise the creditor’s right to foreclose on their security interests, which would cause substantial harm to our business and prospects.

The Company needs additional financing to continue operations and become profitable; if we do not raise additional capital, we will need to curtail or cease operations; and our financial statements contain a going concern qualification.

We require additional capital for the development of our business operations. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may increase our capital needs and/or cause us to spend our cash resources faster than we expect. Accordingly, we will need to obtain additional funding in order to continue our operations. The uncertainties surrounding our ability to fund our operations raise substantial doubt about our ability to continue as a going concern.

For the past five years, the Company has funded its development activities primarily through private placements of debt and equity, and stockholder loans. As of December 31, 2022, we had approximately $55,273 in cash. The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2022, includes an explanatory paragraph stating that our lack of revenues and working capital raise substantial doubt about our ability to continue as a going concern. To become profitable, the Company will require additional financing. There can be no assurance that additional financing will be available to the Company when needed, on favorable terms or otherwise. The exact amount of additional financing raised, if any, will determine how quickly we can reach profitability on our operations. If additional funding is not obtained, we may need to reduce, defer or cancel product development efforts, our production and marketing operations, or overhead expenditures to the extent necessary. Moreover, any such additional financing may dilute the interests of existing stockholders. The absence of additional financing, if and when needed, could cause the Company to delay full implementation of its business plan in whole or in part, curtail its business activities, seriously harm the Company and its prospects and have an adverse effect on the Company’s financial condition and results of operations.

COVID-19 and Other Macroeconomic Factors.

The COVID-19 pandemic had a significant impact around the world and has created significant volatility, uncertainty, and economic disruption. It prompted governments and businesses to take unprecedented measures in response. While economies of various countries have rebounded from the global Covid-19 economic shutdown that began in the late first quarter and early second quarter of calendar year 2020, the impact of the Covid-19 pandemic continued, to varying degrees, in 2022 and continues, to varying degrees, in 2023 due to mounting inflationary cost pressures and potential recession indicators that have now negatively impacted the global economy. We continue to monitor the effects of the pandemic and macroeconomic environment and take appropriate steps to mitigate the impact on our business, employees and financial condition; however, the nature and extent of this impact in future periods remains difficult to predict due to numerous uncertainties outside our control.

Our limited operating history makes it difficult for potential investors to evaluate our business prospects.

The Company commenced operations in 2016 and began generating commercial revenues in 2017. Accordingly, we have a limited operating history upon which to base an evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertainties, and we cannot assure you that the Company will achieve or sustain profitability in the future.

The Company’s prospects must be considered in light of the risks encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. Future operating results will depend upon many factors, including our success in attracting and retaining motivated and qualified personnel, our ability to establish credit lines or obtain financing, our ability to develop and market new products, our ability to control costs, and general economic conditions. We cannot assure you that the Company will successfully address any of these risks. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.

The Company’s ultimate success will be dependent in part on our ability to successfully develop, produce and market a portfolio of natural phytocannabinoid-rich industrial hemp products, and market acceptance of our planned products.

Our ultimate success will be dependent in part on our ability to successfully develop, produce and market a portfolio of natural phytocannabinoid-rich industrial hemp products. We are an agribusiness and grow our product indoors and outdoors, and there are risks associated with the production of our product relating to such things as weather, soil deterioration, and infestation that could affect our supplies and inventory. In addition, market acceptance by and demand for our products from consumers will also be key factors in our ability to succeed. If we are unable to develop and market our portfolio of existing and planned products or if they are not accepted by consumers, our business, results of operations and financial condition could be seriously harmed.

We face substantial risk of product liability claims and potential adverse product publicity.

Like any other retailer, distributor or manufacturer of products that are designed to be ingested, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss or injury. Although we carry products liability insurance, a successful products liability claim brought against us that is in excess of our insurance coverage limits or assertion or settlement of any uninsured claim, or a significant number of insured claims could have a material adverse effect on our business and results of operations.

A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce or deplete our financial resources.

A significant product defect could materially harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and reduce end-user loyalty. A product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and profitability and could reduce or deplete our financial resources.

We need to undertake additional significant marketing efforts for our present and planned products.

Until 2019, our marketing efforts were limited in large part to sales in the business-to-business channel. In order to achieve profitability, we need to undertake significant marketing efforts for our existing and planned products in the business-to-consumer and medical channels, including building awareness of our Veritas Farms™ brand and promoting both online and “brick and mortar” sales. While we have significantly expanded our efforts since 2019, these marketing efforts must continue on an ongoing basis. There is no assurance that any marketing strategy we develop can be successfully implemented or if implemented, that it will result in significant sales of our existing and planned products.

Our agreements with customers do not require the purchase of any specified amount of products.

Our agreements with customers do not require them to purchase any specified amounts of our products or dollar amounts of sales or to make any purchases whatsoever. Therefore, we cannot assure you that, in any future period, our sales generated from our customers, individually or in the aggregate, will equal or exceed historical levels. We also cannot assure you that, if sales to any of our customers cease or decline, we will be able to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation or reduction of sales, or a decrease in the prices of products sold to one or more of these customers could cause a significant decline in our net sales and profitability.

If the Company fails to properly manage its growth, the Company’s business could suffer.

A significant part of the Company’s strategy will be to expand sales and marketing of its existing products into new channels and geographic markets and develop, sell and market additional products, such as those in its Veritas Farms™ product line. As we continue to grow our business and develop products, we expect to need additional research, development, managerial, operational, sales, marketing, financial, accounting, legal and other resources. The Company expects its growth to place a significant strain on management, as well as on operational and financial resources and systems. In addition, some members of our management do not have significant experience managing a CBD agribusiness operation, so our management may not be able to manage such growth effectively. Additionally, the majority of our personnel are currently working remotely, which may limit their ability to perform certain job functions and may negatively impact productivity. In the long term, we may experience challenges to productivity and collaboration, and technology infrastructure security, as personnel work remotely on a regular basis. To effectively manage our growth, we must continue to adapt to a remote work environment. To manage growth effectively, the Company will need to maintain a system of management controls, and attract and retain qualified personnel, as well as develop, train and manage management-level and other employees. Failure to manage our growth effectively could cause us to over-invest or under-invest in infrastructure, and result in losses or weaknesses in our infrastructure, which could have a material adverse effect on the ability to successfully implement our planned growth strategies, as well as on the Company’s business, results of operations and financial condition.

Our management may not be able to control costs in an effective or timely manner.

The Company’s management has used reasonable efforts to assess, predict and control costs and expenses. However, the Company only has a limited operating history upon which to base those efforts. Implementing our business plan may require more employees, capital equipment, supplies or other expenditure items than management has predicted. Likewise, the cost of compensating employees and consultants or other operating costs may be higher than management’s estimates, which could lead to sustained losses.

We expect our quarterly financial results to fluctuate.

We expect our net sales and operating results to vary significantly from quarter to quarter due to a number of factors, including changes in:

As a result of the variability of these and other factors, our operating results in future quarters may be below the expectations of our stockholders.

Cybersecurity breaches of our IT systems could degrade our ability to conduct our business operations and deliver products and services to our customers, delay our ability to recognize revenue, compromise the integrity of our software programs, result in significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.

We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and product development activities to our marketing and sales efforts and communications with our customers and business partners. Computer programmers may attempt to penetrate our network security, or that of our website, and misappropriate our proprietary information or cause interruptions of our service. Because the techniques used by such computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. We have also outsourced a number of our business functions to third-party contractors, and our business operations also depend, in part, on the success of our contractors’ own cybersecurity measures. Similarly, we rely upon distributors, resellers and system integrators to sell our products and our sales operations depend, in part, on the reliability of their cybersecurity measures. Additionally, we depend upon our employees to appropriately handle confidential data and deploy our IT resources in a safe and secure fashion that does not expose our network systems to security breaches and the loss of data. Accordingly, if our cybersecurity systems and those of our contractors fail to protect against unauthorized access, sophisticated cyberattacks and the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged.

The market for CBD products is highly competitive and the Company faces substantial competition. If we are unable to compete effectively in the market, our business and operating results could be materially and adversely affected.

The industrial hemp cultivation and derivative products industry is relatively new and rapidly evolving. While we believe that the industry is fragmented at the present time, there are numerous competitors, including Green Roads, Charlotte’s Webb, Folium Biosciences, Mary’s Nutritional and CV Sciences, some of whom are larger and more well-established with a longer operating history and greater financial resources than does the Company. Moreover, we may also face competition with larger firms in consumer products manufacturing and distribution industry, who elect to enter the market given the relatively low barriers to entry. The Company believes that it competes effectively with its competitors because of its vertical integration through the cultivation, extraction, formulation, manufacturing and distribution processes, the quality of its products and customer service. However, no assurance can be given that the Company will effectively compete with its existing or future competitors. In addition, competition may drive the prices of our products down, which may have a materially adverse effect on our business.

Given the rapid changes affecting the global, national and regional economies generally, and the CBD industry specifically, the Company may experience difficulties in further establishing and maintaining a competitive advantage in the marketplace. The Company’s success will depend on our ability to keep pace with any changes in such markets, especially legal and regulatory changes. Our success will depend on our ability to respond to, among other things, changes in the economy, market conditions and competitive pressures. Any failure to anticipate or respond adequately to such changes could have a material adverse effect on the Company’s business, financial condition and results of operations.

Our failure to appropriately and timely respond to changing consumer preferences and demand for new products and services could significantly harm our customer relationships and have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to changing consumer trends and preferences. Our failure to accurately predict or react to these trends could negatively impact consumer opinion of us as a source for the latest products, which in turn could harm our customer relationships and cause us to lose market share. The success of our product offerings depends upon a number of factors, including our ability to:

If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could have a material adverse effect on our financial condition and results of operations.

Recent turnover with our executive officers and board of directors may disrupt our operations, our strategic focus or our ability to drive stockholder value.

There have been significant changes to our executive officers and board of directors since May 2021 as previously reported in our Current Reports on Form 8-K filed May 12, 2021, August 12, 2021, June 3, 2022, July 5, 2022, July 28, 2022, November 14, 2022 and December 12, 2022, which includes the following: (1) on May 12, 2021, in accordance with the terms of a Securities Purchase Agreement dated May 12, 2021 with the Wit Trust, an existing stockholder, and the sale to the Wit Trust of the Series B Convertible Preferred Stock and Series A Convertible Preferred Stock, (i) Bao T. Doan and Marc J. Horowitz stepped down from the board of directors, (ii) Alexander M. Salgado stepped down as Chief Executive Officer and a director of the Company, (iii) Michael Pelletier stepped down as an employee of the Company, except pursuant to a consulting agreement entered into with Mr. Pelletier on the same date, he continued to serve as Chief Financial Officer until August 11, 2021, (iv) Stephen E. Johnson (“Mr. Johnson”), Dr. van der Post and Craig Fabel (“Mr. Fabel”) were elected and appointed as directors on the board of directors, (v) Thomas E. Vickers (Mr. Vickers”), an incumbent director, was appointed as Chairperson of the Board, (vi) Mr. Johnson was appointed as Chief Executive Officer and President of the Company, and (vii) Ramon A. Pino was appointed as Executive Vice President of Finance, Treasurer and Secretary of the Company, and who was subsequently appointed as Chief Financial Officer on August 11, 2021; (2) on June 1, 2022, Kristen High (“Ms. High”) was elected and appointed as a director on the board of directors; (3) on June 30, 2022, Dave Smith, the Company’s COO, resigned; (4) on July 25, 2022, (i) Mr. 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, (5) on November 7, 2022, (i) Mr. Annoscia stepped down as Chief Executive Officer, President, and a director, and (ii) Mr. Vickers was appointed interim Chief Executive Officer and interim President, and (6) on December 8, 2022, (i) Kellie Newton, Mr. 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. Turnover among our executive officers and board of directors may disrupt our operations, our strategic focus or our ability to drive stockholder value, and could have a material adverse effect on our operations, business and financial condition. 

We are dependent upon our executive officers and the loss of any of such individuals could have an adverse effect on the Company.

There have been significant changes to our executive officers and board of directors since May 2021 as described in the previous risk factor “Recent turnover with our executive officers and board of directors may disrupt our operations, our strategic focus or our ability to drive stockholder value.” Our success depends in large part upon the efforts of Mr. Vickers, our interim Chief Executive Officer and interim President and Mr. Pino, our Chief Financial Officer. While we are party to an employment agreement with Mr. Pino, we do not have an agreement with Mr. Vickers nor is Mr. Vickers receiving any compensation for his services as interim Chief Executive Officer and interim President. In addition, we do not currently maintain “key man” life insurance on any of our executive officers. Accordingly, the loss of the services of any of our executive officers, could potentially have a material adverse effect on the Company.

The Company’s success will be dependent in part upon its ability to attract qualified personnel and consultants.

The Company’s success will be dependent in part upon its ability to attract qualified management, including a permanent Chief Executive Officer, President and Chief Operating Officer, operational, administrative, product development and marketing and sales personnel and consultants. The inability to do so on favorable terms may harm the Company’s proposed business.

Increases in costs, disruption of supply or shortage of materials, including raw materials could harm our business.

The Company may experience increases in the cost or a sustained interruption in the supply or shortage of materials needed for the growing and production of its products. Any such an increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various materials, including raw materials, in our business. The prices for these materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. Substantial increases in the prices for our materials increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased prices for our products and services.

Natural elements and adverse weather events can disrupt our business.

Our business involves the growing of hemp, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Further, to the extent that our products are grown outside, we are subject to weather and climate conditions. Extended cold streaks, rain or snow, or generally cold weather or adverse climate conditions, could materially adversely affect our hemp plants. Accordingly, there can be no assurance that natural elements will not have a material adverse effect on any future production of our products.

There is limited availability of clinical studies regarding industrial hemp-based products.

Although hemp plants have a long history of human consumption, there is little long-term experience with human consumption of certain of these innovative product ingredients or combinations thereof in concentrated form. Although the Company performs research and/or tests the formulation and production of its products, there is limited clinical data regarding the safety and benefits of ingesting industrial hemp-based products. Any instance of illness or negative side effects of ingesting industrial hemp-based products would have a material adverse effect on our business and operations.

We do not have any business interruption insurance, and this may cause us to be unable to continue as a going concern if there is an interruption to our business.

There are a variety of things that may cause an interruption in our business, such as weather events. We do not carry business interruption insurance, which means that if our business is interrupted, we could be unable to produce, develop and market our products, and could lose substantial revenue and cash flow, materially harming our business, operations, and financial results.

We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual property rights or any claims that we are infringing upon the rights of others may adversely affect our competitive position.

Our commercial success depends, in large part, on our ability to obtain, maintain and protect our current and future brands (including Veritas Farms™), our proprietary formulations and products and to defend our intellectual property rights. Our ability to successfully implement our business plan depends on our ability to build and maintain brand recognition using trademarks, service marks, trade dress and other intellectual property. We cannot be sure that trademarks will be issued with respect to any future trademark applications or that our competitors will not challenge, invalidate or circumvent any existing or future trademarks issued to us. We may rely on trade secret, trademark, patent and copyright laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited protection. The steps we have taken and the steps we will take to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights. If our efforts to protect our intellectual property are unsuccessful or inadequate, or if any third party misappropriates or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on the Company’s business and prevent our brands from achieving or maintaining market acceptance. Protecting against unauthorized use of our trademarks and other intellectual property rights may be expensive, difficult and in some cases not possible. In some cases, it may be difficult or impossible to detect third-party infringement or misappropriation of our intellectual property rights, and proving any such infringement may be even more difficult.

The Company may experience difficulty opening or maintaining bank accounts.

Because the use, sale and distribution of cannabis remains illegal under federal law, many banks will not accept deposits from or provide other bank services to businesses involved with cannabis. Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships, which may increase over time. Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our business plan. Furthermore, the inability to open bank accounts may make it difficult for our existing and potential customers to operate and may make it difficult for them to contract with us.

Laws and regulations affecting the CBD industry are evolving under the Farm Bill, and changes to applicable regulations may materially affect our future operations in the CBD market.

The CBD used by the Company is derived from hemp as defined in the Farm Bill and codified at 7 USC 1639o means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” The cannabis sativa plant and its derivatives may also be deemed marijuana, depending on certain factors. “Marijuana” is a Schedule I controlled substance and is defined in the Federal Controlled Substances Act (“CSA”) at 21 USC Section 802(16) as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” Exemptions to that definition provided in 21 USC Section 802(16) include “the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination” or hemp as defined in 7 USC 1639o.

Substances meeting the definition of hemp in the Farm Bill and 7 USC 1639o may be used in clinical studies and research through an Investigational New Drug (“IND”) application with the FDA. Substances scheduled as controlled substances, like marijuana, require more rigorous regulation, including interaction with several agencies including the FDA, the U.S. Drug Enforcement Administration (“DEA”), and the National Institute on Drug Abuse within the National Institutes of Health (“NIH”).

Accordingly, if the CBD used by the Company is deemed marijuana and, therefore, a Schedule I controlled substance, the Company could be subject to significant additional regulation, as well as enforcement actions and penalties pertaining to the CSA, and any resulting liability could require the Company to modify or cease its operations.

Furthermore, in conjunction with the Farm Bill, the FDA released a statement about the status of CBD as a nutritional supplement, noting that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and Section 351 of the Public Health Service Act. Any difficulties we experience in complying with existing and/or new government regulation could increase our operating costs and adversely impact our results of operations in future periods. The FDA has issued guidance titled “FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD)” pursuant to which the FDA has taken the position that CBD is prohibited from use as an ingredient in a food or beverage or as a dietary ingredient in or as a dietary supplement based on several provisions of the FDCA. In the definition of “dietary supplement” found in the FDCA at 21 USC 321(ff), an article authorized for investigation as a new drug, antibiotic, or biological for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, is excluded from the definition of dietary supplement. A similar provision in the FDCA at 21 USC 331(ll) makes it a prohibited act to introduce or deliver into commerce any food with a substance that was investigated as a new drug prior to being included in a food. There are no similar exclusions for the use of CBD in non-drug topical products, as long as such products otherwise comply with applicable laws. The FDA created a task force to address the further regulation of CBD and other cannabis-derived products and is currently evaluating the applicable science and pathways for regulating CBD and other cannabis-derived ingredients.

As a result of the Farm Bill’s recent passage, we expect that there will be a constant evolution of laws and regulations affecting the CBD industry which could affect the Company’s plan of operations. Local, state and federal hemp laws and regulations may be broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal compliance and may ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to our business.

Changes to state laws pertaining to industrial hemp could slow the use of industrial hemp, which could impact our revenues in future periods. Approximately 40 states have authorized industrial hemp programs pursuant to the Farm Bill. Additionally, various states have enacted state-specific laws pertaining to the handling, manufacturing, labeling, and sale of CBD and other hemp products. Compliance with state-specific laws and regulations could impact our operations in those specific states. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured, and while there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests.

Our business is subject to compliance with government regulation, and the failure and costs associated therewith to comply with present and future government regulation could harm our business, results of operations, financial condition and prospects, could put us out of business and could cause you to lose your entire investment.

We are subject to numerous federal, state, local, and foreign laws and regulations, including those relating to:

The Farm Bill, along with the Agricultural Act of 2014, the corresponding Consolidated Appropriations Act of 2016 provisions (as extended by resolution into 2018) and Colorado’s Industrial Hemp Regulatory Program and related state law, provide for the cultivation of hemp, and processing and manufacturing of hemp products, as part of agricultural pilot programs and/or state plans adopted by individual states, including Colorado (pursuant to which we operate). The uncertainty of conflicting interpretations of these legislative authorities, as they relate to: (a) the CSA’s provisions relating to the possession, cultivation, processing or other handling of “marijuana” or (b) the FDCA’s provisions relating to the permissibility of hemp-derived ingredients in finished consumer goods and products presents a substantial risk to the success and ongoing viability of the Company and the hemp industry in general. The uncertainty is a deterrent to investment in cannabis related businesses, securing channels of distribution and obtaining banking, payment processing services, transfer agent, clearing, and other financial services. Investors face uncertainty in the ability to deposit and clear the securities offered herein.

New legislation or regulations may be introduced at either the federal and/or state level which, if passed, would impose substantial new regulatory requirements on the manufacture, packaging, labeling, advertising and distribution and sale of hemp-derived products. New legislation or regulations may require the reformulation, elimination or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material.

The FDA, FTC and their state-level equivalents, possess broad authority to enforce the provisions of federal and state law, respectively, applicable to consumer products and safeguards as such relate to foods, dietary supplements and cosmetics, including powers to issue a public warning or notice of violation letter to a company, publicize information about illegal products, detain products intended for import or export (in conjunction with U.S. Customs and Border Protection) or otherwise deemed illegal, request a recall of illegal products from the market, and request the Department of Justice, or the state-level equivalent, to initiate a seizure action, an injunction action, or a criminal prosecution in the U.S. or respective state courts. The initiation of any regulatory action towards industrial hemp or hemp derivatives by the FDA, FTC or any other related federal or state agency, would result in greater legal cost to the Company, may result in substantial financial penalties and enjoinment from certain business-related activities, and if such actions were publicly reported, they may have a materially adverse effect on the Company, its business and its results of operations.

Unfavorable interpretations of laws governing hemp processing activities could subject us to enforcement or other legal proceedings and limit our business and prospects.

There are no express protections in the United States under applicable federal or state law for possessing or processing hemp biomass derived from lawful hemp not exceeding 0.3% THC on a dry weight basis and intended for use in finished product, but that may temporarily exceed 0.3% THC during the interim processing stages. While it is a common occurrence for hemp biomass to have variance in THC content during interim processing stages after cultivation but prior to use in finished products, there is risk that state or federal regulators or law enforcement could take the position that such hemp biomass is a Schedule I controlled substance in violation of the CSA and similar state laws. In the event that the Company’s operations are deemed to violate any laws, the Company could be subject to enforcement actions and penalties, and any resulting liability could cause the Company to modify or cease its operations.

Costs associated with compliance with various laws and regulations could impact our financial results.

The manufacture, labeling and distribution of CBD products is regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict our ability to market CBD based products in the future. The FDA may regulate our products to ensure that the products are not adulterated or misbranded. We may also be subject to regulation by other federal, state and local agencies with respect to our CBD based products. Our advertising activities are subject to regulation by the FTC under the Federal Trade Commission Act. In recent years, the FTC and state attorneys general have initiated numerous investigations of dietary and nutritional supplement companies and products. Any actions or investigations initiated against the Company by governmental authorities or private litigants could have a material adverse effect on our business, financial condition and results of operations. Any actions or investigations initiated against the Company by governmental authorities or private litigants could have a material adverse effect on our business, financial condition and results of operations.

The shifting regulatory environment necessitates building and maintaining of robust systems to achieve and maintain compliance in multiple jurisdictions and increases the possibility that we may violate one or more of the legal requirements applicable to our business and products. If our operations are found to be in violation of any applicable laws or regulations, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, injunctions, or product withdrawals, recalls or seizures, any of which could adversely affect our ability to operate our business, our financial condition and results of operations.

Uncertainty caused by potential changes to legal regulations could impact the use and acceptance of CBD products.

There is substantial uncertainty and differing interpretations and opinions among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids and the CSA. These different opinions include, but are not limited to, the regulation of cannabinoids by the DEA and/or the FDA, and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The existing uncertainties in the CBD regulatory landscape in the United States cannot be resolved without further federal, and perhaps state-level, legislation and regulation or a definitive judicial interpretation of existing laws and regulations. If these uncertainties are not resolved in the near future or are resolved in a manner inconsistent with our business plan, such uncertainties may have an adverse effect upon our plan of operations and the introduction of our CBD-based products in different markets.

If we fail to obtain necessary permits, licenses and approvals under applicable laws and regulations, our business and plan of operations may be adversely impacted.

We may be required to obtain and maintain certain permits, licenses and regulatory approvals in the jurisdictions where we sell or plan to sell our products. There can be no assurance that we will be able to obtain or maintain any necessary licenses, permits or approvals. Any material delay in obtaining, or inability to obtain, such licenses, permits and approvals is likely to delay and/or inhibit our ability to carry out our plan of operations, and could have a material adverse effect on our business, financial condition and results of operations.

Our and our independent distributors’ failure to comply with applicable advertising laws and regulations could adversely affect our financial conditions and results of operations.

The advertisement of our products is subject to extensive regulations in the markets in which we do business. We and our independent distributors may fail to comply with such regulations governing the advertising of our products. We cannot ensure that all marketing materials used by us and our independent distributors will comply with applicable regulations, including bans on false or misleading product claims. If we or our independent distributors fail to comply with applicable regulations, we could be subjected to claims of false advertising, misrepresentation, significant financial penalties, and/or costly mandatory product recalls and relabeling requirements with respect to our products, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations.

We may seek to grow our business through key joint ventures, partnerships, and strategic alliances, including acquisitions of, or investments in, new or complementary businesses, facilities, technologies, offerings, or products, and the failure to manage these strategic alliances, or to integrate them with our existing business, could have a material adverse effect on us.

In the future we intend to consider opportunities in key joint ventures, partnerships, and strategic alliances, and or acquire or make investments in new or complementary businesses, facilities, technologies, offerings, or products, which may enhance our capabilities, complement our current products or expand the breadth of our markets. Strategic alliances and or acquisitions involve numerous risks, including:

Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies, products and services. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. As a result of future strategic transactions, we might need to issue additional equity securities, spend our cash, or incur debt (which may only be available on unfavorable terms, if at all) or contingent liabilities, any of which could reduce our profitability and harm our business. If we are unable to identify suitable strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies, offerings and products effectively, our business, financial condition, and results of operations could be materially and adversely affected. Also, while we intend to employ several different methodologies to assess potential business opportunities, the new business opportunities may not meet or exceed our expectations or desired objectives.

We are and plan to continue to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934 that requires us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs could reduce or eliminate our ability to earn a profit.

We are and plan to continue to be required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. To comply with these requirements, our independent registered public accounting firm has to review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel has to review and assist in the preparation of such reports. The incurrence of such costs is an expense to our operations, may increase as the Company grows and therefore have a negative effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if an active market ever develops, could drop significantly.

Our internal controls are inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

Our executive officers have identified two material weaknesses that have caused management to conclude that, as of December 31, 2022 our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting and or disclosure controls and procedures such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in Item 9A. Controls and Procedures, the identified material weaknesses at December 31, 2022 relate to the following:

The Jobs Act and the Company’s designation as a “smaller reporting company” under the Exchange Act has reduced the information that the Company is required to disclose, which could adversely affect the price of our common stock.

Under the Jobs Act, the information that the Company is required to disclose has been reduced in a number of ways.

Before the adoption of the Jobs Act, the Company was required to register the common stock under the Exchange Act within 120 days after the last day of the first fiscal year in which the Company had total assets exceeding $1,000,000 and 500 record holders of the common stock; the Jobs Act has changed this requirement such that the Company must register the common stock under the Exchange Act within 120 days after the last day of the first fiscal year in which the Company has total assets exceeding $10,000,000 and 2,000 record holders or 500 record holders who are not “Accredited Investors.” As a result, the Company is now required to register the common stock under the Exchange Act substantially later than previously.

Since the Company is not required, among other things, to file reports under Section 13 of the Exchange Act or to comply with the proxy requirements of Section 14 of the Exchange Act until such registration occurs or to comply with certain provisions of Sarbanes-Oxley Act and the Dodd-Frank Act and certain provisions and reporting requirements of or under the Securities Act and the Exchange Act, and the Company’s officers, directors and 10% stockholders are not required to file reports under Section 16(a) of the Exchange Act until such registration occurs, the Jobs Act has had the effect of reducing the amount of information that the Company and its officers, directors and 10% stockholders are required to provide for the foreseeable future.

In addition, the Company is a “smaller reporting company,” as defined in Rule 12b-2 under the Exchange Act. A smaller reporting company is generally defined as a company with less than $250 million of public float or a company with less than $100 million in annual revenues and either no public float or a public float that is less than $700 million. As a smaller reporting company, we are not required to provide certain information in our SEC reports as is otherwise required by larger companies. Accordingly, the Company is not required, among other things, to provide information in its SEC reports as to “risk factors”, “selected financial data”, “supplementary financial information”, “quantitative and qualitative disclosures about market risk”, “only two-year MD&A comparison rather than three-year comparison”, “compensation discussion and analysis”, “grants of plan-based awards table”, “option exercises and stock vested table”, “pension benefits table”, “nonqualified deferred compensation table”, “disclosure of compensation policies and practices related to risk management”, “pay ratio disclosure”, “compensation committee report”, “description of policies/procedures for the review, approval or ratification of related party transactions”, or “auditor’s attestation of management’s assessment of internal control over financial reporting”. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our shares of common stock held by non-affiliates exceeds $250 million as of the end of our second fiscal quarter ending June 30th of each year, or (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our shares of common stock held by non-affiliates exceeds $700 million as of the end of our second fiscal quarter ending June 30th of each year. For as long as we continue to be a smaller reporting company, we expect that we will take advantage of the reduced disclosure obligations available to us as a result of this classification. We also expect that we will remain a smaller reporting company for the foreseeable future, and we could retain our smaller reporting company status indefinitely depending on the size of our revenues and public float.

As a result of such reduced disclosure, the price for the common stock may be adversely affected, if an active market ever develops.

Public companies are subject to risks relating to securities fraud and derivative lawsuits, which may have a material adverse effect on our business, operations, and financial results.

As a publicly traded company, we are subject to state and federal securities laws. There is a risk that we may be subject to lawsuits that allege that we have violated such laws. Such a lawsuit would cause us to incur significant legal fees and could take up significant time of our executive officers and directors. We may be unable to defend or settle such an action, causing a material adverse effect on our business, operations, and financial results.

Such allegations could materially harm our reputation among investors and damage our ability to raise funds, issue securities, or remain liquid. It may reduce trading volume and cause a significant decline in the market price of our shares of common stock, damaging your ability to sell the shares of common stock.

Trading on the OTCQB may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares. Moreover, there is only a limited trading market for our common stock and we cannot guarantee the existence of an active established public trading market for our shares of common stock.

Our shares of common stock are currently quoted on the OTCQB market tier of the over-the-counter market operated by OTC Markets Group, Inc. (“OTC Markets”). Trading in stock quoted on the OTCQB is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our shares of common stock for reasons unrelated to operating performance. Accordingly, OTCQB may provide less liquidity for holders of our shares of common stock than a national securities exchange such as the Nasdaq Stock Market. Moreover, there is a limited trading market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that trading market might become. If a liquid trading market does not develop or is not sustained, investors may find it difficult to dispose of shares of our common stock and may suffer a loss of all or a substantial portion of their investment in our common stock.

Market prices for our shares of common stock may also be influenced by a number of other factors, including:

All of the foregoing factors may limit the ability of an investor to liquidate their investment in our common stock. There is no assurance that we can successfully develop or maintain an active established trading market for our shares of common stock. Accordingly, investors should be prepared to hold the securities for an indefinite period of time.

Trading and listing of securities of cannabis related businesses, including our common stock, may be subject to restrictions.

In the United States, many clearing houses for major broker-dealer firms, including Pershing LLC, the largest clearing, custody and settlement firm in the United States, have refused to handle securities or settle transactions of companies engaged in cannabis related business. This means that certain broker-dealers cannot accept for deposit or settle transactions in the securities of cannabis related businesses. Further, stock exchanges in the United States, including Nasdaq and the New York Stock Exchange, have historically refused to list certain cannabis related businesses, including cannabis retailers, that operate primarily in the United States. Our existing operations, and any future operations or investments, may become the subject of heightened scrutiny by clearing houses and stock exchanges, in addition to regulators and other authorities in the United States. Any existing or future restrictions imposed by Pershing LLC, or any other applicable clearing house, stock exchange or other authority, on trading in our common stock could have a material adverse effect on the liquidity of our common stock.

Were our common stock to be considered penny stock, and therefore become subject to the penny stock rules, U.S. broker-dealers may be discouraged from effecting transactions in shares of our common stock.

Broker-dealers are generally prohibited from effecting transactions in “penny stocks” unless they comply with the requirements of Section 15(h) of the Exchange Act and the rules promulgated thereunder. These rules apply to the stock of companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share or who do not meet certain other financial requirements specified by the SEC. Trades in our common stock are subject to these rules, which include Rule 15g-9 under the Exchange Act, which imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special written determination that the penny stock is a suitable investment for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale.

The penny stock rules also require a broker/dealer, prior to effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. A broker/dealer also must provide the customer with current bid and offer quotations for the relevant penny stock and information on the compensation of the broker/dealer and its salesperson in the transaction. A broker/dealer must also provide monthly account statements showing the market value of each penny stock held in a customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.

Our securities have in the past constituted “penny stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could severely limit the market liquidity of such shares and impede their sale in the secondary market.

Our directors with the consent of the majority of the holders of the Series B Convertible Preferred Stock have the right to authorize the issuance of shares of our preferred stock and additional shares of our common stock.

Our directors, within the limitations and restrictions contained in our articles of incorporation, with the consent of the majority of the holders of the Series B Convertible Preferred Stock and under certain circumstances with the consent of the majority of the holders of the Series A Convertible Preferred Stock, and without further action by the holders of our common stock, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and any other preferences, special rights and qualifications of any such series. While we have no intention of issuing additional shares of preferred stock at the present time, we continue to seek to raise capital through the sale of our securities and may issue shares of preferred stock in connection with a particular investment. Any issuance of shares of preferred stock could adversely affect the rights of holders of our common stock.

The shares of Series B Convertible Preferred Stock issued in May 2021 provide super-voting rights that resulted in a change of control of the Company.

Each outstanding share of the Series B Convertible Preferred Stock of the Company entitles the holder to 250 votes at any meeting of our stockholders, for an aggregate of 250,000,000 votes, and such shares of Series B Convertible Preferred Stock will vote together with the common stockholders. As a result of the change in control, the holder of the Series B Convertible Preferred Shares could vote the shares in a manner that could be contrary to the interests of the holders of our common stock. All shares of the Series B Convertible Preferred Stock are owned by the Wit Trust.

The Cornelis F. Wit Revocable Living Trust controls approximately 88% of our outstanding voting securities. This concentration of ownership may have an effect on matters requiring the approval of our stockholders, including transactions that are otherwise favorable to our common stockholders.

As of the date of filing this report, the Wit Trust Wit Trust owned approximately 88% of our outstanding voting securities. As a result of this majority ownership of voting securities, the Wit Trust has the ability to exert substantial control over all matters requiring approval by our stockholders and our board of directors, including the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other significant corporate transactions, and may delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without the support of the Wit Trust, regardless of the impact of such transaction on our other stockholders. This concentration of control could be disadvantageous to other stockholders with interests different from those of the Wit Trust.

We do not expect to pay cash dividends in the foreseeable future and any return to investors is expected to result, if at all, only from potential increases in the price of our common stock, and; in respect of rights to the payment of dividends, the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock rank senior to the common stock.

We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our shares of common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our shares of common stock. Further, in respect of rights to the payment of dividends, the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock rank senior to the common stock and any other class or series of stock of the Company.

The “market overhang” from options, warrants, preferred stock and convertible securities could adversely impact the market price of our common stock.

The “market overhang” from options, warrants, preferred stock and convertible securities could adversely impact the market price of our common stock as a result of the dilution which would result if such securities were exercised for or converted into common stock. As of the date of filing this report, there were 41,625,331 shares of our common stock outstanding. In addition, the Company has issued and outstanding (i) 4,000,000 shares of Series A Convertible Preferred Stock, each share convertible into 20 shares of common stock for an aggregate of 80,000,000 shares of common stock, (ii) 1,000,000 shares of Series B Convertible Preferred Stock, each share convertible into 5 shares of common stock for an aggregate of 5,000,000 shares of common stock, and (iii) options, warrants and other securities exercisable for or convertible into 68,555,270 shares of common stock. All outstanding shares of our common stock are eligible for sale in the public market under applicable federal securities laws, subject in certain cases to the requirements of Rule 144 under the Securities Act, and shares issued upon the exercise or conversion of outstanding options, warrants, preferred stock or other convertible securities may also be eligible for sale in the public market, to the extent permitted by Rule 144 or other applicable securities laws and the provisions of the applicable option, warrant, preferred stock and convertible securities agreements. If these shares are sold, or if it is perceived that they may be sold, in the public market, the trading price of our common stock could fall.

Future issuances of our common stock or rights to purchase our common stock, including pursuant to our equity incentive plans, could result in additional dilution to the percentage ownership of our stockholders and could cause the price of our common stock to decline.

We have historically funded our operations in large part with proceeds from equity and convertible debt financings, and we expect to continue to do so in the future. If we sell common stock or other equity or convertible debt securities in the future, our then-existing stockholders could be materially diluted by such issuances and new investors could gain rights, preferences and privileges senior to the holders of our common stock, which could cause the price of our common stock to decline.

We may seek to grow our business through key joint ventures, partnerships, and strategic alliances, including acquisitions of, or investments in, new or complementary businesses, facilities, technologies, offerings, or products, and the failure to manage these strategic alliances, or to integrate them with our existing business, could have a material adverse effect on us.

In the future we intend to consider opportunities in key joint ventures, partnerships, and strategic alliances, and or acquire or make investments in new or complementary businesses, facilities, technologies, offerings, or products, which may enhance our capabilities, complement our current products or expand the breadth of our markets. Strategic alliances and or acquisitions involve numerous risks, including:

Our ability to successfully grow through strategic transactions depends upon our ability to identify, negotiate, complete and integrate suitable target businesses, facilities, technologies, products and services. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. As a result of future strategic transactions, we might need to issue additional equity securities, spend our cash, or incur debt (which may only be available on unfavorable terms, if at all) or contingent liabilities, any of which could reduce our profitability and harm our business. If we are unable to identify suitable strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies, offerings and products effectively, our business, financial condition, and results of operations could be materially and adversely affected. Also, while we intend to employ several different methodologies to assess potential business opportunities, the new business opportunities may not meet or exceed our expectations or desired objectives.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company owns its 140-acre cultivation and production facility located at 8648 Lake Davis Road, Pueblo, Colorado.

Our executive and sales offices are currently located at 401 E. Las Olas Boulevard Suite 1400, Fort Lauderdale, FL 33301.

Our warehouse and distribution facilities are located in approximately 12,240 square feet of space at 1325 Cheyenne Ave., Pueblo, CO 81003. This space is leased from a non-affiliated party at a rental of approximately $5,100 per month pursuant to a three-year lease expiring in February 2024.

We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.

Item 3. 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 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the OTCQB market tier of the OTC Markets’ electronic quotation system under the symbol “VFRM”. Currently the market for our common stock is extremely limited. We can provide no assurance that our common stock will continue to be traded on the OTCQB or another OTC Markets tier or an exchange, or if traded, that a meaningful, consistent and liquid market for our common stock will be sustainable.

Holders of our Common Stock

As of April 14, 2023, we had 41,625,331 shares of common stock outstanding and 188 holders of record of our common stock.

Dividends

The payment by us of dividends, if any, in the future rests within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements and financial condition, as well as other relevant factors. We have not paid any dividends since our inception and we do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business. There can be no assurance that cash dividends of any kind will ever be paid.

Additionally, pursuant to the terms of the Company’s Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (collectively, the “Preferred Shares”), the Company is prohibited from declaring and paying dividends on the Company’s common stock until all accrued and unpaid dividends are paid on such Preferred Shares. As of December 31, 2022, the accrued and unpaid dividends on the Preferred Shares were $595,830.

Item 6. [Reserved].

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

COVID-19 and Other Macroeconomic Factors

The COVID-19 pandemic had a significant impact around the world and has created significant volatility, uncertainty, and economic disruption. It prompted governments and businesses to take unprecedented measures in response. While economies of various countries have rebounded from the global Covid-19 economic shutdown that began in the late first quarter and early second quarter of calendar year 2020, the impact of the Covid-19 pandemic continued, to varying degrees, in 2022 and continues, to varying degrees, in 2023 due to mounting inflationary cost pressures and potential recession indicators that have now negatively impacted the global economy. We continue to monitor the effects of the pandemic and macroeconomic environment and take appropriate steps to mitigate the impact on our business, employees and financial condition; however, the nature and extent of this impact in future periods remains difficult to predict due to numerous uncertainties outside our control.

Results of Operations

Year ended December 31, 2022 compared to year ended December 31, 2021

Revenues. We had net sales for the year ended December 31, 2022 of $1,063,105, as compared to $2,906,425 for the year ended December 31, 2021. The decrease reflects a significant contraction of retail sales in 2022 from 2021, primarily as a result of increased competition and decreased acceptance in big box retail leading to reduced inventory turnover. 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. We co-package in addition to marketing our own Veritas Farms brand product line.

Cost of Sales. All expenses incurred to grow, process, and package the finished goods are included in our cost of sales. Cost of sales decreased to $2,446,271 for the year ended December 31, 2022, from $4,108,133 for the year ended December 31, 2021, primarily as a result of a reduced inventory write down which occurred during the year ended December 31, 2022 as compared to the year ended December 31,2021 in addition to reduced cost of goods sold related to the reduction in sales. We had gross (expense) of ($1,383,166) for the year ended December 31, 2022, as compared to gross (expense) of ($1,201,708) for the year ended December 31, 2021.

Expenses. Selling, general and administrative expenses decreased to $4,081,321 for the year ended December 31, 2022, from $6,125,366 for the year ended December 31, 2021, reflecting the significant reduction in marketing expenses, as well as the reduction in the number of employees during the year ended December 31, 2022 in addition to a significant reduction in our research and development. Selling, general and administrative expenses primarily consist of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.

Interest expense was $53,680 during the year ended December 31, 2022 compared to $86,645 for the year ended December 31, 2021. Interest expense incurred to related parties was $432,052 during the year ended December 31, 2022 and $65,650 for the year ended December 31, 2021. Included in interest expense for both periods is the accretion of discounts recorded related to financial instrument derivatives that were deemed a part of the financings that we entered into.

Net (Loss). As a result of the decrease in operating, marketing and public company expenses incurred during the year ended December 31, 2022, net loss for the year ended December 31, 2022, decreased to ($5,543,908) or ($0.13) per share based on 41,625,331 weighted average shares outstanding, from ($7,263,567) or ($0.17) per share based on 43,377,832 weighted average shares outstanding for the year ended December 31, 2021.

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 December 31, 2022, we had working capital of approximately $364,839.

Cash decreased to $55,273 at December 31, 2022 from $481,763 at December 31, 2021. The decrease was primarily due to cash used in operating activities.

As of December 31, 2022, total assets were $6,794,471, as compared to $8,597,840 at December 31, 2021. Assets primarily decreased due to decreases in cash, inventories and property and equipment assets.

Total liabilities as of December 31, 2022 were $7,400,748, as compared to $3,772,555 at December 31, 2021. The increase was due in large part to increases in dividends payable and convertible notes payable.

Net cash used in operating activities decreased to $3,891,956 for the year ended December 31, 2022, from $4,755,792 for the year ended December 31, 2021. Results of operations, offset by decreases in inventories and employee retention credit receivables comprised most of the change.

Net cash provided by investing activities was $18,456 for the year ended December 31, 2022 as compared to net cash used in investing activities of $80,289 for the year ended December 31, 2021, reflecting a decrease in cash used for the purchase of property and equipment in 2022.

Net cash provided by financing activities was $3,447,010 for year ended December 31, 2022, primarily attributable to $3,500,000 received from convertible notes payable. This compares to net cash provided by financing activities of $5,210,151 for the year ended December 31, 2021.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2022:

Sources of Liquidity and Capital Resources; Debt Obligations

For the past five years 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, an Economic Injury Disaster Loan, and PPP loans.

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 December 31, 2022 we are in default in the payment of principal. This default does not trigger any other default events for any other notes payable.

In September 2020, the Company commenced a $4.0 million private offering of up to 8,000,000 Units (“Units”) at a price of $0.50 per Unit, which private offering ended April 30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling the holder to purchase one share of our common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December 31, 2020, the Company sold 2,080,000 Units in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. From January 1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105 resulting in net proceeds of $86,895. The terms of this offering provided that, if during the one-year period from the final closing of the offering, the Company undertakes a subsequent private offering of its equity, equity equivalent or debt securities (a “Subsequent Offering”), the investor will be entitled to exchange their Units purchased in the offering for an equivalent dollar amount of securities sold in the Subsequent Offering (based on the respective offering prices). The Company also entered into a registration rights agreement with these investors which states, among other things, that the Company shall use commercially reasonable efforts to prepare and file with the SEC a registration statement covering, among other things, the resale of all or such portion of the registrable securities that are not then registered on an effective registration statement. As of December 31, 2021, all Unit holders converted their Units to Series A Preferred Shares.

On May 11, 2021, the Company consummated the issuance and sale of the Preferred Shares to the Wit Trust described under “Business – Our Background” above, which generated gross proceeds of $2,000,000 (including certain bridge financing previously furnished by the Wit Trust to the Company in April 2021).

On September 30, 2021, the Company completed a private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share (“2021 Private Placement”) in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion of an account payable); and (ii) the surrender of 280,000 Units. The investors in the 2021 Private Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Dr. van der Post, a member of the Board of Director of the Company, in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued and unpaid interest. As a result of the 2021 Private Placement and the voting rights accorded the Series A Preferred Shares and Series B Preferred Shares, the Wit Trust now holds approximately 88% of the voting power of the Company.

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 on March 9, 2022 was amended and restated in the principal amount for up to $3,000,000 (the “Secured Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. The Secured Convertible Promissory Note is secured by the Company’s assets and contain certain covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate 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 accrues interest on the aggregate amount loaned at a rate of 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. As of December 31, 2022, $3,000,000 was outstanding under 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.

The accompanying financial statements have been prepared in conformity with GAAP in the United States, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception. As of and for the period ended December 31, 2022, the Company had an accumulated deficit of ($39,474,622) and a net loss of ($5,543,908). 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 stockholders. 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.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Factors Affecting Future Performance

Item 1A of this report 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.

Critical Accounting Policies

Inventory Valuation 

Inventories are comprised of raw materials and supplies, hemp, internally produced work in progress, and finished goods. Inventories are initially valued at cost and subsequently at the lower of cost and net realizable value. Inventory cost is determined on a weighted average cost basis and any trade discounts and rebates are deducted from the purchase price. Raw material costs include the purchase cost of the materials, freight-in and duty. Costs incurred during the hemp growing and production process are capitalized as incurred to the extent that cost is less than net realizable value. These costs include materials, labor and manufacturing overhead used in the growing and production processes. The Company capitalizes pre-harvest hemp costs. Finished goods include the cost of direct materials and labor and a proportion of manufacturing overhead allocated based on normal production capacity.

Net realizable value represents the estimated selling price for inventories in the ordinary course of business, less all estimated costs of completion and costs necessary to make the sale. The Company periodically reviews the value of items in inventory and records write-downs or write-offs of inventory based on its subjective assessment of market conditions and values, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence in order to determine current net realizable value. The Company also includes quantitative and qualitative value factors such as terpene content, oil color and consistency, traceability, and heavy metal content in its net realizable value market oil review and has determined that a market average selling price is the appropriate net realizable value measurement. Changes in average market selling prices could materially impact future inventory valuations. The impact of changes in inventory values is reflected in cost of sales.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 8. Financial Statements and Supplementary Data.

See the Index to the Consolidated Financial Statements beginning on page F-1 below.

VERITAS FARMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Veritas Farms, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Veritas Farms, Inc. (the Company) as of December 31, 2022, and 2021, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. However, as described in Note 2 to the financial statements, the Company has sustained substantial losses from operations since its inception. As of and for the year ended December 31, 2022, the Company had an accumulated deficit of $39,474,622, and a net loss of $5,543,908. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern within a year from the date the financial statements are issued. Continuation as a going concern is dependent on the ability to raise additional capital and financing, though there is no assurance of success. Management’s plans in regard to these matters are also described in Note 2 to the accompanying consolidated financial statements.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to an account or disclosure that is material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Inventory – Refer to Notes 1 and 3 to the consolidated financial statements

Critical Audit Matter Description

Inventories consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories on hand, estimated time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value of specific inventory items has been impaired.

We identified the net realizable value of oil inventory as a critical audit matter because of the significant judgments made by management to estimate the net realizable value. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates related to net realizable value of oil inventory.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures to address the Company’s valuation of inventory included the following, among others:

/s/ Prager Metis CPAs LLC

Hackensack, NJ

April 17, 2023

We have served as the Company’s auditor since 2018

VERITAS FARMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements

VERITAS FARMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements

VERITAS FARMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements

VERITAS FARMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

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 strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial hemp on its 140-acre farm pursuant to Federal law.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Principles of Consolidation

The accompanying 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 (“271 Lake Davis”). All significant inter-company accounts and transactions have been eliminated in consolidation.

Estimates in Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Fair Value Measurement

The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”) which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The Company does not have any assets or liabilities measured at fair value on a recurring basis.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount reported in the accompanying consolidated balance sheets approximates fair value. At times, cash and cash equivalents may be in excess of FDIC insurance limits of $250,000. The Company had no cash equivalents as of December 31, 2022 and December 31, 2021.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Revenue Recognition

Under ASC 606, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.

The Company’s product revenue is generated primarily through two sales channels, e-commerce sales and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

A description of the Company’s principal revenue generating activities are as follows:

The following tables represent a disaggregation of revenue by sales channel:

Cost of Goods Sold

Cost of goods sold includes the costs directly attributable to production of inventory such as cultivation costs, extraction costs, packaging costs, security, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.

Inventories

Inventories consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value of specific inventory items has been impaired. The Company recorded an inventory write down of $802,493 in 2022 which is presented in the Statement of Operations. Inventory write-downs were recorded to reflect anticipated net realizable value on disposition of existing inventory assets.

Property and Equipment

Purchases of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the Consolidated Statements of Operations. Depreciation is recognized over the estimated economic useful lives of each class of assets and is computed using the straight-line method.

Assets Held for Sale

The Company classifies an asset group as held for sale in the period that (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable and transfer of the asset is expected to qualify for recognition as a completed sale within one year (subject to certain events or circumstances), (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially and subsequently measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Upon designation as an asset held for sale, the Company stops recording depreciation or amortization expense on the asset. The Company assesses the fair value of assets held for sale less any costs to sell at each reporting period until the asset is no longer classified as held for sale. Conversely, gains are generally not recognized on the sale of a long-lived asset until the date of sale. 

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Impairment of Long-Lived Assets

The carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments, industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the fair market value. The Company has determined that no impairment exists at December 31, 2022 and December 31, 2021.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: the Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

The Company records a discount to convertible notes and convertible preferred stock for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note, if applicable. Debt discounts under these arrangements are amortized to noncash interest expense using the effective interest rate method over the term of the related debt to their date of maturity. If a security or instrument becomes convertible only upon the occurrence of a future event outside the control of the Company, or, is convertible from inception, but contains conversion terms that change upon the occurrence of a future event, then any contingent beneficial conversion feature is measured and recognized when the triggering event occurs and contingency has been resolved.

Compensation and Benefits

The Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Stock-Based Compensation

The Company accounts for share-based payments in accordance with ASC Topic 718, Compensation - Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. The Company recognizes forfeitures when they occur.

The Company accounts for stock-based compensation to other non-employees in the same manner in which it accounts for stock-based compensation for employees.

Income Taxes

The Company accounts for income taxes under ASC 740. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

In accordance with ASC 740, management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. 

Income tax benefits are recognized for income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the Company’s financial condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at December 31, 2022 and December 31, 2021.

Leases

The Company has two leased buildings that are classified as operating lease right-of use (“ROU”) assets and operating lease liabilities in the Company’s consolidated balance sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement. Operating lease expense is recognized on a straight-line basis over the lease term and is included in Selling, general and administrative expenses.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Related Party Transactions

The Company follows ASC 850, Related Party Disclosures, (“ASC 850”) for the identification of related parties and disclosure of related party transactions. Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

In accordance with ASC 850, the consolidated financial statements include disclosures of related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary for an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Legal Proceedings

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in any such matter may harm the Company’s business.

Correction of Previously Issued Financial Statements

The accompanying consolidated statement of operations for the year ended December 31, 2021 has been corrected for the following: an adjustment to reclassify selling, general and administrative expenses of $175,367 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 $3,081,792 to $2,906,425 with a corresponding increase of gross expense from $1,026,341 to $1,201,708 and selling, general and administrative expenses decreased from $6,300,733 to $6,125,366.  The correction had no impact on total operating loss and net loss.

Subsequent Events

The Company has evaluated subsequent events through the date which the financial statements were issued. See Note 13: Subsequent Events

Impact of New Accounting Standards

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements. 

In August 2020, the FASB issued ASU 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Additionally, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share (“EPS”) calculation in certain areas. This standard is effective for the Company beginning in fiscal year 2024 and early adoption is permitted. The Company is analyzing the effect of this standard.

ASU 2020-06 is effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Company is currently evaluation the impact this ASU will have on its consolidated financial statements

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE 2: GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with 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 December 31, 2022, the Company had an accumulated deficit of ($39,474,622), and a net loss of ($5,543,908). These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. A going concern disclosure means that there is substantial doubt that the company can continue as an ongoing business for the next 12 months from the date the financial statements are issued. Continuation as a going concern is dependent on the ability to raise additional capital and financing until we can achieve a level of operational profitability, though there is no assurance of success.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

NOTE 3: INVENTORIES

Inventories consists of:

Inventory values include 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 and total inventory impairment write-downs of $1,991,991 which include reductions of $303,697 to finished goods and $1,688,294 to hemp and oil for the year ended December 31, 2021.

NOTE 4: PROPERTY AND EQUIPMENT

Total depreciation expense was $459,072 and $499,000 for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, 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 year.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE 5: NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE

The following table summarizes the notes payable outstanding as of December 31, 2022.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

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

Paycheck Protection Program

In May 2020, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company received a loan in the amount of $803,994 under U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“2020 PPP Loan”). In June 2021, the 2020 PPP Loan principal and all accrued interest totaling $822,837 was forgiven in full.

In February 2021, as part of the business incentives offered in the CARES Act, the Company received a second loan in the amount of $803,994 under the SBA Paycheck Protection Program (“2021 PPP Loan”). In April 2022, the 2021 PPP Loan principal and all accrued interest totaling $812,981 was forgiven in full.

Economic Injury Disaster Loan

In June 2020, the Company received a loan in the amount of $150,000 from the SBA as an Economic Injury Disaster Loan (“EIDL”). The EIDL accrues interest at the rate of 3.75% per annum and has a term of 30 years. The first payment due is deferred two years. The principal balance of the EIDL as of December 31, 2022 has been classified as a long-term liability in notes payable.  

8% Secured Promissory Notes Payable

On April 19, 2021, the Company issued a secured convertible promissory note in the principal amount of $25,000 to our Chairperson of the Board, Thomas E. Vickers, who also serves as our interim Chief Executive Officer and interim President since November 7, 2022 (“Mr. Vickers”). The note carried an interest rate of eight percent (8%) per annum and had a maturity date of May 19, 2021. On May 19, 2021, the Company and Mr. Vickers extended the maturity date of the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding $25,000 in principal in accordance with the note’s terms and $25,000 in additional cash consideration in exchange for 50,000 shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Shares”).

On July 22, 2021, the Company issued secured convertible promissory notes in the aggregate principal amount of $1,075,000 in exchange for an aggregate amount of $1,075,000, which secured convertible promissory notes were issued to the Wit Trust, a principal shareholder who holds securities of the Company that constitute a majority of the voting securities of the Company, in the amount of $1,000,000, Stephen E. Johnson, former Chief Executive Officer and President of the Company (“Mr. Johnson”), in the amount of $50,000, and Ramon A. Pino, Chief Financial Officer of the Company (“Mr. Pino”), in the amount of $25,000. These secured convertible promissory notes accrued interest at eight percent (8%) per annum and had a maturity date of (i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted the outstanding $25,000 in principal in accordance with the note’s terms in exchange for 25,000 Series A Preferred Shares. On September 7, 2021, Mr. Johnson converted the outstanding $50,000 in principal in accordance with the note’s terms in exchange for 50,000 Series A Preferred Shares. On September 30, 2021, the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series A Preferred Shares.

On August 30, 2021, the Company issued a secured convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust. The note carried an interest rate of eight percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the Wit Trust converted the outstanding $500,000 in principal in accordance with the note’s terms in exchange for 500,000 Series A Preferred Shares.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

10% Convertible 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 December 31, 2022 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 December 31, 2022 and $0 as of December 31, 2021 on the accompanying balance sheet with amortization to interest expense of $23,750 for the year ended December 31, 2021.

10% Secured Convertible Promissory Note

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 on March 9, 2022 was amended and restated in the principal amount for up to $3,000,000 (the “Secured Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. The Secured Convertible Promissory Note is secured by the Company’s assets and contain certain covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will accrue interest on the aggregate amount loaned at a rate of 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 $280,833 on the accompanying balance sheet with amortization to interest expense of $160,476 for the year ended December 31, 2022 and $33,691 for the year ended December 31, 2021. At December 31, 2022, $3,000,000 was outstanding under 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.

The secured convertible promissory notes issued in 2022 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 (“Incentive Plan”) which authorizes the Company to grant or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards up to a total of 6,867,747 shares of common stock. Under the terms of the Incentive Plan, awards may be granted to our employees, directors or consultants. Awards issued under the Incentive Plan vest as determined at the time of grant by the Board of Directors or any of the Committees appointed under the Incentive Plan.

The Company’s outstanding stock options typically have a 10-year term. Outstanding non-qualified stock options granted to employees and consultants vest on a case-by-case basis. Outstanding incentive stock options issued to employees typically vest over a three-year period. The incentive stock options granted vest based solely upon continued employment (“time-based”). The Company’s time-based share awards typically vest in 33.3% increments on each of the three anniversary dates of the date of grant. Outstanding incentive stock options issued to executives typically vest partially upon grant date, with the residual vesting over the subsequent 6 or 12 months.

Veritas Farms, Inc. and Subsidiary

Notes to Consolidated Financial Statements

On May 12, 2021, the Company granted four non-employee directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.16 with a term of ten (10) years, with 25% of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company.

On May 12, 2021, the Company granted (i) Mr. Johnson stock options under the Incentive Plan to purchase 450,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years, vesting ratably on the first three anniversaries of the grant date subject to Mr. Johnson’s continuous service to the Company, and (ii) Mr. Pino stock options under the Incentive Plan to purchase 385,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years, vesting ratably on the first three anniversaries of the grant date subject to Mr. Pino’s continuous service to the Company. In addition the Company also granted 150,000 stock options to purchase shares of common stock at a per share exercise price of $0.38 and 100,000 stock options to purchase shares of common stock at a per share exercise price of $0.11 during the year ended December 31, 2021. The aggregate fair value for all options granted for the year ended December 31, 2021 was $263,500.

On January 1, 2022, the Company granted an aggregate 625,000 options to employees, including 300,000 options to Dave Smith, our former Chief Operating Officer under the Incentive Plan, at a per share exercise price of $0.049 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries of the grant date subject to the employee’s continuous service to the Company.

On June 30, 2022, the Company granted an aggregate 950,000 options to employees and directors, including five non-employee directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.031 with a term of ten (10) years, with twenty five percent (25%) of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company. The employee stock options will vest ratably on the first three anniversaries of the grant date subject to the employee’s continuous service to the Company.

On December 8, 2022, the Company granted one non-employee directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.019 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 year ended December 31, 2022 was $60,661.

Total stock-based compensation expense was $112,346 and $214,150 for the years ended December 31, 2022 and December 31, 2021, respectively.

The following table summarizes the stock option activity for the Company’s Incentive Plan for the years ended December 31, 2022 and December 31, 2021: