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. 26 Results of Operations
Year ended
Revenues. We had net sales for the year endedDecember 31, 2022 of$1,063,105 , as compared to$2,906,425 for the year endedDecember 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 endedDecember 31, 2022 , from$4,108,133 for the year endedDecember 31, 2021 , primarily as a result of a reduced inventory write down which occurred during the year endedDecember 31, 2022 as compared to the year endedDecember 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 endedDecember 31, 2022 , as compared to gross (expense) of ($1,201,708 ) for the year endedDecember 31, 2021 . Expenses. Selling, general and administrative expenses decreased to$4,081,321 for the year endedDecember 31, 2022 , from$6,125,366 for the year endedDecember 31, 2021 , reflecting the significant reduction in marketing expenses, as well as the reduction in the number of employees during the year endedDecember 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 endedDecember 31, 2022 compared to$86,645 for the year endedDecember 31, 2021 . Interest expense incurred to related parties was$432,052 during the year endedDecember 31, 2022 and$65,650 for the year endedDecember 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 endedDecember 31, 2022 , net loss for the year endedDecember 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 endedDecember 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. AtDecember 31, 2022 , we had working capital of approximately$364,839 .
Cash decreased to
As of
Total liabilities as of
Net cash used in operating activities decreased to$3,891,956 for the year endedDecember 31, 2022 , from$4,755,792 for the year endedDecember 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
Net cash provided by financing activities was$3,447,010 for year endedDecember 31, 2022 , primarily attributable to$3,500,000 received from convertible notes payable. This compares to net cash provided by financing activities of$5,210,151 for the year endedDecember 31, 2021 . 27 Contractual Obligations
The following table sets forth our contractual obligations as of
Contractual obligation Payments due
by period
Less than Total 1 year 1-2 Years 2-3 Years 3+ Years Promissory notes(1)$ 153,278 $ 6,452 $ 3,295 $ 3,420 $ 140,111 Convertible notes(1) 4,450,000 200,000 (2) 4,250,000 (3) - - Operating lease obligations(4) 264,182 150,052 106,174 7,956 - Total$ 4,867,460 $ 356,504 $ 4,359,469 $ 11,376 $ 140,111
(1) Amounts do not include interest to be paid.
(2) Includes
2022 and are currently in default.
(3) Includes
2024.
(4) Includes office lease obligations for our executive office in
warehouse facilities inColorado .
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.
InMarch 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. OnMay 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 toSeptember 6, 2021 . InSeptember 2021 , the Company and the investor further extended the maturity date of the Convertible Note toOctober 1, 2022 . As ofDecember 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. InSeptember 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 endedApril 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 throughAugust 31, 2025 . As ofDecember 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 . FromJanuary 1, 2021 throughApril 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 theSEC 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 ofDecember 31, 2021 , all Unit holders converted their Units to Series A Preferred Shares. OnMay 11, 2021 , the Company consummated the issuance and sale of the Preferred Shares to theWit Trust described under "Business - Our Background" above, which generated gross proceeds of$2,000,000 (including certain bridge financing previously furnished by theWit Trust to the Company inApril 2021 ). OnSeptember 30, 2021 , the Company completed a private offering which commenced onAugust 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 andAugust 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 theBoard of Director of the Company, in the amount of$50,000 , and; theWit 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, theWit Trust now holds approximately 88% of the voting power of the Company. 28 OnOctober 12, 2021 , the Company issued a secured convertible credit line promissory note in the principal amount for up to$1,500,000 , which onMarch 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 theWit 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 ofDecember 31, 2022 ,$3,000,000 was outstanding under the Secured Convertible Promissory Note. OnAugust 2, 2022 , the Company issued a secured convertible promissory note in the principal amount of$250,000 to theWit Trust in exchange for$250,000 . The note carries an interest rate of ten percent (10%) per annum and has a maturity date ofOctober 1, 2024 . OnAugust 17, 2022 , the Company issued a secured convertible promissory note in the principal amount of$250,000 to theWit Trust in exchange for$250,000 . The note carries an interest rate of ten percent (10%) per annum and has a maturity date ofOctober 1, 2024 . OnSeptember 6, 2022 , the Company issued a secured convertible promissory note in the principal amount of$250,000 to theWit Trust in exchange for$250,000 . The note carries an interest rate of ten percent (10%) per annum and has a maturity date ofOctober 1, 2024 . OnOctober 11, 2022 , the Company issued a secured convertible promissory note in the principal amount of$250,000 to theWit Trust in exchange for$250,000 . The note carries an interest rate of ten percent (10%) per annum and has a maturity date ofOctober 1, 2024 . OnNovember 16, 2022 , the Company issued a secured convertible promissory note in the principal amount of$250,000 to theWit Trust in exchange for$250,000 . The note carries an interest rate of ten percent (10%) per annum and has a maturity date ofOctober 1, 2024 . The accompanying financial statements have been prepared in conformity with GAAP inthe 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 endedDecember 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.
29 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.
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