VERITAS FARMS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

Unless the context otherwise requires, references in this report to “the Company”, “Veritas Farms,” “Veritas”, “we”, “us” and “our” means Veritas Farms, Inc. and its subsidiary.


Forward-Looking Statements



Certain statements made in this report are "forward-looking statements"
regarding the plans and objectives of management for future operations. Such
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Our plans and objectives are based, in part, on assumptions
involving judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the current state of our operations, the
inclusion of such information should not be regarded as a statement by us or any
other person that our objectives and plans will be achieved. We undertake no
obligation to revise or update publicly any forward-looking statements for
any
reason.



Business Overview



Veritas Farms, Inc. is an agribusiness focused on growing, producing, marketing,
and distributing superior quality, whole plant, full spectrum hemp oils and
extracts containing naturally occurring phytocannabinoids (collectively, "CBD").
Veritas Farms owns 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.



Veritas Farms meticulously processes its hemp crop to produce superior quality
whole-plant hemp oil, extracts and derivatives which contain the entire full
spectrum of cannabinoids extracted from the flowers and leaves of hemp plants.
Veritas Farms employs the use of the cold ethanol extraction method to extract
the whole plant hemp oil from its hemp crop. Whole-plant hemp oil is known to
provide the essential phytocannabinoid "entourage effect" resulting from the
synergistic absorption of the entire full spectrum of unique hemp cannabinoids
by the receptors of the human endocannabinoid system. As a result, Veritas Farms
believes that its products are premier quality cannabinoids and are highly
sought after by consumers and manufacturers of premium hemp products.



Veritas Farms has developed a wide variety of formulated phytocannabinoid-rich
hemp products containing CBD which are marketed and distributed by the Company
under its Veritas Farms brand name. Our products are also available in bulk,
white label and private label formulations for distributors and retailers. These
types of products are in high demand by health food markets, wellness centers,
pet suppliers, physicians and other healthcare practitioners.



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Veritas Farms products (50+ SKUs) 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 other online
retailers and "brick and mortar" retail outlets.



The branding of the Company's line of hemp oil and extract products has enabled
market penetration during 2021 and 2022 into large retail chains increasing
brand exposure and awareness. The initial rollouts have been successful in
creating distribution opportunities into thousands of new retail outlets across
the country (over 8,000 retail outlets as of the date of this report). The shift
from smaller order fulfilment to larger "Big Box" orders creates an economy of
scale that offers the opportunity for the Company to achieve profitability.

Recent Developments



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Management Changes


On June 30, 2022, David Smith notified the Company of his resignation as Deputy Chief Executive Officer of the Company with effect June 30, 2022.



On July 25, 2022, the Board of Directors of the Company appointed Alessandro M.
Annoscia to serve as the Company's Chief Executive Officer and President to
assume the duties of principal executive officer and as a Board member effective
July 25, 2022. The Company's former Chief Executive Officer, Stephen E. Johnson,
stepped down as Chief Executive Officer, President, and a director of the
Company, and from any and all other positions he holds with the Company and its
subsidiary as of July 25, 2022.



On November 7, 2022, the Board of Directors of the Company appointed our
Chairman of the Board, Thomas E. Vickers to serve as the Company's Interim Chief
Executive Officer to assume the duties of principal executive officer effective
November 7, 2022. The Company's former Chief Executive Officer, Alessandro M.
Annoscia, stepped down as Chief Executive Officer, President, and a director of
the Company, and from any and all other positions he holds with the Company and
its subsidiary as of November 7, 2022.



Corporate Information


The Company was incorporated in the state of Nevada on March 15, 2011 under the
name Armeau Brands Inc. and changed its name to SanSal Wellness Holdings, Inc.
on October 13, 2017. On January 31, 2019, the Company changed its name from
SanSal Wellness Holdings, Inc. to Veritas Farms, Inc.



Our executive offices are located at 1815 Griffin Road, Suite 401, Dania Beach,
FL 33004 and our telephone number is (833) 691-4367. The Company's year-end is
December 31. Our corporate website is www.TheVeritasFarms.com. Information
appearing on our website is not part of this Quarterly Report on Form 10-Q.

Results of Operations


The nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021



Revenues. Revenues for the nine months ended September 30, 2022 decreased to
$948,046, as compared to revenues of $2,007,616 for the nine months ended
September 30, 2021. The decrease reflects a significant contraction of retail
sales in 2022 from 2021. Sales include bulk oils for wholesale, capsules,
gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet
chews, all in various potency levels and flavors.



Cost of goods sold. All expenses incurred to grow, process, and package the
finished goods are included in our cost of goods sold. Cost of goods sold for
the nine months ended September 30, 2022 decreased to $1,007,616 from $1,287,505
for the nine months ended September 30, 2021. The decrease in cost of sales can
be attributed to the decrease in sales, which was also offset by the disposal of
expired and unsaleable finished goods during the nine months ended September 30,
2022 as compared to the nine months ended September 30, 2021.



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Gross margin. We had gross expense of $59,570 for the nine months ended
September 30, 2022, as compared to gross margin of $716,566 for the nine months
ended September 30, 2021. The decrease in gross margin can be attributed to the
decrease in sales in addition to the disposal of expired and unsaleable finished
goods during the nine months ended September 30, 2022 as compared to the nine
months ended September 30, 2021.



Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $3,282,968 for the nine months ended
September 30, 2022, from $4,360,129 for the nine months ended September 30,
2021. The decrease to selling, general and administrative expenses is primarily
due to reductions in total salary and related expenses. Selling, general and
administrative expenses consist primarily of administrative personnel costs,
facilities expenses, professional fee expenses and marketing costs for our
Veritas Farms brand products.



Other income/(expense). Interest expense for the nine months ended September 30,
2022 was $332,084, as compared to $97,111 for the nine months ended September
30, 2021. Interest expense increased in the nine months ending September 30,
2022 compared to the nine months ending September 30, 2021 due to the interest
method amortization of a beneficial conversion feature, in addition to an
increase in interest bearing notes payable. We also recorded a loss on lease
termination of $0 for the nine months ended September 30, 2022 compared to
$244,840 for the nine months ended September 30, 2021.



Net loss. As a result of all of the above, the net loss attributable to common shareholders for the nine months ended September 30, 2022decreased to
$3,167,489 Where $0.08 per share based on a weighted average number of outstanding shares of 41,625,331, $3,381,921 Where $0.08 per share for the nine months ended
September 30, 2021based on a weighted average number of shares outstanding of 43,968,420.

The three months ended September 30, 2022 compared to the three months ended
September 30, 2021

Revenues. Revenues for the three months ended September 30, 2022 decreased to
$180,408, as compared to revenues of $555,870 for the three months ended
September 30, 2021. The decrease reflects a significant contraction of retail
sales in 2022 from 2021. Sales include bulk oils for wholesale, capsules,
gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet
chews, all in various potency levels and flavors.



Cost of goods sold. All expenses incurred to grow, process, and package the
finished goods are included in our cost of goods sold. Cost of goods sold for
the three months ended September 30, 2022 increased to $363,975 from $282,117
for the three months ended September 30, 2021. The increase in cost of sales can
be attributed to the disposal of expired and unsaleable finished goods during
the three months ended September 30, 2022 as compared to the three months ended
September 30, 2021.



Gross margin. We had gross expense of $183,567 for the three months ended
September 30, 2022, as compared to gross margin of $273,753 for the three months
ended September 30, 2021. The decrease in gross margin can be attributed to the
decrease in sales in addition to the disposal of expired and unsaleable finished
goods during the three months ended September 30, 2022 as compared to the three
months ended September 30, 2021.



Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $640,241 for the three months ended
September 30, 2022, from $1,558,524 for the three months ended September 30,
2021. The decrease to selling, general and administrative expenses is primarily
due to reductions in total salary and related expenses. Selling, general and
administrative expenses consist primarily of administrative personnel costs,
facilities expenses, professional fee expenses and marketing costs for our
Veritas Farms brand products.



Other income/(expense). Interest expense for the three months ended September
30, 2022 was $134,569, as compared to $34,801 for the three months ended
September 30, 2021. Interest expense increased in the three months ending
September 30, 2022 compared to the three months ending September 30, 2021 due to
the interest method amortization of a beneficial conversion feature, in addition
to an increase in interest bearing notes payable.



Net loss. As a result of all of the above, the net loss attributable to common shareholders for the three months ended September 30, 2022decreased to
$1,080,054 Where $0.03 per share based on a weighted average number of outstanding shares of 41,625,331, $1,499,097 Where $0.04 per share for the three months ended
September 30, 2021based on a weighted average number of shares outstanding of 41,974,977.


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Cash and capital resources

Liquidity is the ability of a company to generate adequate amounts of cash to
meet its needs for cash. We have historically experienced negative cash flows
and have relied on the proceeds from the sale of debt and equity securities to
fund our operations. In addition, we have utilized stock-based compensation as a
means of paying for consulting and salary related expenses. At September 30,
2022, we had working capital of approximately $1,663,145.



Cash decreased to $124,749 at September 30, 2022 of $481,763 at December 31, 2021. The decrease is mainly due to free cash flow used in operating activities.



As of September 30, 2022, total assets were $8,348,528 as compared to $8,597,840
at December 31, 2021. The decrease in assets is primarily due to a decrease in
cash and property and equipment, net of accumulated depreciation.



Total current liabilities as of September 30, 2022 were $2,862,606, as compared
to $2,209,096 at December 31, 2021. The increase was mainly due to increases in
dividends payable and deferred revenue.



Net cash used in operating activities was $3,297,146 for the nine months ended
September 30, 2022, as compared to $4,286,248 for the nine months ended
September 30, 2021. The decrease is largely attributable to the increase in net
loss attributable to common shareholders, and by changes in inventories,
accounts payable, employee retention credit receivable and deferred revenue.



Net cash provided by investing activities was $23,621 for the nine months ended
September 30, 2022 as compared to net cash used of $53,898 for the nine months
ended September 30, 2021, reflecting a decrease in capital expenditures in 2022.



Net cash provided by financing activities was $2,916,511 for the nine months
ended September 30, 2022 as compared to $4,474,749 for the nine months ended
September 30, 2021. Net cash provided by financing activities for the nine
months ended September 30, 2022 included net proceeds of $3,000,000 from
convertible note payables received from the Wit Trust. Net cash provided by
financing activities for the nine months ended September 30, 2021 included net
proceeds of $803,994 from a loan received under the U.S. Small Business
Administration Paycheck Protection Program as part of the business incentives
offered in the Coronavirus Aid, Relief, and Economic Security Act received in
February 2021, net proceeds of $86,895 from private offerings of our equity
securities and $3,665,440 from initial closings under private placements.



Contractual Obligations



The following table sets forth our contractual obligations as of September 30,
2022:



                                                            Payments due by period
                                                  Less than
Contractual obligation               Total          1 year         1-2 Years       2-3 Years        3+ Years
Promissory notes(1)               $   164,939     $   17,567       $    3,264     $     3,389       $ 140,719
Convertible notes(1)                3,950,000        200,000 (2)            -       3,750,000 (3)           -
Operating lease obligations(4)        295,076        149,900          113,309          31,867               -
Total                             $ 4,410,015     $  367,467       $  116,573     $ 3,785,256       $ 140,719



(1) The amounts do not include interest to be paid.

(2) Includes $200,000 10% convertible bonds payable that mature in October

2022.

(3) Includes $3,750,000 10% convertible bonds payable that mature in October

2024.

(4) Includes office rental obligations for our executive office in Florida and our

     warehouse facilities in Colorado.



Sources of liquidity and capital resources; Debt securities



Our primary sources of capital to develop and implement our business plan and
expand our operations have been the proceeds from private offerings of our debt
and equity securities and notes payable.



In March 2020, the Company received a $200,000 loan from a single investor,
evidenced by a one-year convertible promissory note ("Convertible Note"). The
Convertible Note bears interest at the rate of ten percent (10%) per annum,
which accrues and is payable together with principal at maturity. Principal and
accrued interest under the Convertible Note may, at the option of the holder, be
converted in its entirety into shares of our common stock at a conversion price
of $0.40 per share, subject to adjustment for stock splits, stock dividends and
similar recapitalization transactions. On May 14, 2021, the Company paid $20,000
in accrued interest to the holder, and the Company and the investor extended the
maturity date of the Convertible Note to September 6, 2021. In September
2021, the Company and the investor further extended the maturity date of the
Convertible Note to October 1, 2022.



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In September 2020, the Company commenced a $4.0 million private offering of up
to 8,000,000 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 the investors which states, among other things, that the
Company shall use commercially reasonable efforts to prepare and file with the
Securities and Exchange Commission ("SEC") a registration statement covering,
among other things, the resale of all or such portion of the registrable
securities that are not then registered on an effective registration statement.
As of September 30, 2021, all Unit holders converted their Units into Series A
Preferred Shares.


On May 11, 2021the Company completed the issue and sale of the preferred shares in confidence of mind described under “Recent Developments” above, which generated gross proceeds of $2,000,000 (including some bridge funding previously provided by the confidence of mind to the Company in April 2021).



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



On October 12, 2021, the Company issued a secured convertible credit line
promissory note in the principal amount for up to $1,500,000 ("Secured
Convertible Promissory Note"), which Secured Convertible Promissory Note was
issued to the Wit Trust. On March 9, 2022, the Company amended the Secured
Convertible Promissory Note originally dated October 12, 2021 to increase the
total available principal balance to $3,000,000. The Secured Convertible
Promissory Note is secured by the Company's assets and contain certain
non-financial covenants and customary events of default, the occurrence of which
could result in an acceleration of the Secured Convertible Promissory Note. The
Secured Convertible Promissory Note is convertible as follows: aggregate
outstanding loaned principal and accrued interest under the Secured Convertible
Promissory Note may, at the option of the holder, be converted in its entirety
into shares of our common stock at a conversion price of $0.05 per share. The
Secured Convertible Promissory Note will accrue interest on the aggregate amount
outstanding at a rate of ten percent (10%) per annum. All unpaid principal,
together with any then unpaid and accrued interest and other amounts payable
under the Secured Convertible Promissory Note, is due and payable, if not
converted pursuant to the terms and conditions of the Secured Convertible
Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an
event of default. The Company determined that there was a beneficial conversion
feature of $475,000 relating to this note which is being amortized over the life
of the note, using the using the effective interest method. The note is
presented net of a discount of $320,952 on the Company's balance sheet with
amortization to interest expense of $120,357 and $0 for the nine month periods
ended September 30, 2022 and September 30, 2021, respectively. At September 30,
2022, $3,000,000 was outstanding on the Secured Convertible Promissory Note.



On August 2, 2022, the Company issued a secured convertible promissory note in
the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The
note carries an interest rate of ten percent (10%) per annum and has a maturity
date of October 1, 2024.



On August 17, 2022, the Company issued a secured convertible promissory note in
the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The
note carries an interest rate of ten percent (10%) per annum and has a maturity
date of October 1, 2024.



On September 6, 2022, the Company issued a secured convertible promissory note
in the principal amount of $250,000 to the Wit Trust in exchange for $250,000.
The note carries an interest rate of ten percent (10%) per annum and has a
maturity date of October 1, 2024.



The accompanying financial statements have been prepared in conformity with U.S.
GAAP, which contemplate continuation of the Company as a going concern. However,
the Company has sustained substantial losses from operations since its
inception. As of and for the period ended September 30, 2022, the Company had an
accumulated deficit of $37,098,203 and a net loss attributable to common
shareholders of $3,167,489. These factors, among others, raise substantial doubt
about the ability of the Company to continue as a going concern. Continuation as
a going concern is dependent on the ability to raise additional capital and
financing until we can achieve a level of operational profitability, though
there is no assurance of success.



The Company believes that it will require additional financing to fund its
growth and achieve profitability The Company anticipates that such financing
will be generated from subsequent private offerings of its equity and/or debt
securities. While we believe additional financing will be available to us as
needed, there can be no assurance that such financing will be available on
commercially reasonable terms or otherwise, when needed. Moreover, any such
additional financing may dilute the interests of existing shareholders. The
absence of additional financing, when needed, could substantially harm the
Company, its business, results of operations and financial condition.



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Capital Expenditures



Any amounts expended for capital expenditures would be the result of an increase
in the capacity needed to adequately service any increase in our business. To
date we have paid for any needed additions to our capital equipment
infrastructure from working capital funds and anticipate this being the case in
the future.



Presently, we have approximately $20,000 planned for capital expenditures to
further develop the Company's infrastructure to allow for growth in our
operations over the next 12 months. We expect to fund these capital expenditure
needs through a combination of vendor provided financing, the use of operating
or capital equipment leases and cash provided from operations.



Factors Affecting Future Performance

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