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.



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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.



                                       27





Contractual Obligations

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





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 $200,000 of 10% convertible notes payable that matured in October


    2022 and are currently in default.

(3) Includes $4,250,000 of 10% convertible notes payable that mature in October


    2024.

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


    warehouse facilities in Colorado.

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.



                                       28





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.





                                       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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