UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
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☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
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| For the transition period from __________________ to ______________ |
Commission file number: 001-14088
Acacia Diversified Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Texas | 75-2095676 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
(727) 678-4420(301) 992-2177
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | ACCA | OTCQB |
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. (1) Yes ☒ No ☐ (2) 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 (§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, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ |
| Accelerated filer ☐ |
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Non-accelerated filer ☐ |
| Smaller Reporting Company ☒ |
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Emerging growth company ☐ |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of November 6, 2019August 3, 2020 is 41,533,55052,481,507 common shares.
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PART I. Financial Information |
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Item 1. | F-1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 1 |
Item 3. |
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Item 4. |
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PART II. Other Information |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I. FINANCIAL INFORMATION
ACACIA DIVERSIFIED HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(UNAUDITED) | (AUDITED) | (UNAUDITED) | (AUDITED) | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash | $ | 74,714 | $ | 51,797 | $ | 415 | $ | 2,616 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $0 in 2019 and $25,000 in 2018 | 11,742 | 135,970 | ||||||||||||||
Inventories | 27,449 | 43,550 | ||||||||||||||
Prepaid expenses and other current assets | 84,408 | 7,815 | 7,585 | 4,335 | ||||||||||||
Current assets of discontinued operations | 507,774 | 129,367 | ||||||||||||||
Total Current Assets | 198,313 | 239,132 | 515,774 | 136,318 | ||||||||||||
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $389,523 and $277,343 in 2019 and 2018, respectively | 381,225 | 453,562 | ||||||||||||||
OTHER ASSETS | ||||||||||||||||
Deposits | 7,401 | 4,201 | - | 841 | ||||||||||||
ROU asset - finance lease, net of accumulated amortization of $11,159 in 2019 | 166,479 | - | ||||||||||||||
ROU asset - operating lease | 7,501 | - | ||||||||||||||
Non-current assets of discontinued operations | - | 517,078 | ||||||||||||||
181,381 | 4,201 | - | 517,919 | |||||||||||||
TOTAL ASSETS | $ | 760,919 | $ | 696,895 | $ | 515,774 | $ | 654,237 | ||||||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Accounts payable and accrued expenses | $ | 307,543 | $ | 289,805 | $ | 476,592 | $ | 282,705 | ||||||||
Current portion of long-term debt | 4,359 | 4,359 | ||||||||||||||
Current portion of lease liability - finance lease | 8,871 | - | ||||||||||||||
Current portion of lease liability - operating lease | 7,576 | - | ||||||||||||||
Convertible notes payable | 184,800 | 199,100 | 191,900 | 264,100 | ||||||||||||
Notes payable to related party | 733,400 | 812,400 | ||||||||||||||
Accrued interest on notes payable to related party | 101,765 | 65,774 | ||||||||||||||
Notes payable to related parties | 802,328 | 752,400 | ||||||||||||||
Accrued interest on notes payable to related parties | 132,077 | 116,629 | ||||||||||||||
Payable to related parties | 65,768 | 66,500 | 47,348 | 35,348 | ||||||||||||
Current liabilities of discontinued operations | 240,828 | 160,347 | ||||||||||||||
Total Current Liabilities | 1,414,082 | 1,437,938 | 1,891,073 | 1,611,529 | ||||||||||||
LONG-TERM LIABILITY: | ||||||||||||||||
Long-term debt | 11,950 | 15,219 | ||||||||||||||
Derivative liability | 372,148 | 196,518 | 189,653 | 381,330 | ||||||||||||
Lease liability - finance lease | 166,678 | - | ||||||||||||||
Long-term liabilities of discontinued operations | - | 175,116 | ||||||||||||||
Total Long-term Liability | 550,776 | 211,737 | 189,653 | 556,446 | ||||||||||||
Total Liabilities | 1,964,858 | 1,649,675 | 2,080,726 | 2,167,975 | ||||||||||||
Commitments and contingencies | - | - | - | - | ||||||||||||
STOCKHOLDERS' DEFICIT | ||||||||||||||||
Common stock, $0.001 par value; 150,000,000 shares authorized; 41,533,543 and 21,813,625 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
| 41,533 | 21,814 | |||||||||||||
Common stock, $0.001 par value; 150,000,000 shares authorized; 43,290,324 and 39,583,543 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 43,291 | 39,584 | ||||||||||||||
Additional paid-in capital | 6,715,024 | 5,692,055 | 6,857,348 | 6,706,657 | ||||||||||||
Accumulated deficit | (7,960,496 | ) | (6,666,649 | ) | (8,465,591 | ) | (8,259,979 | ) | ||||||||
Total Stockholders' Deficit | (1,203,939 | ) | (952,780 | ) | (1,564,952 | ) | (1,513,738 | ) | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 760,919 | $ | 696,895 | $ | 515,774 | $ | 654,237 |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINEMONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 AND 2019 AND 2018
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
REVENUE | $ | 97,927 | $ | 29,931 | $ | 402,156 | $ | 134,516 | ||||||||
COSTS OF GOODS SOLD | ||||||||||||||||
Costs of goods sold | 91,097 | 49,338 | 272,408 | 115,451 | ||||||||||||
Depreciation expense | 37,388 | 18,124 | 110,617 | 54,012 | ||||||||||||
128,485 | 67,462 | 383,025 | 169,463 | |||||||||||||
GROSS PROFIT (LOSS) | (30,558 | ) | (37,531 | ) | 19,131 | (34,947 | ) | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||||||||
Employee compensation expenses | 152,167 | 125,024 | 474,992 | 393,802 | ||||||||||||
General and administrative expenses | 98,012 | 208,658 | 291,451 | 873,336 | ||||||||||||
Depreciation and amortization expense | 4,247 | 10,803 | 12,723 | 11,841 | ||||||||||||
254,426 | 344,485 | 779,166 | 1,278,979 | |||||||||||||
LOSS FROM OPERATIONS | (284,984 | ) | (382,016 | ) | (760,035 | ) | (1,313,926 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Bad debt recovery | - | 7,000 | - | 14,000 | ||||||||||||
Derivative (expense) | (257,773 | ) | (155,126 | ) | (444,901 | ) | (155,126 | ) | ||||||||
Loss on disposition of assets | (3,658 | ) | - | (3,658 | ) | (12,362 | ) | |||||||||
Interest expense | (31,498 | ) | (30,294 | ) | (83,060 | ) | (56,307 | ) | ||||||||
Other income (expense) | (3,593 | ) | - | 2,209 | - | |||||||||||
TOTAL OTHER EXPENSE | (296,522 | ) | (178,420 | ) | (529,410 | ) | (209,795 | ) | ||||||||
NET LOSS BEFORE INCOME TAXES | $ | (581,506 | ) | $ | (560,436 | ) | $ | (1,289,445 | ) | $ | (1,523,721 | ) | ||||
Income taxes | - | - | - | - | ||||||||||||
NET LOSS | $ | (581,506 | ) | $ | (560,436 | ) | $ | (1,289,445 | ) | $ | (1,523,721 | ) | ||||
NET LOSS PER COMMON SHARE, BASIC AND DILUTED | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.09 | ) | ||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 39,385,153 | 19,450,674 | 29,867,649 | 17,544,648 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||
Employee compensation expenses | $ | 97,304 | $ | 129,135 | ||||
General and administrative expenses | 68,860 | 75,640 | ||||||
166,164 | 204,775 | |||||||
LOSS FROM OPERATIONS | (166,164 | ) | (204,775 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Derivative income | 122,406 | 27,180 | ||||||
Interest expense | (21,500 | ) | (20,762 | ) | ||||
TOTAL OTHER INCOME | 100,906 | 6,418 | ||||||
NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (65,258 | ) | (198,357 | ) | ||||
Income taxes | - | - | ||||||
NET LOSS FROM CONTINUING OPERATIONS | (65,258 | ) | (198,357 | ) | ||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | (140,354 | ) | 332 | |||||
NET LOSS | $ | (205,612 | ) | $ | (198,025 | ) | ||
NET LOSS PER COMMON SHARE: | ||||||||
Net loss from continuing operations per common share | ||||||||
- basic and diluted | $ | (0.00 | ) | $ | (0.01 | ) | ||
Net loss from discontinued operations per common share | $ | (0.00 | ) | $ | 0.00 | |||
- basic and diluted | ||||||||
NET LOSS PER COMMON SHARE, BASIC AND DILUTED | $ | (0.01 | ) | $ | (0.01 | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 40,510,238 | 22,130,410 |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2020 AND 2019 AND 2018
(UNAUDITED)
Common Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total | Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
Balance December 31, 2017 (audited) | 17,539,982 | $ | 17,540 | $ | 4,451,038 | $ | (4,953,946 | ) | $ | (485,368 | ) | |||||||||||||||||||||||||||||
Balance December 31, 2018 (audited) | 21,813,625 | $ | 21,814 | $ | 5,692,055 | $ | (6,666,649 | ) | $ | (952,780 | ) | |||||||||||||||||||||||||||||
Common stock issued for services | 1,647,000 | 1,647 | 632,261 | - | 633,908 | 2,000 | 2 | 3,182 | - | 3,184 | ||||||||||||||||||||||||||||||
Common stock issued for accrued expense | 2,233,125 | 2,233 | 444,392 | - | 446,625 | |||||||||||||||||||||||||||||||||||
Common stock issued for conversion of convertible note | 505,138 | 505 | 44,495 | - | 45,000 | |||||||||||||||||||||||||||||||||||
Common stock issued to related party for leasehold improvement | 36,018 | 36 | 17,613 | - | 17,649 | |||||||||||||||||||||||||||||||||||
Settlement of derivative liability from conversion of convertible note | - | - | 41,933 | - | 41,933 | |||||||||||||||||||||||||||||||||||
Employee stock plan compensation | 7,500 | - | 37,069 | - | 37,069 | - | - | 9,102 | - | 9,102 | ||||||||||||||||||||||||||||||
Common stock issued for cash | 200,000 | 200 | 69,800 | - | 70,000 | 760,000 | 760 | 90,440 | - | 91,200 | ||||||||||||||||||||||||||||||
Cumulative adjustments from adoption of ASC 842 | - | - | - | (4,402 | ) | (4,402 | ) | |||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,523,721 | ) | (1,523,721 | ) | - | - | - | (198,025 | ) | (198,025 | ) | ||||||||||||||||||||||||||
Balance September 30, 2018 (unaudited) | 21,663,625 | $ | 21,656 | $ | 5,652,173 | $ | (6,477,667 | ) | $ | (803,838 | ) | |||||||||||||||||||||||||||||
Balance March 31, 2019 (unaudited) | 23,080,763 | $ | 23,081 | $ | 5,881,207 | $ | (6,869,076 | ) | $ | (964,788 | ) |
Common Stock | ||||||||||||||||||||
Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
Balance December 31, 2018 (audited) | 21,813,625 | $ | 21,814 | $ | 5,692,055 | $ | (6,666,649 | ) | $ | (952,780 | ) | |||||||||
Common stock issued for services | 7,598,825 | 7,598 | 279,315 | - | 286,913 | |||||||||||||||
Common stock issued for conversion of convertible note | 8,046,501 | 8,047 | 200,103 | - | 208,150 | |||||||||||||||
Settlement of derivative liability from conversion of convertible note | - | - | 269,270 | - | 269,270 | |||||||||||||||
Employee stock plan compensation | 40,000 | 40 | 56,132 | - | 56,172 | |||||||||||||||
Common stock issued for cash | 760,000 | 760 | 90,440 | - | 91,200 | |||||||||||||||
Settlement of payable to related party | 200,000 | 200 | 7,800 | - | 8,000 | |||||||||||||||
Settlement of notes payable and accrued interest with related party | 3,074,592 | 3,075 | 119,909 | - | 122,984 | |||||||||||||||
Cumulative adjustments from adoption of ASC 842 | - | - | - | (4,402 | ) | (4,402 | ) | |||||||||||||
Net loss | - | - | - | (1,289,445 | ) | (1,289,445 | ) | |||||||||||||
Balance September 30, 2019 (unaudited) | 41,533,543 | $ | 41,533 | $ | 6,715,024 | $ | (7,960,496 | ) | $ | (1,203,939 | ) |
Common Stock | ||||||||||||||||||||
Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||
Balance December 31, 2019 (audited) | 39,583,543 | $ | 39,584 | $ | 6,706,657 | $ | (8,259,979 | ) | $ | (1,513,738 | ) | |||||||||
Common stock issued for services | 272,000 | 272 | 5,659 | - | 5,931 | |||||||||||||||
Common stock issued for conversion of convertible note | 3,394,781 | 3,395 | 68,805 | - | 72,200 | |||||||||||||||
Settlement of derivative liability from conversion of convertible note | - | - | 69,271 | - | 69,271 | |||||||||||||||
Employee stock plan compensation | 40,000 | 40 | 6,956 | - | 6,996 | |||||||||||||||
Net loss | (205,612 | ) | (205,612 | ) | ||||||||||||||||
Balance March 31, 2020 (unaudited) | 43,290,324 | $ | 43,291 | $ | 6,857,348 | $ | (8,465,591 | ) | $ | (1,564,952 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBERMARCH 31, 2020 30,AND 2019 AND 2018
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,289,445 | ) | $ | (1,523,721 | ) | ||
Adjustments to reconcile net loss to net cash and cash equivalents used by operating activities: | ||||||||
Depreciation and amortization | 123,340 | 65,853 | ||||||
Common stock issued for services | 286,913 | 633,908 | ||||||
Common stock issued from employee stock plan | 56,172 | 37,069 | ||||||
Original issue discount on convertible note payable | 16,800 | 15,800 | ||||||
Amortization of debt discount | 6,000 | - | ||||||
Derivative expense | 444,901 | 155,126 | ||||||
Loss on disposition of equipment | 3,658 | 12,362 | ||||||
(Increase) decrease in: | ||||||||
Accounts receivable | 124,228 | 17,925 | ||||||
Inventories | 16,101 | 12,016 | ||||||
Prepaid expenses and other current assets | (79,793 | ) | (172 | ) | ||||
ROU asset - operating lease | 22,154 | - | ||||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | 26,787 | 235,652 | ||||||
Payable to related parties | 7,268 | 6,091 | ||||||
Accrued interest on notes payable to related party | 44,975 | - | ||||||
Lease liability - operating lease | (22,079 | ) | - | |||||
Net cash used by operating activities | (212,020 | ) | (332,091 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Payment to related party for leasehold improvement | - | (6,000 | ) | |||||
Proceeds from sale of equipment | - | 38,361 | ||||||
Acquisition of property and equipment | (43,502 | ) | (55,683 | ) | ||||
Net cash provided (used) by investing activities | (43,502 | ) | (23,322 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 91,200 | 70,000 | ||||||
Proceeds from convertible note payable | 162,000 | 125,000 | ||||||
Payment on long-term debt | (3,269 | ) | (1,126 | ) | ||||
Payments on lease liability - finance lease | (6,492 | ) | - | |||||
Proceeds from issuance of notes payable to related party | 35,000 | 184,000 | ||||||
Net cash provided by financing activities | 278,439 | 377,874 | ||||||
Net change in cash and cash equivalents | 22,917 | 22,461 | ||||||
Cash and cash equivalents, beginning of the year | 51,797 | 28,417 | ||||||
Cash and cash equivalents, end of the year | $ | 74,714 | $ | 50,878 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
Common stock issued to related party for leasehold improvement | $ | - | $ | 17,649 | ||||
Acquisition of equipment with long-term debt | $ | - | $ | 21,794 | ||||
Common stock issued to related party to settle accrued expenses | $ | 8,000 | $ | 446,625 | ||||
Common stock issued to related party to settle notes payable and accrued interest | $ | 122,984 | $ | - | ||||
Common stock issued for conversion of convertible notes payable and related interest | $ | 208,150 | $ | - | ||||
Settlement of derivative liability from conversion of convertible notes payable | $ | 269,270 | $ | - | ||||
Acquisition of ROU asset - finance lease | $ | 182,041 | $ | - | ||||
Acquisition of ROU asset - operating lease | $ | 29,655 | $ | - |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss from continuing operations | $ | (65,258 | ) | $ | (198,357 | ) | ||
Net income (loss) from discontinued operations | (140,354 | ) | 332 | |||||
Adjustments to reconcile net loss from continuing operations to net cash and cash equivalents used by operating activities: | ||||||||
Common stock issued for services | 5,931 | 3,184 | ||||||
Common stock issued from employee stock plan | 6,996 | 9,102 | ||||||
Accrued interest on notes payable to related parties | 15,448 | 16,026 | ||||||
Derivative expense (income) | (122,406 | ) | (27,180 | ) | ||||
(Increase) decrease in: | ||||||||
Prepaid expenses and other current assets | (2,409 | ) | (3,252 | ) | ||||
Increase (decrease) in: | ||||||||
Accounts payable and accrued expenses | 193,887 | 68,182 | ||||||
Payable to related parties | 3,000 | - | ||||||
Net cash used by operating activities from continuing operations | (105,165 | ) | (131,963 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | - | 91,200 | ||||||
Proceeds from issuance of notes payable to related parties | 49,928 | - | ||||||
Net cash provided by financing activities from continuing operations | 49,928 | 91,200 | ||||||
Net cash used by continuing operations | (55,237 | ) | (40,763 | ) | ||||
CASH FLOWS - DISCONTINUED OPERATIONS: | ||||||||
Net cash provided by operating activities of discontinued operations | 29,756 | 72,068 | ||||||
Net cash used in investing activities of discontinued operations | - | (24,102 | ) | |||||
Net cash used in financing activities of discontinued operations | (3,293 | ) | (3,194 | ) | ||||
Net cash provided by discontinued operations | 26,463 | 44,772 | ||||||
Net (decrease) increase in cash and cash equivalents | (28,774 | ) | 4,009 | |||||
Less: net (decrease) increase in cash and cash equivalents from discontinued operations | (26,573 | ) | 4,080 | |||||
Net (decrease) increase in cash and cash equivalents from continuing operations | (2,201 | ) | (71 | ) | ||||
Cash and cash equivalents, beginning of the year | 2,616 | 1,060 | ||||||
Cash and cash equivalents, end of the year | $ | 415 | $ | 989 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Continuing operations | ||||||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
Discontinued operations | ||||||||
Cash paid for interest | $ | 3,221 | $ | 2,643 | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
NON-CASH FINANCING AND INVESTING ACTIVITIES FROM CONTINUING OPERATIONS: | ||||||||
Common stock issued for conversion of convertible notes payable | $ | 72,200 | $ | 45,000 | ||||
Settlement of derivative liability from conversion of convertible notes payable | $ | 69,271 | $ | 41,933 | ||||
NON-CASH FINANCING AND INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS: | ||||||||
Acquisition of ROU asset - finance lease | $ | - | $ | 182,041 | ||||
Acquisition of ROU asset - operating lease | $ | - | $ | 29,655 |
The accompanying notes are an integral part of these consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019MARCH 31, 2020
(UNAUDITED)
NOTE 1 – THE COMPANY
Acacia Diversified Holdings, Inc. (“Acacia” or the “Company”) has five, a Texas corporation, had four wholly-owned subsidiaries, MariJ Pharmaceuticals, Inc. (“MariJ Pharma”), a Florida corporation, Canna-Cures Research & Development Center, Inc. (“Canna-Cures”), a Florida corporation, and Eufloria Medical of Tennessee, Inc. (“EMT”), a company incorporated in the state of Tennessee. In July 2018, the Company also announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”), incorporated in the state of Florida, complete with a current compounding pharmacy license in Florida. The Medahub acquisition allowsallowed the Company to be fully HIPAA compliant and cloud based on an HL7 platform. The Company can nowplanned to offer licensing agreements for other cannabis companies wanting to be HIPAA compliant from left to right or seed to sale and Doctordoctor to Patient.patient.
The Company’s primary source of revenue iswas from the extraction of medicinal hemp oil, from a non-psychoactive cannabis plant. All extraction services are currentlywere provided in states where such services arewere deemed legal. The Company's subsidiary EMT has beenwas invited to be part of the hemp pilot program in Tennessee. This program providesprovided the Company the license to grow, manufacture, and dispense organic hemp oil in Tennessee. The Company plansplanned on participating in this pilot program through thisits new, wholly-owned subsidiary.
The Company also opened itshad a retail store in Tennessee.Tennessee selling hemp infused products. Revenue generated from retail sales iswas not expected to be material to the Company based on current operating model.
On March 26, 2020, the Company announced in a current report on Form 8-k that its operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and the world and thus the Company’s business operations have been disrupted and it was unable to timely prepare the Company’s financial statements for the 2019 fiscal year. As such, the Company would be making use of the 45-day grace period provided by the SEC’s Order and available filing extension to delay filing of its Annual Report. Around this time, the Company also suspended its operations, laid off all of its employees and ceased to generate any revenue.
As a result of the insufficient cash flows from the operations of our subsidiaries as well as the disruption of our business from the COVID-19 pandemic, as of March 31, 2020, the Company discontinued the operations of all of its wholly-owned subsidiaries. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements.
On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company. On the same date, the Company filed a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,324 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. The parties agree that the change in control would not be effective until all conditions of the Acquisition Agreement are satisfied, including, but not limited to, the acquisition of funding by OFH to satisfy certain debts of the Company and the resignation of its existing board of directors. On May 20, 2020, the Company’s existing board of directors resigned.
Pursuant to the terms of the Acquisition Agreement, the parties agree that the Company will transfer to Richard K. Pertile (“Pertile”), our former CEO, all the issued and outstanding shares of each of the Company’s wholly-owned subsidiaries, and Pertile agreed to forgive all amounts due him or his related parties from the Company. The forgiveness of debt was approximately $910,000 and the value of the net assets of the subsidiaries was approximately $267,000 (net of $240,000 of liabilities). The Acquisition Agreement also specified which accounts payable, accrued liabilities and convertible notes would remain as liabilities of the Company. OFH has agreed to the payment of the following liabilities:
Professional fees | $ | 110,000 | ||
Accounts payable | 28,050 | |||
Accrued compensation to our former CEO | 187,000 | |||
Accrued compensation to our former COO | 91,000 | |||
Convertible notes | 250,000 | |||
$ | 666,050 |
As of the date of the issuance of the consolidated financial statements, the Company settled professional fees in the amount of $110,000 and other liabilities remained outstanding.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to assume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from a hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to the position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula each resigned their respective positions as a director for Acacia Diversified Holdings, Inc.
NOTE 2 – GOING CONCERN
TheBased on operating losses and negative cash from operations and the discontinued operations of the Company’s operations, substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plan in this regard is to find new operations to enter into and focus on building profitable operations. To finance operations while it finds new operations, the Company has not generated profit to date. Thewill continue financing activity such as entering into loan agreements and issuing new shares of the Company’s common stock. Therefore, the Company expects to continue to incur operating losses as it proceeds withand to incur professional fees to maintain its extraction, growing and manufacturing activities in Tennessee and research and development activities and continues to navigate through the regulatory process. The Company expects general and administrative costs to increase, asreporting company status. Until such time that the Company adds personnelis able to generate revenue and other administrative expenses associated with its current efforts. As such, and without substantially increasing revenuebecome profitable or findingfind new sources of capital, the Company will find it difficult to continue to meet its obligations as they come due. The Company continues to seek working capital but thereThere can be no assurance that the Company will be successful in its efforts to raise capital, or if it were successful in raising capital, that it would be successful in meeting its business plans. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. Management’s plans include securing additional extraction contracts and increasing sales at the retail store in Tennessee, attempting to start new businesses outside of Colorado, finding additional operational businesses to buy, and attempting to raise funds from the public through an equity offering of the Company’s common stock. Management intendsstock and identifying and developing new opportunities. However, the recent COVID-19 pandemic has presented unprecedented challenges to make every effort to identifybusinesses and develop all these sources of funds, butthe investing landscape around the world. Therefore, there can be no assurance that Management’s plans will be successful.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses for all periods presented and has a substantial accumulated deficit. As of September 30, 2019,March 31, 2020, these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. The consolidated financial statements and notes thereto are presented as prescribed by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 20182019 and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the Securities and Exchange Commission on April 1, 2019.June 26, 2020. Operating results for the ninethree months ended September 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three-month period ended March 31, 2020 and nine-month periods ended September 30, 2019, and 2018, (b) the financial position at September 30, 2019March 31, 2020 and (c) cash flows for the nine-monththree-month period ended March 31, 2020 and 2019.
As a result of the insufficient cash flows from the operations of our subsidiaries as well as the disruption of our business from the COVID-19 pandemic, as of March 31, 2020, the Company discontinued the operations of all of its wholly-owned subsidiaries. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements. For the three months ended March 31, 2020 and 2019, all gains and losses on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to discontinued operations, have been aggregated in a single caption entitled “Income (loss) from discontinued operations, net of tax” in our consolidated statements of operations for all periods ended September 30, 2019 and 2018.presented.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019MARCH 31, 2020
(UNAUDITED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Acacia Diversified Holdings, Inc. and its wholly-owned subsidiaries, MariJ Pharmaceuticals, Inc, Canna-Cures Research & Development Center, Inc., Eufloria Medical of Tennessee, Inc., Medahub Operations Group, Inc. and Medahub, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. As a result of the insufficient cash flows from the operations of our subsidiaries as well as the disruption of our business from the COVID-19 pandemic, as of March 31, 2020, the Company discontinued the operations of all of its wholly-owned subsidiaries. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements. For the three months ended March 31, 2020 and 2019, all gains and losses on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to discontinued operations, have been aggregated in a single caption entitled “Income (loss) from discontinued operations, net of tax” in our consolidated statements of operations for all periods presented.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The actual results may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
RECLASSIFICATION
Certain accounts in the prior period's financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.
MEDAHUB ACQUISITION
In July 2018, the Company announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”), which includes a current compounding pharmacy license in Florida. The Medahub acquisition allows the Company to be fully HIPAA compliant and cloud based on an HL7 platform. The Company can now offer licensing agreements for other cannabis companies wanting to be HIPAA compliant from left to right or seed to sale and Doctor to Patient. The Company issued 600,000 shares of its restricted common stock to the principal of Medahub as consideration of the acquisition, valued at $126,000.
When determining the accounting of the acquisition, the Company concluded that the acquisition does not constitute the acquisition of a business since there was no inputs, processes or outputs within Medahub. In addition, although the Company acquired certain software and technology from Medahub, the most significant asset it acquired was Medahub's principal's commitment to provide support, guidance and direction for implementing this technology. Without the principal's commitment of his time, the Company will not be able to implement the technology and begin generating cash flows. Therefore, the Company believes that the value of the purchase is concentrated on the service provided by Medahub's principal. As a result, the Company allocated the entire purchase price to the service provided and accounted for it as professional fee expense.
As of March 31, 2020, the Company discontinued the operations of Medahub and presented its assets, liabilities and results of operations as part of discontinued operations in the consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
LEASES
In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new guidelines are contained in Accounting Standards Codification ASC Topic 842 - Leases ("ASC 842"). This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company applied this standard retrospectively on January 1, 2019 through a cumulative effect adjustment recognized as of January 1, 2019. In applying this standard, the Company elects to apply all practical expedients to not reassess the followings:
| 1. | Whether a pre-existing contract is or contain a lease |
| 2. | Whether a pre-existing lease should be classified as an operating or finance lease, and |
| 3. | Whether the initial direct costs capitalized for a pre-existing lease under the previously lease accounting standard ASC Topic 840 qualify for capitalization |
In addition, in the applying ASC 842, the Company does not elect the hindsight practical expedient.
As a result, the Company recorded its right-of-use assets and corresponding lease liabilities on its balance sheet beginning January 1, 2019.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)March 31, 2020, the Company discontinued the operations of its subsidiaries and presented the right-of-use assets and related liabilities and results of operations as part of discontinued operations in the consolidated financial statements.
REVENUE RECOGNITION
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces numerous requirements in U.S. GAAP, including industry specific requirements, and provides a single revenue recognition model for recognizing revenue from contracts with customers. The Company adopted this standard effective January 1, 2018.
The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer. The Company’s revenues from extraction activities and from retail sales are recognized at a point in time.
The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way the Company records its revenues.
The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application to accumulated deficit. Additionally, incremental footnote disclosures are required to present the 2018 revenues under the prior standard. Under the modified retrospective method, an entity may also elect to apply the standard to either (i) all contracts as of January 1, 2018, or (ii) only to contracts that are not completed as of January 1, 2018. The Company elected to adopt this guidance using the modified retrospective method at January 1, 2018 which did not result in an adjustment to accumulated deficit. Additionally, upon adoption, the Company evaluated its revenue recognition policy for all revenue streams within the scope of the ASU under previous standards and using the five-step model under the new guidance and confirmed that there were no differences in the pattern of revenue recognition.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
As of March 31, 2020, the Company discontinued the operations of its subsidiaries and presented the results of operations of the subsidiaries as part of discontinued operations in the consolidated financial statements.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company’s accounts receivable represents amounts due from customers for extraction services performed. Allowance for uncollectible accounts receivable is estimated based on the aging of the accounts receivable and management estimate of uncollectible amounts. At September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company provideddid not provide for $0 and $25,000 ofan allowance for doubtful accounts. As of March 31, 2020, the Company discontinued the operations of its subsidiaries and presented its accounts respectively.receivable as asset of discontinued operations in the consolidated financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. The Company’s inventory consists of raw materials and finished goods. Cost of inventory includes cost of ingredients, labor, quality control and all other costs incurred to bring our inventories to condition ready to be sold. As of March 31, 2020, the Company discontinued the operations of its subsidiaries and presented its inventories as assets of discontinued operations in the consolidated financial statements.
DEFERRED FARM EXPENSE
The Company's subsidiary EMT grows hemp plants in both its indoor and outdoor facility. In accordance with Accounting Standards Codification 905 - Agriculture, all direct and indirect costs of growing the plants are accumulated until the time of harvest. These deferred cost cannot exceed the realizable value of the oil processed from the hemp plants. Crop costs such as soil preparation incurred before planting are deferred and allocated to the growing crop. Deferred farm expense is included as inventory costs. As of March 31, 2020, the Company discontinued the operations of its subsidiaries and presented its deferred farm expense as asset of discontinued operations in the consolidated financial statements.
DEBT DISCOUNT
The Company incurred debt discount related to the issuance of convertible promissory notes, as described in Note 9.6. The discount was recognized in its entirety as interest expense rather than amortized over the life of the convertible promissory note. The immediate recognition did not yield materially different result.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
DEBT ISSUANCE COSTS
The Company incurred direct costs associated with the issuance of convertible promissory notes, as described in Note 9.6. The Company recognized these costs as interest expense.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation under Accounting Standards Codification 718 - Compensation-Stock Compensation (“ASC 718”). ASC 718 requires that all stock-based compensation be recognized as expense in the financial statements and that such cost be measured at the fair value of the award at the grant date and recognized over the period during which an employee is required to provide services (requisite service period). An additional requirement of ASC 718 is that estimated forfeitures be considered in determining compensation expense. Estimating forfeitures did not have a material impact on the determination of compensation expense during the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019.
The Company accounts for stock based awards based on the fair market value of the instrument using a 10-day volume weighted adjusted price (VWAP) and accounts for stock options issued using the Black-Scholes option pricing model and utilizing certain assumptions including the followings:
Risk-free interest rate – This is the yield on U.S. Treasury Securities posted at the date of grant (or date of modification) having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
Expected life—years – This is the period of time over which the options granted are expected to remain outstanding. Options granted by the Company had a maximum term of ten years. An increase in the expected life will increase compensation expense.
Expected volatility – Actual changes in the market value of stock are used to calculate the volatility assumption. An increase in the expected volatility will increase compensation expense.
Dividend yield – This is the annual rate of dividends per share over the exercise price of the option. An increase in the dividend yield will decrease compensation expense. The Company does not currently pay dividends and has no immediate plans to do so in the near future.
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of Accounting Standards Codification 505-50, Equity – Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.
During the ninethree months ended September 30, 2019,March 31, 2020, the board of directors approved the following issuances of the Company’s restricted common stock to consultants, employees, and directors for services rendered:
| 1. |
|
| 2. |
|
| 3. | 40,000 shares issued to employees |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
4. | 20,000 shares issued to an employee for services rendered, valued at $436. |
FAIR VALUE ESTIMATES – The Company measures assets and liabilities it acquires at fair value in accordance with Accounting Standards Codification 820 – Fair Value Measurement (“ASC 820”). The objective of ASC 820 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. These two types of inputs have created the following fair value hierarchy:
● | Level 1 – Quoted prices for identical instruments in active markets; |
● | Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
● | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when estimating fair value. The Company has liability measured at fair value on a recurring basis due to the issuance of convertible note payable as described in Note 6.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
NOTE 4 – RELATED PARTY TRANSACTIONS
Notes Payable to Related PartyParties
The Company entered into the following promissory notes payable to its former CEO during the year ended December 31, 20182019 and during the ninethree months ended September 30, 2019:March 31, 2020:
Note Date | Note Amount | Accrued Interest through December 31, 2018 | Accrued Interest for nine months ended September 30, 2019 | Total Accrued Interest | Note Balance 12/31/18 | New Loan | Note Conversion | Note Balance 12/31/19 | New Loan | Note Conversion | Note Balance 3/31/2020 | |||||||||||||||||||||||||||||||||||
Total notes payable and accrued interest due to related party at December 31, 2017 | $ | 558,400 | $ | 56,544 | $ | 33,412 | $ | 89,956 | ||||||||||||||||||||||||||||||||||||||
September 2017 | $ | 558,400 | $ | - | $ | - | $ | 558,400 | $ | - | $ | - | $ | 558,400 | ||||||||||||||||||||||||||||||||
March 2018 | - | - | - | - | 72,000 | - | (72,000 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||
April 2018 | - | - | - | - | 42,000 | - | (42,000 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||
August 2018 | 70,000 | 2,170 | 4,187 | 6,357 | 70,000 | - | - | 70,000 | - | - | 70,000 | |||||||||||||||||||||||||||||||||||
November 2018 | 20,000 | 184 | �� | 1,197 | 1,381 | 20,000 | - | - | 20,000 | - | - | 20,000 | ||||||||||||||||||||||||||||||||||
December 2018 | 50,000 | 142 | 2,992 | 3,134 | 50,000 | - | - | 50,000 | - | - | 50,000 | |||||||||||||||||||||||||||||||||||
May 2019 | 10,000 | - | 307 | 307 | (1) | - | 10,000 | - | 10,000 | - | - | 10,000 | ||||||||||||||||||||||||||||||||||
June 2019 | 25,000 | - | 630 | 630 | (2) | - | 25,000 | - | 25,000 | - | - | 25,000 | ||||||||||||||||||||||||||||||||||
December 2019 | (3) | - | 19,000 | - | 19,000 | - | - | 19,000 | ||||||||||||||||||||||||||||||||||||||
February 2020 | (4) | - | - | - | - | 40,000 | - | 40,000 | ||||||||||||||||||||||||||||||||||||||
March 2020 | (5) | - | - | - | - | 9,928 | - | 9,928 | ||||||||||||||||||||||||||||||||||||||
175,000 | 2,496 | 9,313 | 11,809 | - | ||||||||||||||||||||||||||||||||||||||||||
$ | 812,400 | $ | 54,000 | $ | (114,000 | ) | $ | 752,400 | $ | 49,928 | $ | - | $ | 802,328 | ||||||||||||||||||||||||||||||||
Total notes payable and accrued interest due to related party at September 30, 2019 | $ | 733,400 | $ | 59,040 | $ | 42,725 | $ | 101,765 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Note Date | Accrued Interest 12/31/18 | Interest Expense | Interest Conversion | Accrued Interest 12/31/19 | Interest Expense | Interest Conversion | Accrued Interest 3/31/2020 | |||||||||||||||||||||||
September 2017 | $ | 56,544 | $ | 44,672 | $ | - | $ | 101,216 | $ | 11,137 | $ | - | $ | 112,353 | ||||||||||||||||
March 2018 | 4,402 | 7,196 | (11,598 | ) | - | - | - | - | ||||||||||||||||||||||
April 2018 | 2,333 | 4,198 | (6,531 | ) | - | - | - | - | ||||||||||||||||||||||
August 2018 | 2,169 | 5,600 | - | 7,769 | 1,396 | - | 9,165 | |||||||||||||||||||||||
November 2018 | 184 | 1,600 | - | 1,784 | 399 | - | 2,183 | |||||||||||||||||||||||
December 2018 | 142 | 4,000 | - | 4,142 | 997 | - | 5,140 | |||||||||||||||||||||||
May 2019 | (1) | - | 508 | - | 508 | 199 | - | 708 | ||||||||||||||||||||||
June 2019 | (2) | - | 1,134 | - | 1,134 | 499 | - | 1,633 | ||||||||||||||||||||||
December 2019 | (3) | - | 75 | - | 75 | 379 | - | 454 | ||||||||||||||||||||||
February 2020 | (4) | - | - | - | - | 403 | - | 403 | ||||||||||||||||||||||
March 2020 | (5) | - | - | - | - | 39 | - | 39 | ||||||||||||||||||||||
$ | 65,774 | $ | 68,983 | $ | (18,129 | ) | $ | 116,629 | $ | 15,448 | $ | - | $ | 132,077 |
(1) In March 2018, the Company entered into three separate unsecured promissory note agreements with its CEO and his spouse, in the amounts of $12,000, $40,000 and $20,000, totaled $72,000. Each of these promissory notes bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 60 days from the date of the note. The principle amount of these notes as well as accrued interest of $5,822 was converted into 1,945,556 shares of the Company's common stock in May 2019.
(2) In April 2018, the Company entered into two separate unsecured promissory note agreements with its CEO and his spouse, in the amounts of $10,000 and $32,000, totaled $42,000. Each of these promissory notes bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 60 days from the date of the note. The principle amount of these notes as well as accrued interest of $3,161 was converted into 1,129 036 shares of the Company's common stock in May 2019.
(3) In August 2018, the Company entered into three separate unsecured promissory note agreements with its CEO and his spouse, in the amounts of $25,000, $25,000, and $20,000, totaled $70,000. Each of these promissory notes bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 60 days from the date of the note. The Company accrued interest on these notes in the amount of $6,357 through September 30, 2019.
(4) In November 2018, the Company entered into an unsecured promissory note agreement with its CEO and his spouse, in the amount of $20,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 30 days from the date of the note. The Company accrued interest on these notes in the amount of $1,381 through September 30, 2019.
(5) In December 2018, the Company entered into an unsecured promissory note agreement with its CEO and his spouse, in the amount of $50,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $3,134 through September 30, 2019.
(6) In May 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $10,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $307$708 through September 30, 2019.March 31, 2020.
(7)(2) In June 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $25,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $630$1,633 through SeptemberMarch 31, 2020.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
(3) In December 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $19,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $454 through March 31, 2020.
(4) In February 2020, the Company entered into an unsecured promissory note agreement with one of its former director, in the amount of $40,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 30 2019.days from the date of the note. The Company accrued interest on these notes in the amount of $403 through March 31, 2020.
(5) In March 2020, the Company entered into two unsecured promissory notes agreements with its former CEO and his spouse, in the amounts of $2,500 and $7,428. The promissory notes bear interest at a rate of 8% per annum. The principle balance and accrued interest is due 30 days from the dates of the notes. The Company accrued interest on these notes in the amount of $39 through March 31, 2020.
As a result, the total principle amount of notes payable to related partyparties from continuing operations was $733,400$802,328 and $752,400, at September 30, 2019March 31, 2020 and $812,400 at December 31, 2018. The amount of accrued2019, respectively. Accrued interest on these notes duepayable to related partyparties from continuing operations was $101,765$132,077 and $116,629, at September 30, 2019March 31, 2020 and $65,774 at December 31, 2018.2019, respectively.
Payable to Related Parties
Payable to related parties from continuing operations consisted of the followings at September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Short term loan from related entity (1) | $ | 59,768 | $ | 61,500 | $ | 35,348 | $ | 26,348 | ||||||||
Auto allowances owed to CEO (2) | 6,000 | 5,000 | ||||||||||||||
$ | 65,768 | $ | 66,500 | |||||||||||||
Auto allowances owed to former CEO (2) | 12,000 | 9,000 | ||||||||||||||
Payable to Related Parties from continuing operations | $ | 47,348 | $ | 35,348 |
(1) In 2017, the Company received a working capital advance of $74,348 from a related entity. These advances are non-interest bearing and were intended as short term capital advances. The remaining balances have been included in payable to related parties as current liabilities on the consolidated balance sheet as current liabilitiessheets at September 30, 2019March 31, 2020 and December 31, 2018.2019.
(2) On May 1, 2016, the Company entered into an employment agreement with its former CEO. The term of the employment is through December 31, 2019. The agreement providesprovided for a monthly storage and corporate housing allowance of $1,000 for a property owned by the CEO and a monthly automobile allowance of $1,000.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)$1,000 to the former CEO.
In May 2018, the board of directors approved to discontinue payment of the storage and corporate housing allowance of $1,000 per month, retroactively to January 1, 2018. As a result, expenses accrued during the three months ended March 31, 2018 was reversed during the three months ended June 30, 2018. The automobile allowance remains unchanged at $1,000 per month.
In July 2018, the board of directors approved issuance of 85,000 shares of the Company's restricted common stock to the Company's CEO to settle the accrued storage and corporate housing allowance and automobile allowance in the amount of $17,000. In addition, in May 2019, the board of directors approved issuance of 200,000 shares of the Company's restricted common stock to the Company's former CEO to settle the accrued automobile allowance expense in the amount of $8,000. As a result, $6,000$12,000 and $5,000$9,000 remained owed to the Company’s CEO at September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
During the three and nine months ended September 30,March 31, 2020 and 2019, expenses from continuing operations related to the automobile allowances totaled $0 and $3,000, and $9,000, respectively.
Other Related Party Transactions
In May 2018, the Company's CEO personally financed the purchase, with the Company's board of directors' approval, a piece of property in Tennessee for the benefit of the Company. The property consists of a 14 acre farm and an indoor growing area. The Company's CEO personally funded the purchase price of the property at $185,000 and closing costs. The board of directors also granted the Company the right to purchase the farm from the Company's CEO at his cost plus 6.09% interest when the Company has sufficient cash flows to do so. At the time of the filing, the Company has not exercised such right.
The board of directors also approved for the Company to enter into a lease to lease this property from the Company's CEO, effective June 1, 2018. The term of the lease is for one year with an automatic renewal term of one year. The lease requires the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, etc. For the three and nine months ended September 30, 2019, the Company incurred $7,900 and $27,133, respectively, in operating expenses for this property.
NOTE 5 – INVENTORIES
The Company’s inventories consisted of the followings at September 30, 2019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
Raw materials | $ | 20,800 | $ | 23,810 | ||||
Finished goods (isolates, tinctures, capsules, etc.) | 6,649 | 12,605 | ||||||
Deferred farm expense | - | 7,135 | ||||||
$ | 27,449 | $ | 43,550 |
NOTE 6 – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
Short term lease
The Company recognizes its office lease in Florida with an initial term of 12 months or less as a short-term lease. Lease payments associated with short-term lease are expensed as incurred in operating lease expense and are not included in our calculation of right-of-use assets or lease liabilities. Operating lease expense related to short-term lease was $3,045 and $8,839 for the three and nine months ended September 30, 2019.
Operating lease
The Company entered into a lease agreement to lease its retail space in Tennessee in October 2017 with a lease term of 24 months. The lease contains a renewal option to extend the term for two additional years. The lease will expire on November 30, 2019 and the Company has notified the landlord that it will not renew the lease. Rent for the first twelve months was $2,500 per month and $2,550 for the next twelve months. In applying ASC 842, the Company uses a lease term of 24 months and an incremental borrowing rate of 5.99% which was the borrowing rate on a finance lease (discussed below).
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Right of use (ROU) asset - operating lease obtained in exchange for lease liability - operating lease | ||||
$ | 29,355 | |||
Amortization of ROU asset - operating lease | (21,854 | ) | ||
ROU asset - operating lease at September 30, 2019 | $ | 7,501 | ||
Lease liability - operating lease on adoption date | $ | 29,655 | ||
Payments on lease liability - operating lease | (22,079 | ) | ||
Lease liability - operating lease on September 30, 2019 | $ | 7,576 | ||
This entire lease liability matures prior to December 31, 2019. | ||||
Operating lease expense for the three months ended September 30, 2019 | $ | 7,575 | ||
Operating lease expense for the nine months ended September 30, 2019 | $ | 23,025 | ||
Weighted average remaining lease term | 3 months | |||
Weighted average discount rate | 5.99 | % |
Finance lease
In May 2018, the Company's CEO personally financed the purchase, with the Company's board of directors' approval, a piece of property in Tennessee for the benefit of the Company. The property consists of a 14 acre farm and an indoor growing area. The Company's CEO personally funded the purchase price of the property at $185,000 and closing costs. The board of directors also granted the Company the right to purchase the farm from the Company's CEO at his cost plus 6.09% interest when the Company has sufficient cash flows to do so. At the time of the filing, the Company has not exercised such right.
The board of directors also approved for the Company to enter into a lease to lease this property from the Company's CEO, effective June 1, 2018. The term of the lease is for one year with an automatic renewal term of one year. The lease also contains an option for the Company to purchase the property from the Company's CEO. The lease requires the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, utilities, etc.
In applying ASC 842 on adoption date, the Company considered the followings:
|
|
|
|
|
|
|
|
|
|
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
ROU asset - finance lease - land | $ | 37,530 | ||
ROU asset - finance lease - improvement | 148,787 | |||
ROU asset - finance lease obtained in exchange for lease liability - finance lease | 186,317 | |||
Cumulative effect adjustment to ROU asset - finance lease on adoption date | (8,679 | ) | ||
Amortization of ROU asset - finance lease | (11,159 | ) | ||
ROU asset - finance lease at September 30, 2019 | $ | 166,479 | ||
Lease liability - finance lease on adoption date | $ | 186,318 | ||
Cumulative effect adjustment to ROU lease liability - finance lease on adoption date | (4,277 | ) | ||
Payments on lease liability - finance lease | (6,492 | ) | ||
Lease liability - finance lease on September 30, 2019 | $ | 175,549 |
Interest expense related to lease liability - finance lease was $2,581 and $7,837 for the three and nine months ended September 30, 2019, respectively.
Amounts of lease liability - finance lease matures over the next five years: | ||||
Twelve Months Ended September 30, | ||||
2020 | $ | 8,871 | ||
2021 | 9,402 | |||
2022 | 9,966 | |||
2023 | 10,562 | |||
2024 and thereafter | 136,748 | |||
$ | 175,549 | |||
Variable lease expense was $7,900 and $27,133, for the three and nine months ended September 30, 2019, respectively. | ||||
Weighted average remaining lease term | 14 years | |||
Weighted average discount rate | 5.99 | % |
NOTE 75 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses of continuing operations consisted of the followings at September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, 2019 | December 31, 2018 | |||||||
Accounts payable to vendors | $ | 104,128 | $ | 83,037 | ||||
Payroll taxes payable | 58,537 | 46,832 | ||||||
Accrued salaries and bonuses | 140,085 | 153,542 | ||||||
Accrued interest on notes payable | 4,793 | 6,394 | ||||||
$ | 307,543 | $ | 289,805 |
NOTE 8 – LONG-TERM DEBT
In June 2018, the Company entered into a financing agreement to finance the purchase of a farm tractor. The financing agreement is secured by the tractor. The total amount financed was $21,794 at 0% interest per annum. The first monthly payment of $363 began in July 2018 and continues for 60 months. The following is the total payment amounts for the next five years:
Twelve Months ending September 30, | ||||
2020 | $ | 4,359 | ||
2021 | 4,359 | |||
2022 | 4,359 | |||
2023 | 3,232 | |||
$ | 16,309 |
March 31, 2020 | December 31, 2019 | |||||||
Accounts payable to vendors | $ | 145,661 | $ | 965 | ||||
Payroll taxes payable | 65,414 | 63,206 | ||||||
Accrued salaries and bonuses | 247,992 | 207,062 | ||||||
Accrued interest on notes payable | 17,525 | 11,472 | ||||||
Accounts payable and accrued expenses of continuing operations | $ | 476,592 | $ | 282,705 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019MARCH 31, 2020
(UNAUDITED)
The current and long-term portions of principle amounts due are as follow:
Amount of principle due in the next 12 months | $ | 4,359 | ||
Long term portion of principle due | 11,950 | |||
$ | 16,309 |
NOTE 96 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
On August 22, 2018, the Company issued a convertible promissory note ("Note 1") for $140,800. Note 1 was discounted at $128,000 and the Company received net proceeds of $125,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of August 22, 2019. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $148,211. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. At December 31, 2018, the derivative liability was valued at $138,218. The Company recognized $0 and $58,503 as derivative expense for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the note holder converted principle in the amount of $140,800 and accrued interest in the amount of $6,400 into the Company's common stock. This resulted in the issuance of 4,899,785 shares of the Company's common stock being issued to the note holder. As a result of the conversion, the derivative liability was extinguished at September 30, 2019.
On October 8, 2018, the Company issued a convertible promissory note ("Note 2") for $58,300. Note 2 was discounted at $53,000 and the Company received net proceeds of $50,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of October 8, 2019. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $57,272. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. At December 31, 2018, the derivative liability was valued at $58,300. The Company recognized $6,198 and $14,250 as derivative expense for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the note holder converted principle in the amount of $58,300 and accrued interest in the amount of $2,650 into the Company's common stock. This resulted in the issuance of 3,146,716 shares of the Company's common stock being issued to the note holder. As a result of the conversion, the derivative liability was extinguished at September 30, 2019.
On June 13, 2019, the Company issued a convertible promissory note ("Note 3") for $93,500. Note 3 was discounted at $85,000 and the Company received net proceeds of $82,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of June 13, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $151,264. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $56,802$35,005 and $177,375$0 as derivative expenseincome for the three and nine months ended September 30, 2019.March 31, 2020 and 2019, respectively. The derivative liability was valued at $177,375$7,652 at September 30, 2019.March 31, 2020.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)March 31, 2020, the holder of Note 3 converted principle amount of $84,200 of the note to 3,644,781 shares of the Company’s common stock.
On July 12, 2019, the Company issued a convertible promissory note ("Note 4") for $91,300. Note 4 was discounted at $83,000 and the Company received net proceeds of $80,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of July 12, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $117,886. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $194,773$46,675 and $0 as derivative expenseincome for the three and nine months ended September 30, 2019.March 31, 2020 and 2019, respectively. The derivative liability was valued at $194,773$83,158 at September 30, 2019.March 31, 2020.
On October 10, 2019, the Company issued a convertible promissory note ("Note 5") for $91,300. Note 5 was discounted at $83,000 and the Company received net proceeds of $80,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of October 10, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $128,642. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $40,725 and $0 as derivative income for the three months ended March 31, 2020 and 2019, respectively. The derivative liability was valued at $98,843 at March 31, 2020.
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
Fair Value Measurement at September 30, 2019 (1)
Fair Value Measurement at March 31, 2020 (1) Using Level 2 | ||||||||||||||||
Note 3 | Note 4 | Note 5 | Total | |||||||||||||
Liability: | ||||||||||||||||
Derivative liability | $ | 7,652 | $ | 83,158 | $ | 98,843 | $ | 189,653 | ||||||||
Total liability | $ | 7,652 | $ | 83,158 | $ | 98,843 | $ | 189,653 |
Note 3 | Note 4 | |||||||||||
Level 2 | Level 2 | Total | ||||||||||
Liability: | ||||||||||||
Derivative liability | $ | 177,375 | $ | 194,773 | $ | 372,148 | ||||||
Total liability | $ | 177,375 | $ | 194,773 | $ | 372,148 |
Fair Value Measurement at December 31, 2018 (1)
Fair Value Measurement at December 31, 2019 (1) Using Level 2 | ||||||||||||||||||||||||||||
Note 1 - Level 2 | Note 2 - Level 2 | Total | Note 3 | Note 4 | Note 5 | Total | ||||||||||||||||||||||
Liability: | ||||||||||||||||||||||||||||
Derivative liability | $ | 138,218 | $ | 58,300 | $ | 196,518 | $ | 111,928 | $ | 129,833 | $ | 139,569 | $ | 381,330 | ||||||||||||||
Total liability | $ | 138,218 | $ | 58,300 | $ | 196,518 | $ | 111,928 | $ | 129,833 | $ | 139,569 | $ | 381,330 |
(1) The Company did not have any assets or liabilities measured at fair value using Level 1 or 3 of the fair value hierarchy as of September 30, 2019March 31, 2020 and December 31, 2018.2019.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes valuation model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the conversion price of the conversion option, and expected volatility, which is based on historical volatility. The Black-Scholes valuation model employs the market approach in determining fair value.
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis during the ninethree months ended September 30, 2019March 31, 2020 and the year ended December 31, 2018:2019:
Note 1 | Note 2 | Note 3 | Note 4 | Total | Note 1 | Note 2 | Note 3 | Note 4 | Note 5 | Total | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | 138,218 | $ | 58,300 | $ | - | $ | - | $ | 196,518 | $ | 138,218 | $ | 58,300 | $ | - | $ | - | $ | - | $ | 196,518 | ||||||||||||||||||||||
Variable conversion feature in convertible notes payable | - | - | 151,264 | 117,886 | 269,150 | - | - | 151,264 | 117,886 | 128,642 | 397,792 | |||||||||||||||||||||||||||||||||
Change in fair value | 58,502 | 14,250 | 26,111 | 76,887 | 175,750 | 58,502 | 14,250 | (25,489 | ) | 11,947 | 10,926 | 70,136 | ||||||||||||||||||||||||||||||||
Conversion of derivative liability to equity from note conversion | (196,720 | ) | (72,550 | ) | - | - | (269,270 | ) | (196,719 | ) | (72,550 | ) | (13,847 | ) | - | - | (283,117 | ) | ||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | - | $ | - |
| $ | 177,375 | $ | 194,773 | $ | 372,148 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | - | (0 | ) | 111,928 | 129,833 | 139,568 | 381,329 | |||||||||||||||||||||||||||||||||||||
Variable conversion feature in convertible notes payable | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
Change in fair value | - | - | (35,005 | ) | (46,675 | ) | (40,725 | ) | (122,405 | ) | ||||||||||||||||||||||||||||||||||
Conversion of derivative liability to equity from note conversion | - | - | (69,271 | ) | - | - | (69,271 | ) | ||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | - | $ | (0 | ) | $ | 7,652 | $ | 83,158 | $ | 98,843 | $ | 189,653 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
DuringSince the nine months ended September 30, 2019,issuance of Note 3, the note holder elected to convert the principle amount of $140,800 and accrued interest of $6,400$84,200 of Note 1 and principle amount of $58,300 and accrued interest of $2,650 of Note 23 into the Company's common stock on the following dates, at the respective conversion prices, resulting in the following number of shares issued to the note holder:
Date of Conversion of Note 1 |
| Amounts Converted |
|
| Conversion Price |
|
| Number of Shares Issued |
| |||
Principle conversion |
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March 5, 2019 |
| $ | 15,000 |
|
| $ | 0.0945 |
|
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| 158,730 |
|
March 19, 2019 |
| $ | 15,000 |
|
| $ | 0.0951 |
|
|
| 157,729 |
|
March 27, 2019 |
| $ | 15,000 |
|
| $ | 0.0795 |
|
|
| 188,679 |
|
April 23, 2019 |
| $ | 12,000 |
|
| $ | 0.0254 |
|
|
| 472,441 |
|
April 29, 2019 |
| $ | 15,000 |
|
| $ | 0.0254 |
|
|
| 590,551 |
|
May 8, 2019 |
| $ | 15,000 |
|
| $ | 0.0375 |
|
|
| 400,000 |
|
May 21, 2019 |
| $ | 15,000 |
|
| $ | 0.0263 |
|
|
| 570,342 |
|
May 30, 2019 |
| $ | 12,000 |
|
| $ | 0.0169 |
|
|
| 710,059 |
|
June 6, 2019 |
| $ | 12,000 |
|
| $ | 0.0169 |
|
|
| 710,059 |
|
June 11, 2019 |
| $ | 14,800 |
|
| $ | 0.0218 |
|
|
| 678,899 |
|
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| $ | 140,800 |
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| 4,637,490 |
|
Accrued interest conversion |
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|
June 18, 2019 |
| $ | 6,400 |
|
| $ | 0.0244 |
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| 262,295 |
|
Total amount converted |
| $ | 147,200 |
|
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|
|
|
|
| 4,899,785 |
|
Date of Conversion of Note 2 | Amounts Converted | Conversion Price | Number of Shares Issued | |||||||||
Principle conversion | ||||||||||||
June 21, 2019 | $ | 15,000 | $ | 0.0206 | 728,155 | |||||||
June 25, 2019 | $ | 12,000 | $ | 0.0192 | 625,000 | |||||||
July 5, 2019 | $ | 12,000 | $ | 0.0188 | 638,298 | |||||||
July 9, 2019 | $ | 15,000 | $ | 0.0190 | 789,474 | |||||||
July 10, 2019 | $ | 4,300 | $ | 0.0190 | 226,316 | |||||||
$ | 58,300 | 3,007,243 | ||||||||||
Accrued interest conversion | ||||||||||||
July 10, 2019 | $ | 2,650 | $ | 0.0190 | 139,473 | |||||||
Total amount converted | $ | 60,950 | 3,146,716 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Date of Conversion of Note 3 | Amounts Converted | Conversion Price | Number of Shares Issued | |||||||||
Principle conversion | ||||||||||||
December 23, 2019 | $ | 12,000 | $ | 0.0480 | 250,000 | |||||||
January 6, 2020 | $ | 15,000 | $ | 0.0465 | 322,581 | |||||||
January 27, 2020 | $ | 15,000 | $ | 0.0338 | 443,787 | |||||||
February 4, 2020 | $ | 20,000 | $ | 0.0338 | 591,716 | |||||||
March 6, 2020 | $ | 22,200 | $ | 0.0109 | 2,036,697 | |||||||
Total amount converted | $ | 84,200 | 3,644,781 |
NOTE 107 – STOCKHOLDERS’ DEFICIT
Preferred Stock
The Company's board of directors is authorized by the Article of Incorporation to issue 2,000,000 shares of preferred stock at $0.001 par value, in one or more series. In August 2019, the Company's board of directors designatesdesignated and authorizesauthorized the issuance of 1,475,000 shares of Series B Convertible Preferred Stock ("series B preferred stock"(the “Preferred Stock”). Each share of series B preferred stock will have 50 votes per share and may be converted into 50 $0.001 par value common stock. The holders of series B preferred stock are entitled to receive, when and if as declared by the board of directors, cumulative dividends payable in cash. The holders of series B preferred stock are also given preference over common stock holders in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and subject and subordinate to the rights of secured creditors of the Company.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
As a result of a change in control, on March 31, 2020, the Company issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the dateCompany had 43,290,324 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the filingissuance of this Form 10-Q, no series B preferred stock has been issued.the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. The parties agree that the change in control would not be effective until all conditions of the Acquisition Agreement are satisfied, including, but not limited to, the acquisition of funding by OFH to satisfy certain debts of the Company and the resignation of its existing board of directors. On May 20, 2020, the Company’s existing board of directors resigned.
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to assume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from a hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to the position of Vice President.
Common Stock
The Company has been authorized to issue 150,000,000 shares of common stock, $.001 par value. Each share of issued and outstanding common stock shall entitle the holder thereof to fully participate in all shareholder meetings, to cast one vote on each matter with respect to which shareholders have the right to vote, and to share ratably in all dividends and other distributions declared and paid with respect to common stock, as well as in the net assets of the corporation upon liquidation or dissolution.
During the ninethree months ended September 30, 2019,March 31, 2020, the Company issue 19,719,9183,706,781 shares of its restricted common stock as follows:
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| 3. | 40,000 shares issued to employees |
4. | 20,000 shares issued to an employee for services rendered, valued at $436. |
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Warrants and Options
At September 30, 2019, 50,000March 31, 2020, 20,000 options were outstanding and there were no warrants outstanding. The Company did not issue any common stock purchase warrants or options during the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019.
Restricted Stock Awards to Key Employees
In March 2017, the board of directors approved issuance of 100,000 shares of the Company’s restricted common stock to its key employees. The award is subject to a four or five-year vesting requirements, i.e. the requisite service period. The shares are issued as the vesting restriction lapses. The Company valued these shares at fair value on commitment date which is the date on which the employee accepted the award and recorded stock based compensation expense over the requisite service period. Stock based compensation expense for these awards for the three months ended September 30,March 31, 2020 and 2019 was $6,996 and 2018 was $10,754 and $11,040,$9,102, respectively. Stock based compensation expense for these awards for the nine months ended September 30, 2019 and 2018 was $56,172 and $37,069.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
NOTE 118 – COMMITMENTS
At March 31, 2020, the Company owed its former CEO $103,845 of unpaid salary, $52,500 of accrued bonus and $12,000 of unpaid automobile allowance. The employment agreement was renewed through June 30, 2020 at an annual salary of $150,000 and continued to provide for a monthly automobile allowance of $1,000. The employment agreement was effectively terminated as a result of the change in control but these amounts remained outstanding as part of the Company’s continuing operations.
At March 31, 2020, the Company owed its former COO $12,085 of unpaid salary and $79,562 of accrued bonus. The employment agreement was renewed through June 30, 2020 at an annual salary of $96,000. The employment agreement was effectively terminated as a result of the change in control but these amounts remained outstanding as part of the Company’s continuing operations.
In August 2016, the Company entered into a licensing agreement to use exclusively a brand name for one of its subsidiary’s products for five years. Pursuant to the terms of the agreement, the Company issued 2,000 shares of its restricted common stock to the brand owner at the beginning of the agreement and 2,000 shares at the end of each of the next four years. At March 31, 2020, there remains 2,000 shares to be issued to the brand owner.
NOTE 9 – DISCONTINUED OPERATIONS
As a result of the insufficient cash flows from the operations of our subsidiaries as well as the disruption of our business from the COVID-19 pandemic, as of March 31, 2020, the Company discontinued the operations of all of its wholly-owned subsidiaries. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements.
On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company. On the same date, the Company filed a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,331 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. The parties agree that the change in control would not be effective until all conditions of the Acquisition Agreement are satisfied, including, but not limited to, the acquisition of funding by OFH to satisfy certain debts of the Company and the resignation of its existing board of directors. On May 20, 2020, the Company’s existing board of directors resigned.
Pursuant to the terms of the Acquisition Agreement, the parties agree that the Company will transfer to Richard K. Pertile (“Pertile”), our former CEO, all the issued and outstanding shares of each of the Company’s wholly-owned subsidiaries and Pertile agreed to forgive all amounts due him or his related parties from the Company. The forgiveness of debt was approximately $910,000 and the value of the net assets of the subsidiaries was approximately $267,000 (net of $240,000 of liabilities). The Acquisition Agreement also specified which accounts payable, accrued liabilities and convertible notes would remain as liabilities of the Company. OFH has agreed to the payment of the followings:
Professional fees | $ | 110,000 | ||
Accounts payable | 28,050 | |||
Accrued compensation to our former CEO | 187,000 | |||
Accrued compensation to our former COO | 91,000 | |||
Convertible notes | 250,000 | |||
$ | 666,050 |
As of the date of the issuance of the consolidated financial statements, the Company settled professional fees in the amount of $110,000 and other liabilities remained outstanding.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
In accordance with the provisions of ASC 205-20, the Company has separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of March 31, 2020 and December 31, 2019, and consist of the following:
March 31, 2020 | December 31, 2019 | |||||||
CURRENT ASSETS OF DISCONTINUED OPERATIONS: | ||||||||
Cash | $ | 576 | $ | 27,149 | ||||
Accounts receivable | - | 52,461 | ||||||
Inventories (1) | 30,686 | 46,197 | ||||||
Prepaid expenses and other current assets | 557 | 3,560 | ||||||
Property and equipment, net of accumulated depreciation of $454,548 in 2020 (2) | 313,105 | - | ||||||
Deposits | 3,810 | - | ||||||
ROU asset - finance lease, net of accumulated amortization of $18,598 in 2020 (3) | 159,040 | - | ||||||
Total Current Assets of Discontinued Operations | 507,774 | 129,367 | ||||||
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS: | ||||||||
Property and equipment, net of accumulated depreciation of $417,144 in 2019 (2) | - | 350,509 | ||||||
Deposits | - | 3,810 | ||||||
ROU asset - finance lease, net of accumulated amortization of $14,879 in 2019 (3) | - | 162,759 | ||||||
Total Non-Current Assets of Discontinued Operations | - | 517,078 | ||||||
TOTAL ASSETS OF DISCONTINUED OPERATIONS | $ | 507,774 | $ | 996,954 | ||||
CURRENT LIABILITIES OF DISCONTINUED OPERATIONS: | ||||||||
Accounts payable and accrued expenses (4) | $ | 31,218 | $ | 113,560 | ||||
Current portion of long-term debt (5) | 14,130 | 4,359 | ||||||
Current portion of lease liability - finance lease (3) | 171,060 | 9,008 | ||||||
Payable to related parties (6) | 24,420 | 33,420 | ||||||
Total Current Liabilities of Discontinued Operations | 240,828 | 160,347 | ||||||
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS: | ||||||||
Long-term debt (5) | - | 10,861 | ||||||
Lease liability - finance lease (3) | - | 164,255 | ||||||
Total Long-term Liabilities of Discontinued Operations | - | 175,116 | ||||||
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS | $ | 240,828 | $ | 335,463 |
(1) Inventories
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
The Company’s inventories of the discontinued operations consisted of the followings at March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | |||||||
Raw materials | $ | 32,294 | $ | 32,294 | ||||
Finished goods (isolates, tinctures, capsules, etc.) | 13,392 | 13,903 | ||||||
Inventory valuation allowance | (15,000 | ) | - | |||||
Inventory of discontinued operations | $ | 30,686 | $ | 46,197 |
As a result of suspending its operations and the increasingly competitive market for its products, the Company provided a valuation allowance of $15,000 to reduce the cost of its inventory to its estimated net realizable value.
(2) Property and equipment
Property and equipment of the discontinued operations consisted of the followings at March 31, 2020 and December 31, 2019:
03/31/2020 | 12/31/2019 | |||||||
Computer equipment | $ | 7,582 | $ | 7,582 | ||||
Website | 7,000 | 7,000 | ||||||
Furniture & equipment | 557,273 | 557,273 | ||||||
Farm equipment | 52,295 | 52,295 | ||||||
Farm improvement | 61,495 | 61,495 | ||||||
Leasehold improvement | 82,008 | 82,008 | ||||||
Total property and equipment | 767,653 | 767,653 | ||||||
Less accumulated depreciation | (454,548 | ) | (417,144 | ) | ||||
Net property and equipment of discontinued operations | $ | 313,105 | $ | 350,509 |
Depreciation expense from discontinued operations for the three months ended March 31, 2020 and 2019 were $37,404 and $36,901, respectively.
(3) Right-of-use assets and lease liabilities
Short term lease
The Company recognizes its office lease in Florida with an initial term of 12 months or less as a short-term lease. Lease payments associated with short-term lease are expensed as incurred in operating lease expense and are not included in our calculation of right-of-use assets or lease liabilities. Operating lease expense for discontinued operations related to short-term lease was $4,199 and $2,895 for the three months ended March 31, 2020 and 2019, respectively. This short-term lease was terminated in July 2020.
Operating lease
The Company entered into a lease agreement to lease its retail space in Tennessee in October 2017 with a lease term of 24 months. The lease contains a renewal option to extend the term for two additional years. The lease expired on November 30, 2019 and the Company notified the landlord that it would not renew the lease. Rent for the discontinued operations for the first twelve months was $2,500 per month and $2,550 for the next twelve months. In applying ASC 842, the Company uses a lease term of 24 months and an incremental borrowing rate of 5.99% which was the borrowing rate on a finance lease (discussed below).
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
Right of use (ROU) asset - operating lease obtained in exchange for lease liability - operating lease | ||||
$ | 29,355 | |||
Amortization of ROU asset - operating lease | (29,355 | ) | ||
ROU asset - operating lease at December 31, 2019 | $ | 0 | ||
Lease liability - operating lease on adoption date | $ | 29,655 | ||
Payments on lease liability - operating lease | (29,655 | ) | ||
Lease liability - operating lease on December 31, 2019 | $ | 0 | ||
This entire lease liability matured on November 30, 2019 | ||||
Operating lease expense for the year ended December 31, 2019 | $ | 28,125 | ||
Weighted average remaining lease term | - | |||
Weighted average discount rate | 5.99 | % |
Finance lease
The board of directors approved for the Company to enter into a lease to lease this property from the Company's former CEO, effective June 1, 2018. The term of the lease was for one year with an automatic renewal term of one year. The lease also contained an option for the Company to purchase the property from the Company's former CEO. The lease required the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's former CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, utilities, etc.
In applying ASC 842 on adoption date, the Company considered the followings:
1. | The lease is with a related party of the Company. | ||
2. | Although the initial lease term is for one year, the Company is reasonably certain to acquire the property from the related party. | ||
3. | Contrary to leases with fixed lease payments, this lease requires the Company to pay all expenses related to the acquisition and operations of the property which are variable. Although the Company can exclude variable lease payments in applying ASC 842, the lease provides the necessary cash flows for the related party to service his debt. Therefore, the Company estimates future incremental borrowing costs to be incurred by the related party when measuring the initial finance lease liability. This amounts to approximately $1,600 per month. | ||
4. | The related party's debt term was 15 years at a borrowing rate of 5.99% | ||
5. | The Company considered the most objective measure of the right-of-use asset to be the purchase price paid by the related party for the property. The purchase price is then allocated among land and improvement and the Company amortizes the improvement over the estimated useful life of 10 years. |
ROU asset - finance lease - land | $ | 37,530 | ||
ROU asset - finance lease - improvement | 148,787 | |||
ROU asset - finance lease obtained in exchange for lease liability - finance lease | 186,317 | |||
Cumulative effect adjustment to ROU asset - finance lease on adoption date | (8,679 | ) | ||
Amortization of ROU asset - finance lease | (18,598 | ) | ||
ROU asset - finance lease at March 31, 2020 | $ | 159,040 | ||
Lease liability - finance lease on adoption date | $ | 186,318 | ||
Cumulative effect adjustment to ROU lease liability - finance lease on adoption date | (4,277 | ) | ||
Payments on lease liability - finance lease | (10,981 | ) | ||
Lease liability - finance lease on March 31, 2020 | $ | 171,060 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
Interest expense related to lease liability - finance lease was $2,515 and $2,643 for the three months ended March 31, 2020 and 2019, respectively.
Amounts of lease liability - finance lease matures over the next five years: | ||||
Twelve Months Ended March 31, | ||||
2021 | $ | 9,140 | ||
2022 | 9,687 | |||
2023 | 10,268 | |||
2024 | 10,883 | |||
2025 and thereafter | 131,082 | |||
$ | 171,060 |
Variable lease expense was $9,671 and $7,720, for the three months ended March 31, 2020 and 2019, respectively. | ||||
Weighted average remaining lease term | 13 years | |||
Weighted average discount rate | 5.99 | % |
(4) Accounts payable and accrued expenses
Accounts payable and accrued expense of discontinued operations consisted of the followings at March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | |||||||
Accounts payable to vendors | $ | 113,560 | $ | 31,218 | ||||
Accounts payable and accrued expenses | $ | 113,560 | $ | 31,218 |
(5) Long-term debt
In June 2018, the Company entered into a financing agreement to finance the purchase of a farm tractor for its discontinued operations. The financing agreement was secured by the tractor. The total amount financed was $21,794 at 0% interest per annum. The first monthly payment of $363 began in July 2018 and continued for 60 months. The following is the total payment amounts for the next four years:
Twelve Months ending March 31, |
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2021 |
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2022 |
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The current and long-term portions of principle amounts due are as follow:
Amount of principle due in the next 12 months |
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Long term portion of principle due |
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| 9,771 |
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Total principle amounts due from discontinued operations |
| $ | 14,130 |
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(6) Payable to related parties
Payable to related parties from continuing operations consisted of the followings at March 31, 2020 and December 31, 2019:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Short term loan from related entity (a) | $ | 24,420 | $ | 33,420 | ||||
Payable to Related Parties from discontinuing operations | $ | 24,420 | $ | 33,420 |
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
(a) In 2017, the Company received a working capital advance of $74,348 from a related entity. These advances are non-interest bearing and were intended as short term capital advances. The remaining balances have been included in payable to related parties as current liabilities of discontinued operations on the consolidated balance sheets at March 31, 2020 and December 31, 2019.
In January 2020, the Company’s former CEO provided a short term advance in the amount of $18,000 for working capital for the discontinued operations. The Company repaid the advance to the former CEO in the same month.
In accordance with the provisions of ASC 205-20, we have not included the results of operations from discontinued operations in the results of continuing operations in the consolidated statements of operations. The results of operations from discontinued operations for the three months ended March 31, 2020 and 2019, have been reflected as discontinued operations in the consolidated statements of operations for the three months ended March 31, 2020 and 2019, and consist of the following:
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |||||||
REVENUE | $ | 1,622 | $ | 163,505 | ||||
COSTS OF GOODS SOLD | ||||||||
Costs of goods sold | 73,220 | 48,742 | ||||||
Depreciation expense | 36,883 | 23,457 | ||||||
110,103 | 72,199 | |||||||
GROSS PROFIT (LOSS) | (108,481 | ) | 91,306 | |||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||
Employee compensation expenses | 1,805 | 29,105 | ||||||
General and administrative expenses (7) | 22,263 | 44,146 | ||||||
Depreciation and amortization expense | 4,241 | 17,163 | ||||||
28,309 | 90,414 | |||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | (136,790 | ) | 892 | |||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | (3,221 | ) | (2,643 | ) | ||||
Other income (expense) | (343 | ) | 2,083 | |||||
TOTAL OTHER EXPENSE | (3,564 | ) | (560 | ) | ||||
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES | (140,354 | ) | 332 | |||||
Income taxes | - | - | ||||||
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax | $ | (140,354 | ) | $ | 332 |
(7) Other Related Party Transactions
The board of directors approved for the Company to enter into a lease to lease this property from the Company's former CEO, effective June 1, 2018. The term of the lease was for one year with an automatic renewal term of one year. The lease required the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's former CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, etc. For the three months ended March 31, 2020 and 2019, the Company incurred $9,864 and $7,720, respectively, in operating expenses of discontinued operations for this property.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the financial statements were issued, and determined that there were no other material events to disclose, other than the followings:
On October 10, 2019,May 20, 2020, the Company announced that it had entered into an Acquisition Agreement and Plan of Share Exchange (“Acquisition Agreement”) with its former CEO Richard K. Pertile, its former board of directors, OFH and its managing member Jeff Bearden. Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company, effective March 31, 2020. On the same date, the Company filed a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,324 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. The parties agree that the change in control would not be effective until all conditions of the Acquisition Agreement are satisfied, including, but not limited to, the acquisition of funding by OFH to satisfy certain debts of the Company and the resignation of its existing board of directors. On May 20, 2020, the Company’s existing board of directors resigned.
Pursuant to the terms of the Acquisition Agreement, the parties agree that the Company will transfer to Richard K. Pertile (“Pertile”), our former CEO, all the issued and outstanding shares of each of the Company’s wholly-owned subsidiaries and Pertile agreed to forgive all amounts due him or his related parties from the Company. The forgiveness of debt was approximately $910,000 and the value of the net assets of the subsidiaries was approximately $267,000 (net of $240,000 of liabilities). The Acquisition Agreement also specified which accounts payable, accrued liabilities and convertible notes would remain as liabilities of the Company. OFH has agreed to the payment of the followings:
Professional fees | $ | 110,000 | ||
Accounts payable | 28,050 | |||
Accrued compensation to our former CEO | 187,000 | |||
Accrued compensation to our former COO | 91,000 | |||
Convertible notes | 250,000 | |||
$ | 666,050 |
As of the date of the issuance of the consolidated financial statements, the Company settled professional fees in the amount of $110,000 and other liabilities remained outstanding.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula each resigned their respective positions as a director for Acacia Diversified Holdings, Inc.
On May 21, 2020, the Company issued a convertible promissory note ("Note 5"6") for $91,300.$103,000. Note 56 was discountedissued to settle professional fees due at $83,000 anda result of the Company received net proceeds of $80,000 after incurring $3,000 of debt issuance costs.change in control. The note bears an interest rate at 10%12% per annum, and principal and accrued interest is due on the maturity date of October 10, 2020.May 21, 2021. The conversion option price associated with the note has a 25%39% discount to the market price of the stock. The market price is based on the average of the two lowest trading pricesprice during a tentwenty day period prior to conversion. The note is convertible at any time.beginning on the 180th day following the date of the note. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company will bifurcate the conversion option, and utilize the Black Scholes valuation model to determine the fair value of the conversion option.
Subsequent to March 31, 2020, the holder of our convertible notes converted the remaining principle balance of Note 3 in the amount of $9,300 and accrued interest of $2,750 into 2,926,471 shares of the Company’s common stock. In addition, the holder of our convertible notes converted the principle balance of Note 4 in the amount of $21,300 into 6,264,705 shares of the Company’s common stock.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
(UNAUDITED)
NOTE 1211 – RECENT ACCOUNTING PRONOUNCEMENTS
We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards and changes in their interpretation, we might be required to change our accounting policies, particularly concerning revenue recognition, the capitalized incremental costs to obtain a customer contract and lease accounting, to alter our operational policies and to implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or to restate our published financial statements. Such changes may have an adverse effect on our business, financial position, and operating results, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results.
Accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements, other than the followings.
The Security and Exchange Commission ("SEC") recently amended its rules to require an analysis of changes in stockholders’ equity in the financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as a note or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amended rules will become effective 30 days after they are published in the Federal Register. The SEC's transition guidance states that the amendments are effective for all filings made on or after the effective date; however, it also states the SEC staff would not object if a filer’s first presentation of the changes in stockholders’ equity was included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company presented an analysis of changes in stockholders' deficit as a separate statement in this Form 10-Q.
Except as noted above and in our Form 10-K, the Company’s management does not believe that recent codified pronouncements by the Financial Accounting Standards Board (“FASB”) (including its EITF), the AICPA or the SEC will have a material impact on the Company’s current or future consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Information
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”, “could”, “predicts”, “potential”, “proposed”, or “continue” or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of operations, impact of competition and other risks detailed below as well as those discussed elsewhere in this Form 10-Q and from time to time in the Company’s Securities and Exchange Commission filings and reports. In addition, general economic and market conditions and growth rates could affect such statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
General
These unaudited interim consolidated financial statements should be read in conjunction with the annual financial statements for the Company most recently completed fiscal year ended December 31, 2018.2019. These unaudited interim consolidated financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited interim consolidated financial statements have been prepared using the same accounting policies and methods as those used by the Company in the annual audited financial statements for the year ended December 31, 2018.2019.
Discussion on the Company’s Operations and Recent Event
Prior to March 31, 2020, the Company had four wholly-owned subsidiaries, MariJ Pharmaceuticals, Inc. ("(“MariJ Pharma"Pharma”)
MariJ Pharma engages in the extraction and processing of very high quality, high-CBD/low-THC content medical grade hemp oils from medical hemp plants. MariJ Pharma specializes in utilizing organic strains of the hemp plant, setting itself apart from the general producers of non-organic products. In addition, MariJ Pharma has the technical expertise and capability to process and formulate the oils and to employ them in its compounding operations. MariJ Pharma will seek to become engaged as owner or co-owner of, a grow facility such as to produce its own plants for processing. The Company intends to acquire, through its MariJ Pharma subsidiary, portions or complete ownership of licenses and grow operations in one or more states and seeks to cultivate, organically extract and process its medicinal hemp crops year around in indoor facilities. The acquisition of these licenses is anticipated to provide the Company with the opportunity to compound medicinal products using mixtures of high cannabinoid profile oils that have very little hallucinogenic properties but have significantly improved medicinal properties. This GeoTraking Technology is designed to provide a full-channel patient care tracking system that is fully compliant under today’s strict HIPAA regulations that require privacy and security of the patient’s information. Beginning with RFID labeling and tracking of every single seed employed in the grow program and continuing through the sale of medicinal products in a sophisticated retail Point of Sale delivery system.
MariJ Pharma’s revenues are anticipated to be generated primarily from several activities, including but not limited to the following:
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On September 28, 2016, MariJ Pharmaceuticals, Inc. received an Organic Certification under the U.S. National Organic Program (7 CFR Part 205) for its proprietary CO2 mobile oil extraction process and handling from OneCert, Inc., the issuing authority for that certification. As such, MariJ is now authorized to process directly for certified organic farms and is able to produce certified organic oils.
The Company is preparing to seek additional investments and financing to pay the costs of building its second mobile oil extraction and processing unit, to finance final construction of its mobile compounding and manufacturing unit for the same industry, and to complete the roll-out of its GeoTraking Technology system. There can be no assurance the Company will be successful in its plans to generate the required capital.
Canna-Cures Research and Development Center, Inc. ("Canna-Cures")
The Company acquired the assets and the business ofFlorida corporation, Canna-Cures Research & Development Center, LLC,Inc. (“Canna-Cures”), a Florida limited liability company, on January 15, 2016. The Company utilizes this subsidiary to engage in researchcorporation, and development activities as well as retail and wholesale distribution of medicinal hemp products and dietary supplements in the state of Colorado, depending upon our ability to comply in each instance with FDA rules and other regulations. Canna-Cures closed its retail operations in 2017 and began to focus its efforts in its development activities in Tennessee.
Eufloria Medical of Tennessee, Inc. ("EMT")
In addition to our current extraction operations, the Company has been invited to be part of the hemp pilot program in Tennessee. This program provides the Company the license to grow, manufacture, and dispense USDA organic hemp oil in Tennessee and represents the first step in moving its operations to the east coast of the United States. The Company plans on participating in this pilot program through this new, wholly-owned subsidiary.
In July 2018, the Company announced that its wholly-owned subsidiary, Eufloria Medical of Tennessee, Inc. (“EMT”), an entity focused ona company incorporated in the growing and distributionstate of new and proprietary medicinal hemp products for patients. EMT intends to utilize MariJ Pharma's USDA certified organic mobile processing and handling solutions for its customers, and technology solutions for the expanding physician market, has leased a 14-acre farm with 32,000 square feet of indoor growing area in southern Tennessee. EMT also acquired an option to purchase the farm upon favorable terms, which option, EMT intends to exercise as soon as possible. The farm will provide the Company’s first grow facility, allowing for improved efficiencies through growing, processing and manufacturing the Company’s own product line and building sales through dedicated distributors. The Company will grow its own plant material, process that plant material through another wholly owned subsidiary, MariJ Pharmaceuticals, Inc. (“MariJ”) and manufacture consumer products with the “EUFLORIA” branding for the dedicated distribution channels.
EMT will seek to align itself with institutions of higher learning in working to develop new products and to identify and develop additional uses for its medical hemp products. It is anticipated that EMT could generate revenues from the following activities:
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The Company will require additional capital to execute these plans and there can be no assurance that the Company will be successful in its plans to generate that capital.
Medahub, Inc. (“Medahub”)
In July 2018, the Company also announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”), incorporated in the state of Florida, complete with a current compounding pharmacy license in Florida. The Medahub acquisition allowsCompany’s primary source of revenue was from the extraction of medicinal hemp oil, from a non-psychoactive cannabis plant. All extraction services were provided in states where such services were deemed legal. The Company also had a hemp farm and a retail store in Tennessee, growing, manufacturing and selling hemp infused products. Revenue generated from retail sales was not material to the Company to be fully HIPAA compliant and cloud based on an HL7 platform.its operating model.
On March 26, 2020, the Company announced in a current report on Form 8-k that its operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and the world and thus the Company’s business operations have been disrupted and it was unable to timely review and prepare the Company’s financial statements for the 2019 fiscal year. As such, the Company would be making use of the 45-day grace period provided by the SEC’s Order and available filing extension to delay filing of its Annual Report. Around this time, the Company also suspended its operations, laid off all of its employees and ceased to generate any revenue.
As a result of the insufficient cash flows from the operations of our subsidiaries as well as the disruption of our business from the COVID-19 pandemic, as of March 31, 2020, the Company discontinued the operations of all of its wholly-owned subsidiaries. The financial results for these subsidiaries have been presented as discontinued operations in the accompanying consolidated financial statements.
On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company. On the same date, the Company can now offer licensing agreementsfiled a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,331 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. The parties agree that the change in control would not be effective until all conditions of the Acquisition Agreement are satisfied, including, but not limited to, the acquisition of funding by OFH to satisfy certain debts of the Company and the resignation of its existing board of directors. On May 20, 2020, the Company’s existing board of directors resigned.
Pursuant to the terms of the Acquisition Agreement, the parties agree that the Company will transfer to Richard K. Pertile (“Pertile”), our former CEO, all the issued and outstanding shares of each of the Company’s wholly-owned subsidiaries and Pertile agreed to forgive all amounts due him or his related parties from the Company. The forgiveness of debt was approximately $910,000 and the value of the net assets of the subsidiaries was approximately $267,000 (net of $240,000 of liabilities). The Acquisition Agreement also specified which accounts payable, accrued liabilities and convertible notes would remain as liabilities of the Company. OFH has agreed to the payment of the followings:
Professional fees | $ | 110,000 | ||
Accounts payable | 28,050 | |||
Accrued compensation to our former CEO | 187,000 | |||
Accrued compensation to our former COO | 91,000 | |||
Convertible notes | 250,000 | |||
$ | 666,050 |
As of the date of the issuance of the consolidated financial statements, the Company settled professional fees in the amount of $110,000 and other cannabis companies wantingliabilities remained outstanding.
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to be HIPAA compliantassume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from lefta hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to right or seed to salethe position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Doctor to Patient. The Company is continuing to develop the capabilities of this technology ahead of marketing this platform to users.Dr. Richard Paula each resigned their respective positions as a director for Acacia Diversified Holdings, Inc.
Operating results for the three months ended SeptemberMarch 31, 2020 and 2019 30, 2019 and 2018::
For the three months ended September 30, 2019, the Company generated revenues of $97,927 from operations, compared to $29,931 for the three months ended September 30, 2018, an increase of $67,996 or 227%. The increase in revenues was due to having more extraction contracts in the current period.Continuing Operations
For the three months ended September 30, 2019, costs of goods sold was $128,485, compared to $67,462 for the three months ended September 30, 2018, an increase of $61,023, or 90%. Costs of goods sold was higher during the three months ended September 30, 2019 primarily due to incurring more technician hours and paying bonuses to serve the increased number of extraction contracts.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s gross loss decreased from a loss of $37,531, or (125%) of revenue for the three months ended September 30, 2018 to a loss of $30,558, or (31%) of revenue for the three months ended September 30, 2019. The decrease in gross loss is primarily due to gross profit earned on our extraction contracts, due to increase in volume, offset by losses incurred in our retail and farm operations.
For the three months ended September 30,March 31, 2019, selling, general and administrative expenses were $254,426,$204,775, compared to $344,485$166,164 during the three months ended September 30, 2018,March 31, 2020, a decrease of $90,059,$38,611 or 26%19%. The decrease in these expenses is primarily attributable to an increasedecrease in salaries and wages increase in professional fees incurred infor our compliance effortformer CEO and towards investor relations. In addition, our subsidiary incurred $128,000 of expenses inCOO during the three months ending September 30, 2018 as a result of being acquired by the Company. Medahub did not incur any expense in the three months ending September 30, 2019.current period.
During the three months ended September 30,March 31, 2019, the Company incurred interest expense of $31,498,$20,762, compared to $30,294$21,500 for the three months ended September 30, 2018,March 31, 2020, an increase of $1,204,$738, or 4%. Interest expense remained consistent because the Company had comparable amounts of convertible notes and notes payable to related partyparties outstanding during both periods. During the three months ended September 30, 2019 and 2018, interest expense was primarily related to the notes payable to related party and on convertible notes payable.
During the three months ended September 30,March 31, 2019, the Company recognized $257,773$27,180 of derivative expense,income, compared to $155,126$122,406 derivative expenseincome for the three months ended September 30, 2018,March 31, 2020, an increase of $102,647,$95,226, or 66%350%. There were threeThe increase in the amount of outstanding convertible notes payable with variable conversion feature that gave rise to derivative liability, coupled with the reduction in our share price during the three months ended September 30, 2019 comparedcurrent period gave rise to only one convertible note payable with variable conversion feature outstanding during the three months ended September 30, 2018.derivative income and its increase.
As a result of the changes in revenues, costs and expenses,described above, the Company incurred a net loss from continuing operations of $581,506$198,357 for the three months ended September 30,March 31, 2019, compared to a net loss from continuing operations of $560,436$65,258 for the three months ended September 30, 2018,March 31, 2020, an increasedecrease of $21,070,$133,099, or 4%67%.
The future trends
Based on operating losses and negative cash from operations and the discontinued operations of the Company’s operations, substantial doubt exists about the Company’s ability to execute its business planscontinue as a going concern. Management’s plan in this regard is to find new operations to enter into and focus on building profitable operations. To finance operations while it finds new operations, the future outcomeCompany will continue financing activity such as entering into loan agreements and issuing new shares of its application to obtain operating licenses in other states. As the industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s abilitycommon stock. Therefore, the Company expects to continue to fundincur operating expenseslosses and to incur professional fees to maintain its reporting company status. Until such time that the Company is able to generate revenue and become profitable or find new sources of capital, the Company will depend onfind it difficult to continue to meet its ability to raise additional capital.obligations as they come due. There can be no assurance that the Company will be successful in doing so.its efforts to raise capital, or if it were successful in raising capital, that it would be successful in meeting its business plans. Management’s plans include attempting to raise funds from the public through an equity offering of the Company’s common stock and identifying and developing new opportunities. However, the recent COVID-19 pandemic has presented unprecedented challenges to businesses and the investing landscape around the world. Therefore, there can be no assurance that Management’s plans will be successful.
Operating results for the nine months ended September 30, 2019 and 2018:Discontinued Operations
For the ninethree months ended September 30,March 31, 2019, the CompanyCompany’s subsidiaries generated revenues of $402,156$163,505 from operations, compared to $134,516$1,622 for the ninethree months ended September 30, 2018,March 31, 2020, an increasedecrease of $267,640,$161,883 or 199%99%. The increasedecrease in revenues was primarily due to having moreno extraction contracts.contracts in the current period. The minimal revenues generated during the current period was from sale of hemp-infused products.
For the ninethree months ended September 30,March 31, 2019, costs of goods sold was $383,025,$72,199, compared to $169,463$110,103 for the ninethree months ended September 30, 2018,March 31, 2020, an increase of $213,562,$37,904, or 126%52%. Costs of goods sold was higher during the nine months ended September 30, 2019current period is primarily due to incurring more technician hours(1) the write down of inventory of $15,000 to its net realizable value, and paying bonuses to serve the increased number of extraction contracts.(2) an increase in depreciation in property and equipment.
As a result of the changes in revenues and costs of goods sold discussed above, the Company’s subsidiaries gross margin decreased from a profit increased fromof $91,306, or 56% of revenues for the three months ended March 31, 2019 to a loss of $34,947,$108,481, or (26%(6,688%) of revenues for the ninethree months ended September 30, 2018 to a gross profit of $19,131, or 5% of revenues, for the nine months ended September 30, 2019.March 31, 2020. The increasedecrease in gross profit is primarily due to higher volume of ourno extraction contracts, despite lower margin, to offset the loss incurred in our retail and farm operations.contracts.
For the ninethree months ended September 30,March 31, 2019, selling, general and administrative expenses were $779,166,$90,414, compared to $1,278,979$28,309 during the ninethree months ended September 30, 2018,March 31, 2020, a decrease of $499,813,$62,105, or 39%69%. The decrease in these expenses is primarily attributable to a decrease in stock based compensation to consultants ingradual lay off of our workforce and the current period, no expenses incurred by our subsidiary Medahub in the current period, offset by increase in compensation expense related to our farm operations, increase in farm operation expenses and administrative salaries.wind down of these operations.
During the ninethree months ended September 30,March 31, 2019, the CompanyCompany’s subsidiaries incurred interest expense of $83,060,$2,643, compared to $56,307$3,221 for the ninethree months ended September 30, 2018. DuringMarch 31, 2020, an increase of $578, or 22%. Interest expense remained consistent and it is attributable to the nine months ended September 30, 2019, the Company accrued interest on its notes payable to related party as well as interest incurred on its four outstanding convertible notes payable. During the nine months ended September 30, 2018, the Company incurred interest expense on its notes payable to related party as well as interest incurred on one outstanding convertible note payable. subsidiaries’ finance lease obligation.
As a result of the changes in revenues, costs and expenses, the Company incurredCompany’s subsidiaries generated a net lossincome from discontinued operations of $1,289,445$332 for the ninethree months ended September 30,March 31, 2019, compared to a net loss from discontinued operations of $1,523,721$140,354 for the ninethree months ended September 30, 2018.March 31, 2020, an decrease of $140,686, or 42,375%.
The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the cannabis industry grows, additional expenses are anticipated to be incurred in complying with various state and federal regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Liquidity and Capital Resources
Continuing Operations
The Company’s cash position at September 30, 2019 increasedMarch 31, 2020 decreased by $22,917$2,201 to $74,714,$415, as compared to a balance of $51,797,$2,616, as of December 31, 2018.2019. The net increasedecrease in cash for the ninethree months ended September 30, 2019March 31, 2020 was primarily attributable to cash providedused by financingoperating activities through issuance of common stock, convertible notesfrom increase in accounts payable and notes payable to a related party. The cash raised was used as working capital and to invest in purchase of property and equipment.accrued expenses.
As of September 30, 2019,March 31, 2020, the Company had negative working capital of $1,215,769$1,375,299 compared to negative working capital of $1,198,806,$1,475,211 at December 31, 2018, a decrease2019, an increase of $16,962,$99,912, attributable primarily to a decrease in accounts receivable, a decrease inreporting its outstandingassets and liabilities from discontinued operations as current assets and current liabilities since these amounts of notes payable and accrued interest dueare expected to related party and outstanding amount of convertible notes payable, offset bybe settled within the recognition of lease liabilities related to its right-of-use finance and operating leases.next twelve months.
Net cash used in operating activities of $212,020$96,165 during the ninethree months ended September 30, 2019,March 31, 2020, was lower compared to the prior period of $332,091,$133,613, primarily due to decreasethe wind down of the operations and an increase in operatingaccounts payable and accrued expenses during the current period.
Net cash used by investing activities was $43,502 for the nine months ended September 30, 2019, compared to $23,322
Net cash provided by financing activities of $278,439$49,928 during the ninethree months ended September 30, 2019 increasedMarch 31, 2020, decreased by $99,435$41,272 compared to $377,874$91,200 during the ninethree months ended September 30, 2018.March 31, 2019. In the current period, as the Company’s share price was decreasing, the Company turned to its related parties to generate cash flows from issuance of notes payable to related parties. In the prior period, the Company was able to better generate cash flows from collecting onthrough sale of its accounts receivable than in the past, therefore, it did not heavily rely on generating cash flows from financing through issuance of common stock to investors, issuance of convertible notes payable and issuance of notes payable to a related party as it did in the prior period.stock.
During the ninethree months ended September 30, 2019,March 31, 2020, the Company issued shares of its common stock to settle $208,150$72,200 of principle and accrued interest of its convertible notes payable and the related derivative liability of $269,271. It also$69,271. During the three months ended March 31, 2019, the Company issued shares of its common stock to settle $45,000 of principle and accrued expenses owed to a related party in the amountinterest of $8,000 and to settleits convertible notes payable and the related derivative liability of $41,933.
As reported in the accompanying consolidated financial statements, for the three months ended March 31, 2020 and 2019, the Company incurred net losses from continuing operations of $65,258 and $198,357, respectively. Management’s plan in this regard is to find new operations to enter into and focus on building profitable operations. To finance operations while it finds new operations, the Company will continue financing activity such as entering into loan agreements and issuing new shares of the Company’s common stock. Therefore, the Company expects to continue to incur operating losses and to incur professional fees to maintain its reporting company status. Until such time that the Company is able to generate revenue and become profitable or find new sources of capital, the Company will find it difficult to continue to meet its obligations as they come due. There can be no assurance that the Company will be successful in its efforts to raise capital, or if it were successful in raising capital, that it would be successful in meeting its business plans. Management’s plans include attempting to raise funds from the public through an equity offering of the Company’s common stock and identifying and developing new opportunities. However, the recent COVID-19 pandemic has presented unprecedented challenges to businesses and the investing landscape around the world. Therefore, there can be no assurance that Management’s plans will be successful.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses from continuing operations for all periods presented and has a substantial accumulated deficit. As of March 31, 2020, these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Discontinued Operations
The Company’s subsidiaries cash position at March 31, 2020 decreased by $26,573 to $576, as compared to a balance of $27,149, as of December 31, 2019. The net decrease in cash for the three months ended March 31, 2020 was attributable to cash used by operating activities through cash collected from accounts receivable, offset by payments on accounts payable and accrued interestexpenses.
As of March 31, 2020, the Company’s subsidiaries had assets of $507,774 and liabilities of $240,828. These assets and liabilities from discontinued operations are reported as current assets and current liabilities since these amounts are expected to be settled within the next twelve months.
Net cash used in operating activities of $20,756 during the three months ended March 31, 2020 decreased by $52,962 compared to the prior period of $73,718, primarily due to a related partydecrease in operating expenses during the amountcurrent period as the Company was winding down the operations of $122,984. It alsothe subsidiaries.
Net cash used in investing activities was $24,102 during the three months ended March 31, 2019.
Net cash used by financing activities of $3,293 during the three months ended March 31, 2020 increased by $99 compared to $3,194 during the three months ended March 31, 2019. The Company’s subsidiaries financing activities consisted of monthly payments of long-term debt and its finance lease obligations which remained consistent during the periods.
During the three months ended March 31, 2019, the Company’s subsidiaries acquired a finance lease by assuming a lease liability in the amount of $182,041. In addition, it acquired an operating lease by assuming a lease liability in the amount of $29,655. During the nine months ended September 30, 2018, the Company issued shares valued at $17,649 to settle a related party liability and acquired equipment by assuming long-term debt of $21,794. It also issued common stock to settle accrued expenses owed to a related party in the amount of $446,625.
As reported in the accompanying consolidated financial statements, for the nine months ended September 30, 2019 and 2018, the Company incurred net losses of $1,289,445 and $1,523,721, respectively. The Company did not produce sufficient revenues in the periods presented to cover its operating expenses and has sustained operating losses since inception. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, successfully generate cash flows from its operations in Tennessee and achieve a level of profitability. Until recently where the Company obtained working capital from convertible notes financing and equity purchase agreement with an outside investor, the Company has financed its activities principally from working capital advances from related parties and issuing notes payable to its CEO. It intends to finance its future operating activities and its working capital needs largely from proceeds from the sale of equity securities, if any, combined with additional funding from its CEO. The sale of equity and convertible notes financing agreements may result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises additional funds through the issuance of convertible notes or other debt financing, these activities or other debt could contain covenants that would restrict the Company’s operations. Any other third-party funding arrangements could require the Company to relinquish valuable rights. The Company will require additional capital beyond its currently anticipated needs. Additional capital, if available, may not be available on reasonable terms or at all.
The Company has not generated significant revenue to date, and will not generate significant revenue in the foreseeable future. The Company expects to continue to incur operating losses as it proceeds with its pursuit of operating licenses in various states. The future trends of all expenses are expected to be primarily driven by the Company’s ability to execute its business plans and the future outcome of its application to obtain operating licenses in other states. As the industry grows, additional expenses are anticipated to be incurred in complying with various regulatory requirements. The Company’s ability to continue to fund operating expenses will depend on its ability to raise additional capital. There can be no assurance that the Company will be successful in doing so.
Financial Condition
The Company’s total assets at September 30,March 31, 2020 was $515,774, compared to total assets at December 31, 2019 of $654,237, a decrease of $138,463, or 21%. As a result of discontinuing its subsidiaries operations, the Company reclassified $507,774 and $129,367 of the subsidiaries assets as current assets of discontinued operations on March 31, 2020 and December 31, 2018 were $760,9192019, respectively, and $696,895, respectively, an increase$517,078 of $64,024, or 9%. the subsidiaries assets as non-current assets of discontinued operations on December 31, 2019.
Total liabilities at September 30,March 31, 2020 consisted of current liabilities of $1,891,073 and derivative liability of $189,653. Total liabilities at December 31, 2019 consisted of current liabilities of $1,611,529 and long-term liabilities of $556,446, a decrease of $87,249, or 4%. As a result of discontinuing its subsidiaries operations, the Company reclassified $240,828 and $160,347 of the subsidiaries liabilities as current liabilities of discontinued operations on March 31, 2020 and December 31, 2018 were $1,964,8572019, respectively, and $1,649,675, respectively, an increase$175,116 of $315,182, or 19%. the subsidiaries assets as non-current assets of discontinued operations on December 31, 2019.
The significant change in the Company’s financial condition is attributable to (i) acquiring a finance lease and an operating lease by assumingresult of winding down its operations in the corresponding lease liabilities, offset by (ii) better collection onthree months ended March 31, 2020. The Company’s subsidiaries collected its accounts receivable. In addition, althoughreceivable, suspended its investments in the farm and leasehold improvements, wrote down its inventory to its net realizable value, suspended payments to its vendors, increased its borrowings from related party note holder andparties while the convertible note holder bothholders converted theirsome of the notes into the Company'sCompany’s common stock, the Company also issued an additional convertible note that gave rise to additional derivative liability during the nine months ended September 30, 2019.stock. As a result of these transactions,changes, the Company’s cash position increasedof its continuing operations decreased from $51,797$2,616 on December 31, 2019 to $74,714 during$415 on March 31, 2020. In addition, the nine months ended September 30, 2019.
Off-Balance Sheet Arrangements
We have made 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019.March 31, 2020. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019,March 31, 2020, the Company’s disclosure controls and procedures were not effective. The controls were determined to be ineffective due to the lack of segregation of duties. In January 2017, the Company hired a part-time financial controller to assist with technical accounting issues and the preparation of the filings. However, until the Company begins generating sufficient revenues, it is unable to remediate the weakness. Despite the existence of material weaknesses, management believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three months ended September 30, 2019,March 31, 2020, in accordance with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the three months ended September 30, 2019,March 31, 2020, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
None.
The Company is a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the ninethree months ended September 30, 2019,March 31, 2020, the Company issue 19,719,9183,706,781 shares of its restricted common stock as follows:
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| 3. | 40,000 shares issued to employees |
4. | 20,000 shares issued to an employee for services rendered, valued at $436. |
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The shares of our common stock were issued pursuant to an exemption from registration in Section 4(a)(2) of the Securities Act of 1933. These shares of our common stock qualified for exemption under Section 4(a)(2) of the Securities Act of 1933 since the issuance of shares by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(a)(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. We did not undertake an offering in which we sold a high number of shares to a high number of investors. In addition, these shareholders had necessary investment intent as required by Section 4(a)(2) since they agreed to receive share certificates bearing a legend stating that such shares are restricted pursuant to Rule 144 of the 1933 Act. This restriction ensures that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.” All shareholders are “sophisticated investors” and are business acquaintances of our officers and directors. Based on an analysis of the above factors, we believe we have met the requirements to qualify for exemption under section 4(a)(2) of the Securities Act of 1933 for this transaction.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibits required by Item 601, Regulation S-K;
Exhibit Number and Description |
| Location Reference | |||
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| (3.0) | Articles of Incorporation |
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| (3.1) |
| See Exhibit Key | |
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| (3.2) | Restated Bylaws Of Acacia Diversified Holdings, Inc. dated June 29, 2015 |
| See Exhibit Key |
| (9.0) | Voting Proxy Agreement between Rick Pertile and Steven L. Sample |
| See Exhibit Key | |
| (10.1) |
| See Exhibit Key | ||
| (10.2) |
| See Exhibit Key | ||
| (10.3) |
| See Exhibit Key | ||
| (10.4) |
| See Exhibit Key | ||
| (10.5) |
| See Exhibit Key | ||
| (10.6) | Security Agreement – CannaCures Research & Development Center, Inc. |
| See Exhibit Key | |
| (10.7) |
| See Exhibit Key | ||
| (14.0) |
| See Exhibit Key | ||
| (21.0) |
| See Exhibit Key | ||
| (31.1) |
| Filed herewith | ||
| (32.1) |
| Filed herewith | ||
| 101.INS | XBRL Instance Document |
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| 101.SCH | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Exhibit Key
3.1 Incorporated by reference herein from the Company’s Form 8-K filed on July 16, 2015.
3.2 Incorporated by reference herein from the Company’s Form 8-K filed on July 16, 2015.
9.0 Incorporated by reference herein from the Company’s Form 10-K filed on April 2, 2018.
10.1 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.2 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.3 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.4 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.5 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.6 Incorporated by reference herein from the Company’s Form 8-K filed on November 3, 2017.
10.7 Incorporated by reference herein from the Company’s Form 10-Q filed on November 5, 2018.
14.0 Incorporated by reference herein from the Company’s Form 10-Q filed on November 13, 2017.
21.0 Incorporated by reference herein from the Company’s Form 10-Q filed on August 7, 2017.
Pursuant to the requirements of the Securities exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned.
| Acacia Diversified Holdings, Inc. |
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Date: | By: | /s/ |
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| Principal Executive Officer |
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| Principal Financial Officer
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