UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549    

FORM 10-Q

Commission file number: 001-14088

Acacia Diversified Holdings, Inc.

(Exact name of small business issuer as specified in its charter)

(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:

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: 

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.

TTAABLEBLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

ACACIA DIVERSIFIED HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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)

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) 

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)

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:

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:

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:

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:

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:

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(UNAUDITED)

(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:

(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:

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)

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: