Company Quick10K Filing
Quick10K
Acacia Diversified Holdings
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
S-1 2019-02-14 Public Filing
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-29 Other Events
8-K 2019-02-14 Other Events
8-K 2018-07-30 Other Events
8-K 2018-07-13 Officers
EQT EQT 5,220
WSR Pillarstone Capital REIT 503
HFFG HF Foods Group 298
EXFO Exfo 112
EQ Embarq 105
VJET Voxeljet Ag 45
DTEA Davidstea 34
UAVS Ageagle Aerial Systems 5
GRP Granite Real Estate 0
AWIN Altegris Winton Futures Fund 0
ACCA 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1 - The Company
Note 2 - Going Concern
Note 3 - Summary of Significant Accounting Policies
Note 4 - Related Party Transactions
Note 5 - Inventories
Note 6 - Right-Of-Use Assets and Lease Liabilities
Note 7 - Accounts Payable and Accrued Expenses
Note 8 - Long-Term Debt
Note 9 - Convertible Notes Payable and Derivative Liability
Note 10 - Stockholders' Deficit
Note 11 - Subsequent Events
Note 12 - Recent Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 ex_152968.htm
EX-32.1 ex_152969.htm

Acacia Diversified Holdings Earnings 2019-06-30

ACCA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 acaciadiv20190630_10q.htm FORM 10-Q acaciadiv20190630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549   

 


 

FORM 10-Q

 


 

(Mark One)

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2019

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

 

 

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.)

 

 

13575 58th St. North #138 Clearwater, FL

33760

(Address of principal executive offices)

(Zip Code)

 

(727) 678-4420

(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 ☐

 

 

 

Non-accelerated filer ☐

 

Smaller Reporting Company ☒

 

 

 

Emerging growth company  ☐

 

 

 

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 August 6, 2019 is  38,133,550 common shares.

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I. Financial Information

 

 

 

 

Item 1.

Financial Statements

F-1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

6

Item 4.

Controls and Procedures

6

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

7

Item 1A.

Risk Factors

7

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

7

Item 3.

Defaults Upon Senior Securities

7

Item 4.

Mine Safety Disclosures

7

Item 5.

Other Information

7

Item 6.

Exhibits

8

 

 

 

Signatures

9

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ACACIA DIVERSIFIED HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
   

(UNAUDITED)

   

(AUDITED)

 

ASSETS

               
                 

CURRENT ASSETS:

               

Cash

  $ 78,766     $ 51,797  

Accounts receivable, net of allowance for doubtful accounts of $25,000 in 2019 and 2018

    100,718       135,970  

Inventories

    39,541       43,550  

Prepaid expenses and other current assets

    9,998       7,815  

Total Current Assets

    229,023       239,132  
                 

PROPERTY AND EQUIPMENT,

net of accumulated depreciation of $351,608 and $277,343 in 2019 and 2018, respectively

    411,868       453,562  
                 
                 

OTHER ASSETS

               

Deposits

    4,201       4,201  

ROU asset - finance lease, net of accumulated amortization of $7,440 in 2019

    170,199       -  

ROU asset - operating lease

    14,894       -  
      189,294       4,201  
                 

TOTAL ASSETS

  $ 830,185     $ 696,895  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               
                 

CURRENT LIABILITIES:

               

Accounts payable and accrued expenses

  $ 277,257     $ 289,805  

Current portion of long-term debt

    4,359       4,359  

Current portion of lease liability - finance lease

    8,738       -  

Current portion of lease liability - operating lease

    15,043       -  

Convertible notes payable

    124,800       199,100  

Notes payable to related party

    733,400       812,400  

Accrued interest on notes payable to related party

    86,977       65,774  

Payable to related parties

    66,150       66,500  

Total Current Liabilities

    1,316,724       1,437,938  
                 

LONG-TERM LIABILITY:

               

Long-term debt

    13,040       15,219  

Derivative liability

    152,707       196,518  

Lease liability - finance lease

    169,037       -  

Total Long-term Liability

    334,784       211,737  
                 

Total Liabilities

    1,651,508       1,649,675  
                 

Commitments and contingencies

    -       -  
                 

STOCKHOLDERS' DEFICIT

               

Common stock, $0.001 par value; 150,000,000 shares authorized; 36,339,982 and 21,813,625

shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

    36,341       21,814  

Additional paid-in capital

    6,521,326       5,692,055  

Accumulated deficit

    (7,378,990 )     (6,666,649 )

Total Stockholders' Deficit

    (821,323 )     (952,780 )
                 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

  $ 830,185     $ 696,895  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 
                                 

REVENUE

  $ 140,724     $ 12,671     $ 304,229     $ 104,585  
                                 

COSTS OF GOODS SOLD

                               

Costs of goods sold

    132,569       34,143       181,311       66,113  

Depreciation expense

    36,844       18,082       73,229       35,888  
      169,413       52,225       254,540       102,001  
                                 

GROSS PROFIT (LOSS)

    (28,689

)

    (39,554

)

    49,689       2,584  
                                 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

                               

Employee compensation expenses

    164,585       126,409       322,825       268,778  

General and administrative expenses

    73,653       344,262       193,439       664,678  

Depreciation and amortization expense

    4,241       422       8,476       1,038  
      242,479       471,093       524,740       934,494  
                                 

LOSS FROM OPERATIONS

    (271,168

)

    (510,647

)

    (475,051

)

    (931,910

)

                                 

OTHER INCOME (EXPENSE)

                               

Bad debt recovery

    -       7,000       -       7,000  

Derivative income (expense)

    (214,308

)

    -       (187,128

)

    -  

Loss on sale of assets

    -       (12,362

)

    -       (12,362

)

Interest expense

    (28,157

)

    (14,486

)

    (51,562

)

    (26,013

)

Other income (expense)

    3,719               5,802       -  

TOTAL OTHER EXPENSE

    (238,746

)

    (19,848

)

    (232,888

)

    (31,375

)

                                 

NET LOSS BEFORE INCOME TAXES

    (509,914

)

    (530,495

)

    (707,939

)

    (963,285

)

Income taxes

    -       -       -       -  
                                 

NET LOSS

  $ (509,914

)

  $ (530,495

)

  $ (707,939

)

  $ (963,285

)

                                 

NET LOSS PER COMMON SHARE, BASIC AND DILUTED

  $ (0.02

)

  $ (0.03

)

  $ (0.04

)

  $ (0.06

)

                                 

WEIGHTED AVERAGE NUMBER OF

                               

COMMON SHARES OUTSTANDING, BASIC AND DILUTED

    28,008,747       18,240,314       25,353,695       17,505,806  

 

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 SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED) 

 

   

Common Stock

                         
   

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 )
                                         

Common stock issued for services

    1,047,000       1,047       506,861             $ 507,908  
                                         

Common stock issued to related party for leasehold improvement

    36,018       36       17,613             $ 17,649  
                                         

Employee stock plan compensation

    7,500       -       26,029             $ 26,029  
                                         

Common stock issued for cash

    200,000       200       69,800             $ 70,000  
                                         

Net loss

                            (963,285 )   $ (963,285 )
                                         

Balance June 30, 2018 (unaudited)

    18,830,500     $ 18,823     $ 5,071,341     $ (5,917,231 )   $ (827,067 )

 

   

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

    4,198,825       4,199       166,858               171,057  
                                         

Common stock issued for conversion of convertible note

    6,252,940       6,253       167,947               174,200  
                                         
Settlement of derivative liability from conversion of convertible note     -       -       230,939                  
                                         

Employee stock plan compensation

    40,000       40       45,378               45,418  
                                         

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

                            (707,939 )     (707,939 )
                                         

Balance June 30, 2019 (unaudited)

    36,339,982     $ 36,341     $ 6,521,326     $ (7,378,990 )   $ (821,323 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (707,939 )   $ (963,285 )

Adjustments to reconcile net loss to net cash and cash equivalents

used by operating activities:

               

Depreciation and amortization

    81,705       36,926  

Common stock issued for services

    171,057       507,908  

Common stock issued from employee stock plan

    45,418       26,029  

Original issue discount on convertible note payable

    8,500       -  

Amortization of debt discount

    3,000       -  

Accrued interest on notes payable to related party

    30,187       -  

Derivative expense (income)

    187,128       -  

Loss on sale of equipment

    -       12,362  

(Increase) decrease in:

               

Accounts receivable

    35,252       21,270  

Inventories

    4,009       3,172  

Prepaid expenses and other current assets

    (2,183 )     (621 )

ROU asset - operating lease

    14,762       -  

Increase (decrease) in:

               

Accounts payable and accrued expenses

    (6,148 )     144,587  

Payable to related parties

    7,650       25,506  

Lease liability - operating lease

    (14,612 )     -  

Net cash used by operating activities

    (142,214 )     (186,146 )
                 

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

    (32,572 )     (9,545 )

Net cash provided (used) by investing activities

    (32,572 )     22,816  
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from issuance of common stock

    91,200       70,000  

Proceeds from convertible note payable

    82,000       -  

Payment on long-term debt

    (2,179 )     -  

Payments on lease liability - finance lease

    (4,266 )     -  

Proceeds from issuance of notes payable to related party

    35,000       114,000  

Net cash provided by financing activities

    201,755       184,000  
                 

Net change in cash and cash equivalents

    26,969       20,670  
                 

Cash and cash equivalents, beginning of the year

    51,797       28,417  
                 

Cash and cash equivalents, end of the year

  $ 78,766     $ 49,087  
                 

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     $ -  

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

  $ 174,200     $ -  

Settlement of derivative liability from conversion of convertible notes payable

  $ 230,938     $ -  

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

JUNE 30, 2019

(UNAUDITED)

 

NOTE 1 – THE COMPANY

 

Acacia Diversified Holdings, Inc. (“Acacia” or the “Company”) has five wholly-owned subsidiaries, MariJ Pharmaceuticals, Inc. (“MariJ Pharma”), Canna-Cures Research & Development Center, Inc. (“Canna-Cures”), 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”), complete with 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’s primary source of revenue is from the extraction of medicinal hemp oil, from a non-psychoactive cannabis plant. All extraction services are currently provided in states where such services are deemed legal. The Company's subsidiary EMT 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 organic hemp oil in Tennessee. The Company plans on participating in this pilot program through this new, wholly-owned subsidiary.

 

The Company also opened its retail store in Tennessee. Revenue generated from retail sales is not expected to be material to the Company based on current operating model.

 

NOTE 2 – GOING CONCERN

 

The Company has not generated profit to date. The Company expects to continue to incur operating losses as it proceeds with 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, as the Company adds personnel and other administrative expenses associated with its current efforts. As such, and without substantially increasing revenue or finding 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 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.  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 intends to make every effort to identify and develop all these sources of funds, but 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 June 30, 2019, 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, 2018 and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on April 1, 2019. Operating results for the six months ended June 30, 2019 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 and six-month periods ended June 30, 2019 and 2018, (b) the financial position at June 30, 2019 and (c) cash flows for the six-month periods ended June 30, 2019 and 2018.

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(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.

 

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.

 

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.

 

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

JUNE 30, 2019

(UNAUDITED)

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.

 

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 June 30, 2019 and December 31, 2018, the Company provided for $25,000 of allowance for doubtful accounts.

 

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.

 

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.

 

DEBT DISCOUNT

 

The Company incurred debt discount related to the issuance of convertible promissory notes, as described in Note 9. 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

JUNE 30, 2019

(UNAUDITED)

 

DEBT ISSUANCE COSTS

 

The Company incurred direct costs associated with the issuance of convertible promissory notes, as described in Note 9. 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 six months ended June 30, 2019 and 2018.  

 

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.

 

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 six months ended June 30, 2019, the board of directors approved issuances of the Company’s restricted common stock to consultants, employees, and directors for services rendered:

 

 

1.

2,000 shares to a consultant for services rendered, valued at $3,184.

 

2.

4,196,825 shares to the Company's CEO and COO for services rendered, valued at $167,873.

 

3.

40,000 shares issued to employees and a director from the employee stock plan valued at $45,418.

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

 

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.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Notes Payable to Related Party

 

The Company entered into the following promissory notes payable to its CEO during the year ended December 31, 2018 and during the six months ended June 30, 2019:

 

Note Date

 

Note Amount

 

 

Accrued Interest through

December 31, 2018

 

 

Accrued Interest for

six months ended

June 30, 2019

 

 

Total

Accrued

Interest

 

Total notes payable and accrued interest due to related party at December 31, 2017

 

 $

558,400

 

 

56,544

 

 

22,152

 

 

78,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 2018 (1)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

April 2018 (2)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

August 2018 (3)

 

 

70,000

 

 

 

2,170

 

 

 

2,777

 

 

 

4,947

 

November 2018 (4)

 

 

20,000

 

 

 

184

 

 

 

793

 

 

 

977

 

December 2018 (5)

 

 

50,000

 

 

 

142

 

 

 

1,984

 

 

 

2,126

 

May 2019 (6)

 

 

10,000

 

 

 

-

 

 

 

105

 

 

 

105

 

June 2019 (7)

 

 

25,000

 

 

 

-

 

 

 

126

 

 

 

126

 

 

 

 

175,000

 

 

 

2,496

 

 

 

5,785

 

 

 

8,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total notes payable and accrued interest due to related party at June 30, 2019

 

$

733,400

 

 

$

59,040

 

 

$

27,937

 

 

$

86,977

 

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 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 $4,947 through June 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 $977 through June 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 $2,126 through June 30, 2019.

 

(6) In May 2019, the Company entered into an unsecured promissory note agreement with its 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 $105 through June 30, 2019.

 

(7) In June 2019, the Company entered into an unsecured promissory note agreement with its 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 $126 through June 30, 2019.

 

As a result, the total principle amount of notes payable to related party was $733,400 at June 30, 2019 and $812,400 at December 31, 2018. The amount of accrued interest on these notes due to related party was $86,977 at June 30, 2019 and $65,774 at December 31, 2018.

 

Payable to Related Parties

 

Payable to related parties consisted of the followings at June 30, 2019 and December 31, 2018:

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

Short term loan from related entity (1)

  $ 63,150     $ 61,500  

Auto allowances owed to CEO (2)

    3,000       5,000  
    $ 66,150     $ 66,500  

 

(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 on the consolidated balance sheet as current liabilities at June 30, 2019 and December 31, 2018. 

 

(2) On May 1, 2016, the Company entered into an employment agreement with its CEO. The term of the employment is through December 31, 2019. The agreement provides 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

JUNE 30, 2019

(UNAUDITED)

 

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 CEO to settle the accrued automobile allowance expense in the amount of $8,000. As a result, $3,000 and $5,000 remained owed to the Company’s CEO at June 30, 2019 and December 31, 2018, respectively.

 

During the three and six months ended June 30, 2019, expenses related to the automobile allowances totaled $3,000 and $6,000, 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 six months ended June 30, 2019, the Company incurred $11,513 and $19,233, respectively, in operating expenses for this property.

 

NOTE 5 – INVENTORIES

 

The Company’s inventories consisted of the followings at June 30, 2019 and December 31, 2018:

 

   

June 30, 2019

   

December 31, 2018

 

Raw materials

  $ 22,770     $ 23,810  

Finished goods (isolates, tinctures, capsules, etc.)

    16,771       12,605  

Deferred farm expense

    -       7,135  
    $ 39,541     $ 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 $2,899 and $5,794 for the three and six months ended June 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 Company does not plan on renewing the lease when it expires. 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

JUNE 30, 2019

(UNAUDITED)

 

Right of use (ROU) asset - operating lease obtained in exchange for lease liability - operating lease

       
    $ 29,355  
         

Lease liability - operating lease on adoption date

  $ 29,655  

Payments on lease liability - operating lease

    (14,612

)

Lease liability - operating lease on June 30, 2019

  $ 15,043  
         

This entire lease liability matures prior to December 31, 2019.

       
         

Operating lease expense for the three months ended June 30, 2019

  $ 7,575  

Operating lease expense for the six months ended June 30, 2019

  $ 15,450  

Weighted average remaining lease term

 

6 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:

 

 

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.

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

 

ROU asset - finance lease - land

  $ 37,530  

ROU asset - finance lease - improvement

    148,788  

ROU asset - finance lease obtained in exchange for lease liability - finance lease

    186,318  

Cumulative effect adjustment to ROU asset - finance lease on adoption date

    (8,679

)

Amortization of ROU asset - finance lease

    (7,440

)

ROU asset - finance lease at June 30, 2019

  $ 170,199  
         

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

    (4,266

)

Lease liability - finance lease on June 30, 2019

  $ 177,775  

 

Interest expense related to lease liability - finance lease was $2,633 and $5,256 for the three and six months ended June 30, 2019, respectively.

 

Amounts of lease liability - finance lease matures over the next five years:

       

Twelve Months Ended June 30,

       

2020

  $ 8,738  

2021

    9,261  

2022

    9,816  

2023

    10,404  

2024 and thereafter

    139,557  
    $ 177,776  
         

Variable lease expense was $11,513 and $19,233, for the three and six months ended June 30, 2019, respectively.

 

Weighted average remaining lease term

 

14 years

 

Weighted average discount rate

    5.99

%

  

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the followings at June 30, 2019 and December 31, 2018:

 

   

June 30, 2019

   

December 31, 2018

 

Accounts payable to vendors

  $ 113,704     $ 83,037  

Payroll taxes payable

    56,046       46,832  

Accrued salaries and bonuses

    107,507       153,542  

Accrued interest on notes payable

    -       6,394  
    $ 277,257     $ 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 June 30,

 

 

 

 

2020

 

$

4,359

 

2021

 

 

4,359

 

2022

 

 

4,359

 

2023

 

 

4,322

 

 

 

$

17,399

 

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(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

    13,040  
    $ 17,399  

 

NOTE 9 – 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. The Company recognized $78,180 and $58,503 as derivative expense for the three and six months ended June 30, 2019, respectively. During the six months ended June 30, 2019, the note holder elected to convert 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 June 30, 2019 and was valued at $138,218 at December 31, 2018. 

 

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. The Company recognized $15,555 and $8,052 as derivative expense for the three and six months ended June 30, 2019, respectively. During June 2019, the note holder elected to convert principle in the amount of $27,000 into the Company's common stock. This resulted in the issuance of 1,353,155 shares of the Company's common stock being issued to the note holder. The derivative liability was valued at $32,134 and $58,300 at June 30, 2019 and December 31, 2018, respectively. 

 

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 $120,573 as derivative expense for the three and six months ended June 30, 2019. The derivative liability was valued at $120,573 at June 30, 2019. 

 

Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2019 and December 31, 2018 is as follows: 

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

 

 

Fair Value Measurement at June 30, 2019 (1) Using

 

   

Note 1

   

Note 2

   

Note 3

 
   

Level 2

   

Total

   

Level 2

   

Total

   

Level 2

   

Total

 

Liability:

                                               

Derivative liability

  $ -     $ -     $ 32,134     $ 32,134     $ 120,573     $ 120,573  

Total liability

  $ -     $ -     $ 32,134     $ 32,134     $ 120,573     $ 120,573  

 

 

Fair Value Measurement at December 31, 2018 (1) Using

 

   

Note 1 - Level 2

   

Note 2 - Level 2

   

Total

 

Liability:

                       

Derivative liability

  $ 138,218     $ 58,300     $ 196,518  

Total liability

  $ 138,218     $ 58,300     $ 196,518  

 

(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 June 30, 2019 and December 31, 2018.

 

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 six months ended June 30, 2019 and the year ended December 31, 2018: 

 

   

Note 1

   

Note 2

   

Note 3

   

Total

 

Balance at December 31, 2018

  $ 138,218     $ 58,300     $ -     $ 196,518  

Variable conversion feature in convertible notes payable

    -       -       151,264       151,264  

Change in fair value

    58,502       8,052       (30,691 )     35,862  

Conversion of derivative liability to equity from note conversion

    (196,719 )     (34,218 )     -       (230,938 )

Balance at June 30, 2019

  $ -     $ 32,134     $ 120,573     $ 152,707  

 

During the six months ended June 30, 2019, the note holder elected to convert the principle amount of $140,800 and accrued interest of $6,400 of Note 1 and principle amount of $27,000 of Note 2 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: 

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

Date of Conversion of Note 1

 

Amounts Converted

   

Conversion Price

   

Number of Shares Issued

 

Principle conversion

                       

March 5, 2019

  $ 15,000     $ 0.0945       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  
    $ 140,800               4,637,490  

Accrued interest conversion

                       

June 18, 2019

  $ 6,400     $ 0.0244       262,295  

Total amount converted

  $ 147,200               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  

Total amount converted

  $ 27,000               1,353,155  

 

NOTE 10 – STOCKHOLDERS’ DEFICIT

 

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 six months ended June 30, 2019, the Company issue 14,526,357 shares of its restricted common stock as follows:

 

 

1.

2,000 shares to a consultant for services rendered, valued at $3,184.

 

2.

4,196,825 shares to the Company's CEO and COO for services rendered, valued at $167,873.

 

3.

40,000 shares issued to employees and a director from the restricted stock plan valued at $45,418.

 

4.

6,252,940 shares issued to the convertible notes holder who elected to convert principle and accrued interest, totaled $174,200, into the Company's common stock.

 

5.

760,000 shares to investors for $91,200 of working capital.

 

6.

200,000 shares issued to the Company's CEO to settle accrued expenses valued at $8,000.

 

7.

3,074,592 shares issued to the Company's CEO to settle notes payable and accrued interest in the amount of $122,984.

 

 

ACACIA DIVERSIFIED HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

 

Warrants and Options

 

At June 30, 2019, 50,000 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 six months ended June 30, 2019 and 2018.

 

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 June 30, 2019 and 2018 was $8,116 and $12,026, respectively. Stock based compensation expense for these awards for the six months ended June 30, 2019 and 2018 was $20,402 and $26,029.

 

NOTE 11 – 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:

 

In July 2019, our convertible note holder (See Note 9) elected to convert the remaining principle of $31,300 of Note 2 and related accrued interest of $2,650 into the Company's common stock, resulting in 1,793,561 shares issued to the note holder. As a result, the related derivative liability was extinguished at the completion of the conversion of Note 2.

 

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 will bifurcate the conversion option, and utilize the Black Scholes valuation model to determine the fair value of the conversion option.

 

In July 2019, the board of directors approved issuance of Class A preferred stock in exchange for common stock held by certain employees, contractors, management and board of directors, with super voting rights, anti-dilution and certain protections. These preferred stock will be converted back into common stock at a later, predetermined date. The terms of the Class A preferred stock are not yet determined at the present time.

 

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

 

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. 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.

 

Discussion on the Company’s Operations and Recent Event

 

MariJ Pharmaceuticals, Inc.  ("MariJ 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:

 

 

a.  

Hemp oil extraction and processing. MariJ Pharma has a unique mobile hemp oil processing and extraction unit designed into a heavy-duty trucks.  That unit has already begun performing extractions and processing of medical hemp oils at various sites and is currently developing additional contracts for services.

 

b.  

Wholesale sale of raw and processed medical hemp oils.

 

c.  

Compounding and manufacturing.  MariJ Pharma has begun construction of a mobile laboratory and testing unit, also on a heavy-duty truck chassis, intended to address the growing demand for these services in the medical cannabis industry.

 

d.  

Licensing and support of the Company’s GeoTraking Technology systems

 

e.  

Processing and compounding services for medical grade hemp oils

 

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 of Canna-Cures Research & Development Center, LLC, a Florida limited liability company, on January 15, 2016.  The Company utilizes this subsidiary to engage in research 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 on the growing and distribution 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:

 

1)

EMT will seek to enter into product development projects with institutions of higher learning in efforts to develop new and better strains of medical hemp related products for dispensing as medications, nutraceuticals, cosmeceuticals, and probably dietary supplements.  EMT anticipates participating in state and federal grants in conjunction with one or more universities as a means to defray part of its costs in these efforts.

2)

Private label packaging services - the Company has obtained a majority of the equipment required to engage in the business of packaging and labeling of medical hemp oils, oil-infused products, and related items.

3)

Retail sales of medical hemp oils, oil-infused products, and other merchandise through its web-based portal or retail dispensaries planned for that purpose.  These activities are dependent in large part upon meeting FDA regulations and criteria relating to the sale and distribution of hemp-infused products, and the Company is currently in the process of determining the status of those criteria.

4)

Retail and wholesale sales of cosmeceutical and nutraceutical products and dietary supplements containing its high-quality hemp oil extracts, subject to compliance with FDA and other regulations.

5)

Growing high quality hemp plants and extracting oil for sale or for manufacturing of oil-infused products.

 

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 announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”), complete with 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 is continuing to develop the capabilities of this technology ahead of marketing this platform to users.

 

Operating results for the three months ended June 30, 2019 and 2018:

 

For the three months ended June 30, 2019, the Company generated revenues of $140,724 from operations, compared to $12,671 for the three months ended June 30, 2018, an increase of $128,053 or 1,011%. The increase in revenues was due to having more extraction contracts in the current period.

 

For the three months ended June 30, 2019, costs of goods sold was $169,413, compared to $52,225 for the three months ended June 30, 2018, an increase of $117,188, or 224%. Costs of goods sold was higher during the three months ended June 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 $39,554, or (312%) of revenue for the three months ended June 30, 2018 to a loss of $28,689, or (20%) of revenue for the three months ended June 30, 2019. The decrease in gross profit is primarily due to lower margin earned on our extraction contracts, despite increase in volume, to offset the loss incurred in our retail and farm operations.

 

For the three months ended June 30, 2019, selling, general and administrative expenses were $242,479, compared to $471,093 during the three months ended June 30, 2018, a decrease of $228,614, or 49%. The decrease in these expenses is primarily attributable to a decrease in stock based compensation in the current period and increase in compensation expense related to our farm operations that commenced this year.

 

During the three months ended June 30, 2019, the Company incurred interest expense of $28,157, compared to $14,486 for the three months ended June 30, 2018, an increase of $13,671, or 94%. During the three months ended June 30, 2019, interest expense was primarily related to the notes payable to related party and on convertible notes payable. During the three months ended June 30, 2018, interest expense was related to the notes payable to related party. There was no convertible notes payable at June 30, 2018.

 

 

During the three months ended June 30, 2019, the Company recognized $214,308 of derivative expense, compared to $0 derivative expense for the three months ended June 30, 2018, an increase of $214,308. The variable conversion feature of the convertible notes payable gave rise to derivative liability. There was no convertible note at June 30, 2018.

 

As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $509,914 for the three months ended June 30, 2019, compared to a net loss of $530,495 for the three months ended June 30, 2018, a decrease of $20,581, or 4%.

 

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 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.

 

Operating results for the six months ended June 30, 2019 and 2018:

 

For the six months ended June 30, 2019, the Company generated revenues of $304,229 from operations, compared to $104,585 for the six months ended June 30, 2018, an increase of $199,644, or 191%.  The increase in revenues was due to having more extraction contracts.

 

For the six months ended June 30, 2019, costs of goods sold was $254,540, compared to $102,001 for the six months ended June 30, 2018, an increase of $152,539, or 150%. Costs of goods sold was higher during the six months ended June 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 profit increased from $2,584, or 2% of revenues, for the six months ended June 30, 2018 to $49,689, or 16% of revenues, for the six months ended June 30, 2019. The increase in gross profit is primarily due to higher volume of our extraction contracts, despite lower margin, to offset the loss incurred in our retail and farm operations.

 

For the six months ended June 30, 2019, selling, general and administrative expenses were $524,740, compared to $934,494 during the six months ended June 30, 2018, a decrease of $109,754, or 44%. The decrease in these expenses is primarily attributable to a decrease in stock based compensation in the current period and increase in compensation expense related to our farm operations that commenced this year.

 

During the six months ended June 30, 2019, the Company incurred interest expense of $51,562, compared to $26,013 for the six months ended June 30, 2018. During the six months ended June 30, 2019, the Company accrued interest on its notes payable to related party as well as interest incurred on its outstanding convertible notes payable. During the six months ended June 30, 2018, the Company only incurred interest expense on its notes payable to related party. 

 

As a result of the changes in revenues, costs and expenses, the Company incurred a net loss of $707,939 for the six months ended June 30, 2019, compared to a net loss of $963,285 for the six months ended June 30, 2018.

 

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

 

The Company’s cash position at June 30, 2019 increased by $26,969 to $78,766, as compared to a balance of $51,797, as of December 31, 2018. The net increase in cash for the six months ended June 30, 2019 was attributable to net cash used in operating activities of $142,214, net cash used by investing activities of $32,572, offset by net cash provided by financing activities of $201,755.

 

As of June 30, 2019, the Company had negative working capital of $1,087,701 compared to negative working capital of $1,198,806, at December 31, 2018, a decrease of $111,105, attributable primarily to a decrease in its outstanding amounts of notes payable and accrued interest due to related party and outstanding amount of convertible notes payable, offset by the recognition of lease liabilities related to its right-of-use finance and operating leases.

 

 

Net cash used in operating activities of $142,214 during the six months ended June 30, 2019, was lower compared to the prior period of $186,146, primarily due to increase in working capital during the period.

 

Net cash used by investing activities was $32,572 for the six months ended June 30, 2019, compared to $22,816 of cash provided by investing activities for the six months ended June 30, 2018. This is primarily attributable to acquiring certain equipment for the Company's farm in Tennessee, whereas prior period's investing activities was offset by proceeds from sale of equipment.

 

Net cash provided by financing activities of $201,755 during the six months ended June 30, 2019 increased by $17,755 compared to $184,000 during the six months ended June 30, 2018. In the current period, the Company's obtained financing through issuance of common stock to investors and issuing convertible note compared to issuing notes payable to a related party in the prior period.

 

During the six months ended June 30, 2019, the Company issued shares of its common stock to settle $174,200 of principle and accrued interest of its convertible notes payable and the related derivative liability of $230,939. It also issued common stock to settle accrued expenses owed to a related party in the amount of $8,000 and to settle notes payable and accrued interest due to a related party in the amount of $122,984. It also 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 six months ended June 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.

 

As reported in the accompanying consolidated financial statements, for the six months ended June 30, 2019 and 2018, the Company incurred net losses of $707,939 and $963,285, 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 June 30, 2019 and December 31, 2018 were $830,185 and $696,895, respectively, an increase of $133,290, or 19%. Total liabilities at June 30, 2019 and December 31, 2018 were $1,651,508 and $1,649,675, respectively, an increase of $1,833, or less than 1%. The significant change in the Company’s financial condition is attributable to (i) acquiring a finance lease and an operating lease by assuming the corresponding lease liabilities, offset by (ii) settlement of notes payable and related accrued interest due to a related party, and (iii) settlement of convertible notes payable by converting principle and related accrued interest into the Company's common stock. As a result of these transactions, the Company’s cash position increased from $51,797 to $78,766 during the six months ended June 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 June 30, 2019. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, 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 June 30, 2019, 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 June 30, 2019, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

None.

 

Item 1A.  Risk Factors

 

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 six months ended June 30, 2019, the Company issue 14,526,357 shares of its restricted common stock as follows:

 

 

1.

2,000 shares to a consultant for services rendered, valued at $3,184.

 

2.

4,196,825 shares to the Company's CEO and COO for services rendered, valued at $167,873.

 

3.

40,000 shares issued to employees and a director from the employee stock plan valued at $45,418.

 

4.

6,252,940 shares issued to the convertible notes holder who elected to convert principle and accrued interest, totaled $174,200, into the Company's common stock.

 

5.

760,000 shares to investors for $91,200 of working capital.

 

6.

200,000 shares issued to the Company's CEO to settle accrued expenses valued at $8,000.

 

7.

3,074,592 shares issued to the Company's CEO to settle notes payable and accrued interest in the amount of $122,984.

 

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.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits

 

Exhibits required by Item 601, Regulation S-K;

 

Exhibit Number and Description 

 

Location Reference

 

 

 

 

 

 

(3.0)

Articles of Incorporation

 

 

 

 

(3.1)

Articles Of Amendment And Restated Articles Of Incorporation of Acacia Diversified Holdings, Inc. dated June 9, 2015

 

See Exhibit Key

 

 

(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)

Consolidated Loan Agreement

 

See Exhibit Key

 

(10.2)

Consolidated Promissory Note

 

See Exhibit Key

 

(10.3)

Security Agreement – Acacia Diversified Holdings, Inc.

 

See Exhibit Key

 

(10.4)

Security Agreement -- Marij Agriculture, Inc.

 

See Exhibit Key

 

(10.5)

Security Agreement – Marij Pharmaceuticals, Inc.

 

See Exhibit Key

 

(10.6)

Security Agreement – CannaCures Research & Development Center, Inc.

 

See Exhibit Key

 

(10.7)

Definitive Asset Purchase Agreement between Acacia Diversified Holdings, Inc. and the Medahub Companies

 

See Exhibit Key

 

(14.0)

Code of Ethics

 

See Exhibit Key

 

(21.0)

List of Subsidiaries

 

See Exhibit Key

 

(31.1)

Certificate of Chief Executive Officer And Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

(32.1)

Certification of Chief Executive Officer And Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

 

101.INS

XBRL Instance Document

 

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

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.

 

 

 

SIGNATURES

 

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.

 

 

 

 

 

Date: August 9, 2019

By:

/s/ Richard K. Pertile           

 

 

 

Richard K. Pertile

 

 

 

Principal Executive Officer

 

 

 

Principal Financial Officer

Principle Accounting Officer

 

 

 

 

 

9