NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 1 – THE COMPANY
Acacia Diversified Holdings, Inc. (“Acacia” or the “Company”), a Texas corporation, had four wholly-owned subsidiaries, MariJ Pharmaceuticals, Inc. (“MariJ Pharma”), a Florida corporation, Canna-Cures Research & Development Center, Inc. (“Canna-Cures”), a Florida corporation, and Eufloria Medical of Tennessee, Inc. (“EMT”), a company incorporated in the state of Tennessee. In July 2018, the Company also announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”) incorporated in the state of Florida, complete with a current compounding pharmacy license in Florida. The Medahub acquisition allowed the Company to be fully HIPAA compliant and cloud based on an HL7 platform. The Company planned to 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 was from the extraction of medicinal hemp oil, from a non-psychoactive cannabis plant. All extraction services were provided in states where such services were deemed legal. The Company's subsidiary EMT was invited to be part of the hemp pilot program in Tennessee. This program provided the Company the license to grow, manufacture, and dispense organic hemp oil in Tennessee. The Company planned on participating in this pilot program through its new, wholly-owned subsidiary.
The Company also had a retail store in Tennessee selling hemp infused products. Revenue generated from retail sales was not expected to be material to the Company based on current operating model.
On March 26, 2020, the Company announced in a current report on Form 8-k that its operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and the world and thus the Company’s business operations have been disrupted and it was unable to timely review and prepare the Company’s financial statements for the 2019 fiscal year. As such, the Company would be making use of the 45-day grace period provided by the SEC’s Order and available filing extension to delay filing of its Annual Report.
On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company. On the same date, the Company filed a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,331 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. On May 20, 2020, the conditions of the Acquisition Agreement were satisfied with the resignation of the former board of directors of the Company and the change of control became effective.
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to assume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from a hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., age 47, was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to the position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula each resigned their respective positions as a director for Acacia Diversified Holdings, Inc.
NOTE 2 – GOING CONCERN
The Company has not generated profit to date. The Company expects to continue to incur operating losses. The Company expects to incur professional fees to maintain its reporting company status. Until such time that the Company is able to generate revenue and become profitable or find new sources of capital, the Company will find it difficult to continue to meet its obligations as they come due. There can be no assurance that the Company will be successful in its efforts to raise capital, or if it were successful in raising capital, that it would be successful in meeting its business plans. Management’s plans include attempting to raise funds from the public through an equity offering of the Company’s common stock and identifying and developing new opportunities. However, the recent COVID-19 pandemic has presented unprecedented challenges to businesses and the investing landscape around the world. Therefore, there can be no assurance that Management’s plans will be successful.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 December 31, 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 Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) with December 31, as its year-end. The consolidated financial statements and notes are the representations of the Company’s management who are responsible for their integrity and objectivity.
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 - Preparing the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions about current, and for some estimates, future economic and market conditions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
RECLASSIFICATION - Certain accounts in the prior period's financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.
MEDAHUB ACQUISITION - In July 2018, the Company announced the completion of its acquisition of Medahub Operations Group, Inc. and Medahub, Inc., technology companies (“Medahub”), which includes a current compounding pharmacy license in Florida. The Medahub acquisition allows the Company to be fully HIPAA compliant and cloud based on an HL7 platform. The Company can now offer licensing agreements for other cannabis companies wanting to be HIPAA compliant from left to right or seed to sale and doctor to patient. The Company issued 600,000 shares of its restricted common stock to the principal of Medahub as consideration of the acquisition, valued at $126,000.
When determining the accounting of the acquisition, the Company concluded that the acquisition does not constitute the acquisition of a business since there was no inputs, processes or outputs within Medahub. In addition, although the Company acquired certain software and technology from Medahub, the most significant asset it acquired was Medahub's principal's commitment to provide support, guidance and direction for implementing this technology. Without the principal's commitment of his time, the Company will not be able to implement the technology and begin generating cash flows. Therefore, the Company believes that the value of the purchase is concentrated on the service provided by Medahub's principal. As a result, the Company allocated the entire purchase price to the service provided and accounted for it as professional fee expense.
CASH AND CASH EQUIVALENTS - The Company considers all short-term investments purchased with a maturity of three months or less to be cash equivalents. Credit risk associated with cash deposits are insured under FDIC up to $250,000 per depositor, per FDIC insured bank, per ownership category. At such time, as the Company’s cash deposits exceed FDIC limits, the Company will reassess their credit risk.
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 December 31, 2019 and 2018, the Company provided for $0 and $25,000, respectively, of allowance for doubtful accounts.
CONCENTRATION OF CUSTOMERS – During the year ended December 31, 2019, the Company’s revenues were concentrated on two customers, Beyond Organic Nutritional and LMK Hemp, who accounted for approximately 70% and 22%, of the total consolidated revenues, respectively. These two customers accounted for approximately 91% of the trade receivable balance at December 31, 2019 was due from two customers.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
For the year ended December 31, 2018, the Company’s extraction revenue, which accounted for 80% of total revenue, came from two customers. These two customers accounted for approximately 59% and 21%, respectively, of total revenue. 98% of the trade receivable balance at December 31, 2018 was due from two customers.
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.
PROPERTY AND EQUIPMENT – Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized, while minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives, which are generally two to seven years.
IMPAIRMENT OF LONG-LIVED ASSETS – In accordance with Accounting Standards Codification 360-10-05 - Impairment or Disposal of Long-Lived Assets, long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment at least annually or whenever facts and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. The Company did not recognize any impairment losses for the periods presented.
DEBT DISCOUNT - During the year ended December 31, 2018, the Company incurred $18,100 of debt discount related to the issuance of two 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.
DEBT ISSUANCE COSTS - The Company follows Accounting Standard Update 2015-03 – Simplifying the Presentation of Debt Issuance Costs, which requires direct costs associated with the issuance of convertible note to be presented in the balance sheet as a direct reduction from the carrying value of the associated debt liability. These costs are amortized into interest expense over the contractual term of the note or a shorter amortization period when deemed appropriate. The Company amortizes debt issuance costs for its convertible note immediately upon issuance since the note is convertible on demand.
OFFERING COSTS - The Company follows the SEC Staff Accounting Bulletin, Topic 5 - Miscellaneous Accounting, which requires that specific incremental costs directly attributable to a proposed or actual offering of securities may be deferred and charged against gross receipts of the offering. However, deferred costs of an aborted offering, or a postponement of existing offering exceeding 90 days, may not be deferred and charged against proceeds of a subsequent offering.
REVENUE RECOGNITION - In May 2014, the FASB issued Accounting Standard Update 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.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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.
ADVERTISING COSTS - Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2019 and 2018 amounted to $5,743 and $10,989, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash equivalents, accounts receivable, deposits, prepaid expenses, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. Accounts payable and accrued expenses included amounts due to vendors and service providers and accrued compensation to the Company’s officers.
FAIR VALUE ESTIMATES – The Company measures its options and warrants 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. No new options or warrants were issued during the years ended December 31, 2019 and 2018.
|
|
Quoted Active
Markets for
Identified Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
-
|
|
|
$
|
239,995
|
|
|
|
-
|
|
|
$
|
239,995
|
|
Common stock issued to settle accrued expense
|
|
|
-
|
|
|
|
8,000
|
|
|
|
-
|
|
|
|
8,000
|
|
Employee Stock Plan
|
|
|
-
|
|
|
|
66,926
|
|
|
|
-
|
|
|
|
66,926
|
|
Derivative liability
|
|
|
-
|
|
|
|
381,330
|
|
|
|
-
|
|
|
|
381,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
-
|
|
|
$
|
536,908
|
|
|
|
-
|
|
|
$
|
536,908
|
|
Common stock issued for acquisition of Medahub, Inc.
|
|
|
-
|
|
|
|
126,000
|
|
|
|
-
|
|
|
|
126,000
|
|
Common stock issued to settle accrued expense
|
|
|
-
|
|
|
|
446,625
|
|
|
|
-
|
|
|
|
446,625
|
|
Employee Stock Plan
|
|
|
-
|
|
|
|
48,109
|
|
|
|
-
|
|
|
|
48,109
|
|
Common stock issued for property improvement
|
|
|
-
|
|
|
|
17,649
|
|
|
|
-
|
|
|
|
17,649
|
|
Derivative liability
|
|
|
-
|
|
|
|
196,518
|
|
|
|
-
|
|
|
|
196,518
|
|
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
All common stock issued for services are valued on the date of the agreements, using a ten day volume weighted average price.
COMPENSATED ABSENCES - The Company has not accrued a liability for compensated absences in accordance with Accounting Standards Codifications 710 – Compensation – General, as the amount of the liability cannot be reasonably estimated at December 31, 2019 and 2018.
LOSS PER COMMON SHARE - Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share would include the weighted average common shares outstanding and potentially dilutive common share equivalents. Because of the net losses for all periods presented, the basic and diluted weighted average shares outstanding are the same since including the additional shares would have an anti-dilutive effect on the loss per share. For this reason, common stock options and warrants to purchase 20,000 and 55,000 shares, respectively, of common stock were not included in the computation of basic and diluted weighted average common shares outstanding for the years ended December 31, 2019 and 2018.
INCOME TAXES - The Company files federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision for income taxes includes federal, state and local income taxes currently payable, as well as deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company currently has substantial net operating loss carryforwards. The Company has recorded a valuation allowance equal to the net deferred tax assets due to the uncertainty of the ultimate realization of the deferred tax assets.
CONTINGENCIES - Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is possible that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed.
As a result of a change in control on March 31, 2020, prior and current management of the Company are continuing their due diligent process and to assess whether contingent liabilities existed.
In the normal course of business, the Company also enters into various other guarantees and indemnities in its relationships with suppliers, service providers, customers and others. These guarantees and indemnifications do not materially impact the Company’s financial condition or results of operations, and indemnifications associated with the Company’s actions generally have no dollar limitations and currently cannot be quantified.
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 years ended December 31, 2019 and 2018.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
NOTE 4 – RELATED PARTY TRANSACTIONS
Notes Payable to Related Party
The Company entered into the following promissory notes payable with its CEO during the years ended December 31, 2019 and 2018:
Note Date
|
|
Note Amount
|
|
|
Accrued Interest
|
|
|
Total
|
|
January 2017 (1)
|
|
$
|
300,000
|
|
|
$
|
16,504
|
|
|
$
|
316,504
|
|
June 2017 (2)
|
|
|
105,000
|
|
|
|
2,048
|
|
|
|
107,048
|
|
June 2017 (3)
|
|
|
130,050
|
|
|
|
2,564
|
|
|
|
132,614
|
|
|
|
|
535,050
|
|
|
|
21,116
|
|
|
|
556,166
|
|
Expenses owed to related party
|
|
|
|
|
|
|
2,234
|
|
|
|
2,234
|
|
|
|
|
535,050
|
|
|
|
23,350
|
|
|
|
558,400
|
|
Consolidation of notes (1) through (3) on September 25, 2017
|
|
|
23,350
|
|
|
|
(23,350
|
)
|
|
|
-
|
|
Consolidated note balance at September 25, 2017
|
|
|
558,400
|
|
|
|
-
|
|
|
|
558,400
|
|
Accrued interest from September 26 through December 31, 2017
|
|
|
-
|
|
|
|
11,872
|
|
|
|
11,872
|
|
Balances as of December 31, 2017
|
|
$
|
558,400
|
|
|
$
|
11,872
|
|
|
$
|
570,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on consolidated note for the year ended December 31, 2018
|
|
$
|
-
|
|
|
$
|
44,672
|
|
|
$
|
44,672
|
|
Balances as of December 31, 2018
|
|
|
558,400
|
|
|
|
56,544
|
|
|
|
614,944
|
|
Accrued interest on consolidated note for the year ended December 31, 2019
|
|
|
-
|
|
|
|
44,672
|
|
|
|
44,672
|
|
Balances as of December 31, 2019
|
|
$
|
558,400
|
|
|
$
|
101,216
|
|
|
$
|
659,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2018 (4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
April 2018 (5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
August 2018 (6)
|
|
|
70,000
|
|
|
|
7,769
|
|
|
|
77,769
|
|
November 2018 (7)
|
|
|
20,000
|
|
|
|
1,784
|
|
|
|
21,784
|
|
December 2018 (8)
|
|
|
50,000
|
|
|
|
4,142
|
|
|
|
54,142
|
|
May 2019 (9)
|
|
|
10,000
|
|
|
|
509
|
|
|
|
10,509
|
|
June 2019 (10)
|
|
|
25,000
|
|
|
|
1,134
|
|
|
|
26,134
|
|
December 2019 (11)
|
|
|
19,000
|
|
|
|
75
|
|
|
|
19,075
|
|
|
|
|
194,000
|
|
|
|
15,413
|
|
|
|
209,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and accrued interest due to related party at December 31, 2019
|
|
$
|
752,400
|
|
|
$
|
116,629
|
|
|
$
|
869,029
|
|
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
(1) In January 2017, the Company entered into a note agreement in the amount of $300,000 with the Company’s former CEO. The note bears interest at a rate of 8% per annum and specifies no due date. The Company accrued interest of $16,504 through September 25, 2017. Concurrently, the board of directors also approved issuance of 100,000 shares of the Company’s common stock as additional interest. These shares were accounted for as debt issuance costs, valued at $182,000. The costs were expensed at the commitment date of the note as interest expense since the note is a short term capital advance with no stated term. This note was convertible into the shares of the Company’s common stock at $0.50/share and the note holder did not exercise the conversion option.
(2) In June 2017, the Company entered into a note agreement in the amount of $105,000 with the Company’s former CEO for short term working capital advance. The note bears interest at a rate of 8% per annum and specifies no due date. The Company accrued interest and recorded interest expense of $2,048 through September 25, 2017. This note was convertible into the shares of the Company’s common stock at $0.50/share and the note holder did not exercise the conversion option.
(3) In June 2017, the Company received a short term working capital advance of $130,050 from its former CEO. The advance bears interest at a rate of 8% per annum and specifies no due date. The Company accrued interest and recorded interest expense of $2,564 through September 25, 2017.
On September 25, 2017, the board of directors approved the Company to enter into a consolidated note payable agreement with the Company’s former CEO to consolidate the above notes (1) and (2) and advances (3) received from its former CEO, including accrued interests on these notes. The total amount of the principle and interest consolidated was $558,400. This consolidated note payable bears 8% interest per annum and is due on demand. Interest expense on this note from September 25, 2017 to December 31, 2017 was $11,872 and $44,672 for each of the years ended December 31, 2019 and 2018. This note is secured by all of the Company's assets.
(4) 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 Company accrued interest on these notes in the amount of $4,402 for the year ended December 31, 2018.
(5) 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 Company accrued interest on these notes in the amount of $2,332 for the year ended December 31, 2018.
In May 2018, the board of directors approved the Company to enter into a promissory note agreement with the Company's CEO and his spouse to consolidate notes (4) and (5). The total amount of the principle consolidated was $114,000. The amount of interest accrued from the note dates to the date of the consolidation was minimal and therefore was not included in the consolidation. The promissory note accrues interest at 8% from the date of consolidation and is due within 120 days of the note date.
(6) 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 $5,600 and $2,168 for the years ended December 31, 2019 and 2018, respectively.
(7) In November 2018, the Company entered into an unsecured promissory note agreements with its CEO and his spouse, in the amounts of $20,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 30 days from the date of the note. The Company accrued interest on these notes in the amount of $1,600 and $184 for the years ended December 31, 2019 and 2018, respectively.
(8) In December 2018, the Company entered into an unsecured promissory note agreements with its CEO and his spouse, in the amounts 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 $4,000 and $144 for the years ended December 31, 2019 and 2018, respectively.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
(9) In May 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $10,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $509 through December 31, 2019.
(10) In June 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $25,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $1,134 through December 31, 2019.
(11) In December 2019, the Company entered into an unsecured promissory note agreement with its former CEO and his spouse, in the amount of $19,000. The promissory note bears interest at a rate of 8% per annum. The principle balance and accrued interest is due 90 days from the date of the note. The Company accrued interest on these notes in the amount of $75 through December 31, 2019.
As a result, the total principle amount of notes payable to related party was $752,400 and $812,400, at December 31, 2019 and 2018, respectively. Accrued interest on these notes payable to related party was $116,629 and $65,774, at December 31, 2019 and 2018, respectively.
Payable to Related Parties
Payable to related parties consisted of the followings at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Short term loan from related entity (1)
|
|
$
|
59,768
|
|
|
$
|
61,500
|
|
Storage and corporate housing and auto allowances owed to former CEO (2)
|
|
|
9,000
|
|
|
|
5,000
|
|
|
|
$
|
68,768
|
|
|
$
|
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 of $59,768 and $61,500 have been included in payable to related parties on the consolidated balance sheets as current liabilities at December 31, 2019 and 2018, respectively.
(2) On May 1, 2016, the Company entered into an employment agreement with its former CEO. The term of the employment is through December 31, 2019. The agreement provided for a monthly storage and corporate housing allowance of $1,000 for a property owned by the former CEO and a monthly automobile allowance of $1,000.
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, no expenses related to the storage and corporate housing allowance was recorded since January 1, 2018. The automobile allowance remained 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 former CEO to settle the storage and corporate housing allowance and automobile allowance in the amount of $17,000 accrued through July 2018. As a result, $9,000 and $5,000 remained owed to the Company’s former CEO at December 31, 2019 and 2018, respectively.
During the years ended December 31, 2019 and 2018, expenses related to the automobile allowances totaled $12,000 each year.
Other Related Party Transactions
In May 2017, the Company and EMT entered into an agreement to purchase a parcel of land in Tennessee and an Industrial Hemp Grower License issued by the Tennessee Department of Agriculture from one of the Company’s directors. The purchase price of the transaction was 80,000 shares of the Company’s restricted common stock. These shares were valued at $1.60 per share, or $128,000, on the commitment date. The purchase price consisted of land preparation and cleanup costs, and compensation to a director for his effort in preparing the Company for operations in Tennessee. The Company also performed excavation and clearing of the land, installing driveway and culvert and completing the survey for excavation. In May 2018, the Company sold this property for $38,361 to an unrelated party, resulting in a loss of $12,362.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
In May 2018, the Company's former 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 former 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 former 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 had not exercised such right.
The board of directors also approved for the Company to enter into an agreement to lease this property from the Company's former CEO, effective June 1, 2018. The term of the lease was for one year with an automatic renewal term of one year. The lease required the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's former CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, etc. For the years ended December 31, 2019 and 2018, the Company incurred $36,953 and $29,152, respectively, in operating expenses for this property.
NOTE 5 – INVENTORIES
The Company’s inventories consisted of the followings at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
32,294
|
|
|
$
|
23,810
|
|
Finished goods (isolates, tinctures and capsules, etc.)
|
|
|
13,903
|
|
|
|
12,605
|
|
Deferred farm expense
|
|
|
-
|
|
|
|
7,135
|
|
|
|
$
|
46,197
|
|
|
$
|
43,550
|
|
NOTE 6 – PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method at rates intended to depreciate the costs of assets over their estimated useful lives. Upon retirement or sale of property and equipment, the cost of the disposed assets and related accumulated depreciation is removed from the accounts and any resulting gain or loss is credited or charged to selling, general and administrative expenses. Expenditures for normal repairs and maintenance are charged to expense as incurred.
Additions and expenditures for improving or rebuilding existing assets that extend the useful life are capitalized. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.
Property and equipment consisted of the followings at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Computer equipment
|
|
$
|
7,582
|
|
|
$
|
7,582
|
|
Website
|
|
|
7,000
|
|
|
|
7,000
|
|
Extraction, farm and lab equipment
|
|
|
609,568
|
|
|
|
609,664
|
|
Leasehold and farm improvement
|
|
|
143,503
|
|
|
|
106,659
|
|
Total property and equipment
|
|
|
767,653
|
|
|
|
730,905
|
|
Less accumulated depreciation
|
|
|
(417,144
|
)
|
|
|
(277,343
|
)
|
Net property and equipment
|
|
$
|
350,509
|
|
|
$
|
453,562
|
|
Depreciation expense for the years ended December 31, 2019 and 2018 totaled $150,517 and $104,560, respectively.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the followings at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Accounts payable to vendors
|
|
$
|
114,110
|
|
|
$
|
83,037
|
|
Payroll taxes payable
|
|
|
63,621
|
|
|
|
46,832
|
|
Accrued salaries and bonuses
|
|
|
207,062
|
|
|
|
153,542
|
|
Accrued interest on convertible notes payable
|
|
|
11,472
|
|
|
|
6,394
|
|
|
|
$
|
396,265
|
|
|
$
|
289,805
|
|
NOTE 8 – 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 $11,877 and $11,361 for the years ended December 31, 2019 and 2018, respectively.
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 contained a renewal option to extend the term for two additional years. The lease expired on November 30, 2019 and the Company notified the landlord that it would not renew the lease. Rent for the 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).
Right of use (ROU) asset - operating lease obtained in exchange for lease liability - operating lease
|
|
|
|
|
|
|
$
|
29,355
|
|
Amortization of ROU asset - operating lease
|
|
|
(29,355
|
)
|
ROU asset - operating lease at December 31, 2019
|
|
$
|
0
|
|
|
|
|
|
|
Lease liability - operating lease on adoption date
|
|
$
|
29,655
|
|
Payments on lease liability - operating lease
|
|
|
(29,655
|
)
|
Lease liability - operating lease on December 31, 2019
|
|
$
|
0
|
|
|
|
|
|
|
This entire lease liability matured on November 30, 2019
|
|
|
|
|
|
|
|
|
|
Operating lease expense for the year ended December 31, 2019
|
|
$
|
28,125
|
|
Weighted average remaining lease term
|
|
|
-
|
|
Weighted average discount rate
|
|
|
5.99
|
%
|
Finance lease
In May 2018, the Company's former 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 consisted of a 14 acre farm and an indoor growing area. The Company's former 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 former CEO at his cost plus 6.09% interest when the Company had sufficient cash flows to do so. At the time of the filing, the Company did not exercise such right.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The board of directors also approved for the Company to enter into a lease to lease this property from the Company's former CEO, effective June 1, 2018. The term of the lease was for one year with an automatic renewal term of one year. The lease also contained an option for the Company to purchase the property from the Company's former CEO. The lease required the Company to pay all expenses related to the acquisition and operation of the property, including but not limited to the Company's former CEO's personal incremental borrowing costs, repairs and maintenance, real estate taxes, licenses and permits, utilities, etc.
In applying ASC 842 on adoption date, the Company considered the followings:
|
1.
|
The lease is with a related party of the Company.
|
|
2.
|
Although the initial lease term is for one year, the Company is reasonably certain to acquire the property from the related party.
|
|
3.
|
Contrary to leases with fixed lease payments, this lease requires the Company to pay all expenses related to the acquisition and operations of the property which are variable. Although the Company can exclude variable lease payments in applying ASC 842, the lease provides the necessary cash flows for the related party to service his debt. Therefore, the Company estimates future incremental borrowing costs to be incurred by the related party when measuring the initial finance lease liability. This amounts to approximately $1,600 per month.
|
|
4.
|
The related party's debt term was 15 years at a borrowing rate of 5.99%
|
|
5.
|
The Company considered the most objective measure of the right-of-use asset to be the purchase price paid by the related party for the property. The purchase price is then allocated among land and improvement and the Company amortizes the improvement over the estimated useful life of 10 years.
|
ROU asset - finance lease - land
|
|
$
|
37,530
|
|
ROU asset - finance lease - improvement
|
|
|
148,787
|
|
ROU asset - finance lease obtained in exchange for lease liability - finance lease
|
|
|
186,317
|
|
Cumulative effect adjustment to ROU asset - finance lease on adoption date
|
|
|
(8,679
|
)
|
Amortization of ROU asset - finance lease
|
|
|
(14,879
|
)
|
ROU asset - finance lease at December 31, 2019
|
|
$
|
162,760
|
|
|
|
|
|
|
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
|
|
|
(8,778
|
)
|
Lease liability - finance lease on December 31, 2019
|
|
$
|
173,263
|
|
Interest expense related to lease liability - finance lease was $10,385 for the year ended December 31, 2019.
Amounts of lease liability - finance lease matures over the next five years:
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
2020
|
|
$
|
9,008
|
|
2021
|
|
|
9,547
|
|
2022
|
|
|
10,119
|
|
2023
|
|
|
10,725
|
|
2024 and thereafter
|
|
|
133,863
|
|
|
|
$
|
173,263
|
|
|
|
|
|
|
Variable lease expense was $39,111 for the year ended December 31, 2019.
|
|
|
|
|
Weighted average remaining lease term
|
|
13 years
|
|
Weighted average discount rate
|
|
|
5.99
|
%
|
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 $58,503 and $138,218 as derivative expense for the years ended December 31, 2019 and 2018, respectively. At December 31, 2018, the derivative liability was valued at $138,218. During 2019, the note holder converted principle in the amount of $140,800 and accrued interest in the amount of $6,400 into the Company's common stock. This resulted in the issuance of 4,899,785 shares of the Company's common stock being issued to the note holder. As a result of the conversion, the derivative liability was extinguished at December 31, 2019.
On October 8, 2018, the Company issued a convertible promissory note ("Note 2") for $58,300. Note 2 was discounted at $53,000 and the Company received net proceeds of $50,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of October 8, 2019. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $57,272. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $14,250 and $58,300 as derivative expense for the years ended December 31, 2019 and 2018, respectively. At December 31, 2018, the derivative liability was valued at $58,300. During 2019, the note holder converted principle in the amount of $58,300 and accrued interest in the amount of $2,650 into the Company's common stock. This resulted in the issuance of 3,146,716 shares of the Company's common stock being issued to the note holder. As a result of the conversion, the derivative liability was extinguished at December 31, 2019.
On June 13, 2019, the Company issued a convertible promissory note ("Note 3") for $93,500. Note 3 was discounted at $85,000 and the Company received net proceeds of $82,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of June 13, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $151,264. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $125,776 as derivative expense for the year ended December 31, 2019. The derivative liability was valued at $111,928 at December 31, 2019.
On July 12, 2019, the Company issued a convertible promissory note ("Note 4") for $91,300. Note 4 was discounted at $83,000 and the Company received net proceeds of $80,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of July 12, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $117,886. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $129,833 as derivative expense for the year ended December 31, 2019. The derivative liability was valued at $129,833 at December 31, 2019.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On October 10, 2019, the Company issued a convertible promissory note ("Note 5") for $91,300. Note 5 was discounted at $83,000 and the Company received net proceeds of $80,000 after incurring $3,000 of debt issuance costs. The note bears an interest rate at 10% per annum, and principal and accrued interest is due on the maturity date of October 10, 2020. The conversion option price associated with the note has a 25% discount to the market price of the stock. The market price is based on the average of the two lowest trading prices during a ten day period prior to conversion. The note is convertible at any time. As a result of the variable feature associated with the conversion option, pursuant to ASC Topic 815, the Company bifurcated the conversion option, and utilized the Black Scholes valuation model to determine the fair value of the conversion option. At the issuance date, the Company recorded a derivative expense and derivative liability of $128,642. At the end of each reporting period, the Company revalued the derivative liability and recorded the change in this value as additional derivative expense. The Company recognized $139,569 as derivative expense for the year ended December 31, 2019. The derivative liability was valued at $139,569 at December 31, 2019.
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2019 is as follows:
|
|
Fair Value Measurement at December 31, 2019 (1) Using Level 2
|
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Total
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
111,928
|
|
|
$
|
129,833
|
|
|
$
|
139,569
|
|
|
$
|
381,330
|
|
Total liability
|
|
$
|
111,928
|
|
|
$
|
129,833
|
|
|
$
|
139,569
|
|
|
$
|
381,330
|
|
Liability measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2018 is as follows:
|
|
Fair Value Measurement at December 31, 2018 (1) Using Level 2
|
|
|
|
Note 1
|
|
|
Note 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 December 31, 2019 and 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.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis during the years ended December 31, 2019 and 2018:
|
|
Note 1
|
|
|
Note 2
|
|
|
Note 3
|
|
|
Note 4
|
|
|
Note 5
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable conversion feature in convertible notes payable
|
|
$
|
148,211
|
|
|
$
|
57,272
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
205,483
|
|
Change in fair value
|
|
|
(9,993
|
)
|
|
|
1,028
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,965
|
)
|
Balance at December 31, 2018
|
|
$
|
138,218
|
|
|
$
|
58,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
196,518
|
|
Variable conversion feature in convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
151,264
|
|
|
|
117,886
|
|
|
|
128,642
|
|
|
|
397,792
|
|
Change in fair value
|
|
|
58,502
|
|
|
|
14,250
|
|
|
|
(25,489
|
)
|
|
|
11,947
|
|
|
|
10,927
|
|
|
|
70,137
|
|
Conversion of derivative liability to equity from note conversion
|
|
|
(196,720
|
)
|
|
|
(72,550
|
)
|
|
|
(13,847
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,117
|
)
|
Balance at December 31, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
111,928
|
|
|
$
|
129,833
|
|
|
$
|
139,569
|
|
|
$
|
381,330
|
|
NOTE 10 – STOCKHOLDERS’ (DEICIT)
Preferred Stock
The Company's board of directors is authorized by the Article of Incorporation to issue 2,000,000 shares of preferred stock at $0.001 par value, in one or more series. In August 2019, the Company's board of directors designated and authorized the issuance of 1,475,000 shares of Series B Convertible Preferred Stock (the “Preferred Stock”). Each share of series B preferred stock will have 50 votes per share and may be converted into 50 $0.001 par value common stock. The holders of series B preferred stock are entitled to receive, when and if as declared by the board of directors, cumulative dividends payable in cash. The holders of series B preferred stock are also given preference over common stock holders in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and subject and subordinate to the rights of secured creditors of the Company.
As a result of a change in control, on March 31, 2020, the Company issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,331 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. On May 20, 2020, the conditions of the Acquisition Agreement were satisfied with the resignation of the former board of directors of the Company and the change of control became effective.
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to assume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from a hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., age 47, was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to the position of Vice President.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 year ended December 31, 2019, the Company issue 17,769,918 shares of its restricted common stock as follows:
●
|
1,202,000 shares to consultants for services rendered, valued at $72,122.
|
●
|
4,196,825 shares to the Company's CEO and COO for services rendered, valued at $167,873.
|
●
|
40,000 shares issued to employees and a director from the restricted stock plan valued at $66,926.
|
●
|
8,296,501 shares issued to the convertible notes holder who elected to convert principle and accrued interest, totaled $503,267, into the Company's common stock.
|
●
|
760,000 shares to investors for $91,200 of working capital.
|
●
|
200,000 shares issued to the Company's former CEO to settle accrued expenses valued at $8,000.
|
●
|
3,074,592 shares issued to the Company's former CEO to settle notes payable and accrued interest in the amount of $122,984.
|
During the year ended December 31, 2018, the Company issue 4,273,643 shares of its restricted common stock as follows:
●
|
2,000 shares to a consultant for services rendered, valued at $1,420.
|
●
|
15,000 shares to the Company's SEC counsel for services rendered, valued at $10,650.
|
●
|
1,000,000 shares to a consultant as payment on a consulting contract, valued at $485,600. In February 2018, the Company filed a Form S-8 with the SEC to register these shares.
|
●
|
10,000 shares each of the three directors, total 30,000 shares for their service to the Company, valued at a total of $10,239.
|
●
|
7,500 shares to employees from the restricted stock plan valued at $37,069.
|
●
|
36,018 shares to a company owned by an independent director for leasehold improvements at the Tennessee store, valued at $17,649 on commitment date. The Company reduced related party payable when the shares were issued.
|
●
|
600,000 shares to the principal of Medahub for services performed, valued at $126,000.
|
●
|
2,233,125 shares to the Company's CEO to settle accrued salary, bonus and expenses in the amount of $446,625.
|
●
|
200,000 shares to a non-employee director for cash value of $70,000.
|
●
|
50,000 shares to a consultant for services rendered, valued at $11,000; and
|
●
|
20,000 shares to each of our four directors and our corporate secretary, total 100,000 shares, for services rendered, valued at a total of $18,000.
|
Warrants and Options
At its meeting of directors on February 1, 2007, the Company’s board of directors approved the Acacia Automotive, Inc. 2007 Stock Incentive Plan1 (the “Plan”), which was approved by our stockholders on November 2, 2007, reserving 1,000,000 shares to be issued there under in the form of common stock or common stock purchase options. On July 26, 2012, our shareholders voted to update and extend the Acacia Automotive, Inc. 2007 Stock Incentive Plan, renaming it the Acacia Diversified Holdings, Inc. 2012 Stock Incentive Plan. Warrants, which may be included as equity compensation if used in other manners, are not a component of the Plan. On June 29, 2015 shareholders holding a majority of the shares of the Company voted to discontinue the Company’s stock incentive plans. At December 31, 2019 and 2018, 20,000 and 50,000 options, respectively, still remained outstanding.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
The Company did not issue any common stock purchase warrants or options during the years ended December 31, 2019 and 2018. The following tables represent stock options and warrants activities for the years ended December 31, 2019 and 2018.
Stock Options
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Yrs)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2017
|
|
|
65,000
|
|
|
$
|
0.35
|
|
|
|
2.00
|
|
|
$
|
16,050
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(15,000
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
0.30
|
|
|
$
|
2,100
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(30,000
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019*
|
|
|
20,000
|
|
|
$
|
0.60
|
|
|
|
0.98
|
|
|
$
|
-
|
|
Exercisable at December 31, 2019*
|
|
|
20,000
|
|
|
$
|
0.60
|
|
|
|
0.98
|
|
|
$
|
-
|
|
* These options expire at 12-23-2020.
Stock Warrants
At December 31, 2019 and 2018, there were no outstanding and exercisable stock purchase warrants. There were no warrants granted, exercised, forfeited or expired during the years ended December 31, 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 for the employees are 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 years ended December 31, 2019 and 2018 was $66,926 and $48,109, respectively.
NOTE 11 – INCOME TAXES
As of December 31, 2019 and 2018 the Company had net operating loss carryforwards of approximately $7,027,000 and $12,357,000, respectively, which will expire beginning at the end of 2020. A valuation allowance has been provided for the deferred tax asset as it is uncertain whether the Company will have future taxable income.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
A reconciliation of the benefit (expense) for income taxes with amounts determined by applying the statutory federal income rate of 21% in 2019 and 2018 to the respective losses before income taxes is as follows:
|
|
2019
|
|
|
2018
|
|
Net (Loss)
|
|
$
|
(1,588,928
|
)
|
|
$
|
(1,712,703
|
)
|
Benefit (expense) for income taxes computed using the statutory rate of 21%
|
|
|
333,675
|
|
|
|
359,668
|
|
Non-deductible expense
|
|
|
(142,614
|
)
|
|
|
(181,168
|
)
|
Change in estimated NOL carryforward
|
|
|
(1,299,432
|
)
|
|
|
-
|
|
Change in valuation allowance
|
|
|
1,108,372
|
|
|
|
(178,500
|
)
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Significant components of the Company's deferred tax liabilities and assets at December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Total deferred tax assets – net operating losses
|
|
$
|
1,486,598
|
|
|
$
|
2,594,970
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax assets
|
|
|
1,486,598
|
|
|
|
2,594,970
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,486,598
|
)
|
|
|
(2,594,970
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2019, open Federal income tax years subject to examination include the tax years ended December 31, 2018 through 2016. At December 31, 2019, net operating loss (“NOL”) carryforwards expiring through 2037 were as follows:
Expiring December 31,
|
|
Amount of NOL Expiring
|
|
2026
|
|
$
|
408,000
|
|
2027
|
|
|
693,000
|
|
2028
|
|
|
771,000
|
|
2029
|
|
|
197,000
|
|
2030
|
|
|
32,000
|
|
2031
|
|
|
415,000
|
|
2033
|
|
|
692,000
|
|
2034
|
|
|
106,000
|
|
2036
|
|
|
1,493,000
|
|
2037
|
|
|
534,000
|
|
|
|
$
|
5,341,000
|
|
NOL from tax years with no expiration date
|
|
Amount of NOL
|
|
2019
|
|
$
|
836,000
|
|
2018
|
|
$
|
850,000
|
|
|
|
$
|
1,686,000
|
|
The net change in the valuation allowance is as follow:
Change in valuation allowance
|
|
|
|
|
2019
|
|
$
|
(1,486,598
|
)
|
2018
|
|
|
(2,594,970
|
)
|
|
|
$
|
1,108,372
|
|
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 12 – LEASES AND COMMITMENTS
The Company rented administrative space in Clearwater, Florida at $965 per month on a month to month basis and rents retail space in Nashville, Tennessee at $2,500 per month beginning in December 2017 for the first twelve months and at $2,250 per month for the next twelve months. The retail space lease ended in November 2019. Rent expense for these leases for the years ended December 31, 2019 and 2018 were $40,124 and $42,040, respectively.
On May 1, 2016, the Company entered into an employment agreement with its former CEO. The term of the employment was through December 31, 2019. The salary for our former CEO for the years 2019 and 2018 was $195,000 each year plus annual bonus at 35% of the salary. Any salary and bonus increases must be reviewed and approved by the Company’s board of directors. The agreement provided for a storage and corporate housing allowance of $1,000 per month, retroactively to January 1, 2018 and a monthly automobile allowance to our former CEO of $1,000. In May 2018, the board of directors approved to discontinue payment of the storage and corporate housing allowance, retroactively to January 1, 2018. As a result, no expenses related to the storage and corporate housing allowance was recorded since January 1, 2018. The automobile allowance remains unchanged at $1,000 per month. As such, the Company was committed to an annual expenditures of $12,000 for the year ended December 31, 2019. During the years ended December 31, 2019 and 2018, expenses related to the automobile allowances totaled $12,000 for each year. At December 31, 2019, the Company owed its former CEO $75,000 of unpaid salary, $52,500 of accrued bonus and $9,000 of unpaid automobile allowance. The employment agreement was renewed through June 30, 2020 at an annual salary of $150,000 and continued to provide for a monthly automobile allowance of $1,000. The agreement also provided for severance payment to the former CEO in the event of a change in control.
On May 1, 2016, the Company entered into an employment agreement with its former COO. The term of the employment was through December 31, 2019. The salary for our former COO for the years 2019 and 2018 was $116,833 and $105,000, respectively, plus annual bonus at 35% of the salary. Any salary and bonus increases must be reviewed and approved by the Company’s board of directors. At December 31, 2019, the Company owed its former COO $20,717 of unpaid salary and $79,562 of accrued bonus. The employment agreement was renewed through June 30, 2020 at an annual salary of $96,000. The agreement also provided for severance payment to the former COO in the event of a change in control.
In August 2016, the Company entered into a licensing agreement to use exclusively a brand name for its products for five years. Pursuant to the terms of the agreement, the Company issued 2,000 shares of its restricted common stock to the brand owner and 2,000 shares at the end of each of the next four years. During the years ended December 31, 2019 and 2018, these shares were valued at $3,184 and $1,420, respectively. There remains 4,000 shares to be issued to the brand owner.
NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS
We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards and changes in their interpretation, we might be required to change our accounting policies, particularly concerning revenue recognition, the capitalized incremental costs to obtain a customer contract and lease accounting, to alter our operational policies and to implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or to restate our published financial statements. Such changes may have an adverse effect on our business, financial position, and operating results, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results.
Accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
ACACIA DIVERSIFIED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 14 – 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:
Subsequent to December 31, 2019, the holder of our convertible notes converted two of the notes in their entirety into 12,835,957 shares of the Company’s common stock.
In January 2020, the Company’s former CEO provided a short term advance in the amount of $18,000 for working capital. The Company repaid the advance to the former CEO in the same month.
In February 2020, the Company entered into an unsecured promissory note agreement with a former director of the Company, 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 30 days from the date of the notes.
In March 2020, the Company entered into two unsecured promissory notes agreements with its former CEO and his spouse, in the amounts of $2,500 and $7,428. The promissory notes bear interest at a rate of 8% per annum. The principle balance and accrued interest is due 30 days from the date of the notes.
On March 26, 2020, the Company announced in a current report on Form 8-k that its operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and the world and thus the Company’s business operations have been disrupted and it was unable to timely review and prepare the Company’s financial statements for the 2019 fiscal year. As such, the Company would be making use of the 45-day grace period provided by the SEC’s Order and available filing extension to delay filing of its Annual Report.
On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer for the Company. On the same date, the Company filed a current report on Form 8-k to announce that it issued in escrow 1,475,000 shares of the Company’s Series B Convertible Preferred Stock (the “Preferred Stock”) to ORCIM Financial Holdings, LLC (“OFH”). Each share of the Preferred Stock has fifty (50) votes per share and may be converted into fifty (50) $0.001 par value common shares. As of March 31, 2020, the Company had 43,290,331 shares of its common stock issued and outstanding. There were no other shares of any capital stock outstanding except for the common stock and Preferred Stock. As the result of the issuance of the Preferred Stock and, upon satisfaction of the terms of the Acquisition Agreement, OFH would have voting control over the Company with 73,750,000 votes on all matters submitted to stockholders for a vote. On May 20, 2020, the conditions of the Acquisition Agreement were satisfied with the resignation of the former board of directors of the Company and the change of control became effective.
OFH is a limited liability company domiciled in Maryland. OFH is controlled by Mr. Jeffery D. Bearden, who owns 100% of the membership interests of OFH. The Preferred Stock was acquired by OFH in exchange for its agreement to assume the debt of the Company in the approximate amount of $450,000. The funds to satisfy the outstanding debt of the Company were acquired by OFH through a loan from a hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., age 47, was appointed as a director for Acacia Diversified Holdings, Inc. (the “Company”). Mr. Simpson also was appointed to the position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula each resigned their respective positions as a director for Acacia Diversified Holdings, Inc.