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