Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
Private Litigation Reform Act of 1995 that involve known and unknown risks,
significant uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed,
or implied, by those forward-looking statements. You can identify
forward-looking statements by the use of the words such as "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", "may",
"will", "should", "could", "predicts", "potential", "proposed", or "continue" or
the negative of those terms. These statements are only predictions. In
evaluating these statements, you should consider various factors which may cause
our actual results to differ materially from any forward-looking statements.
Although we believe that the exceptions reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements
due to numerous factors, including, but not limited to, availability of
financing for operations, successful performance of operations, impact of
competition and other risks detailed below as well as those discussed elsewhere
in this Form 10-Q and from time to time in the Company's Securities and Exchange
Commission filings and reports. In addition, general economic and market
conditions and growth rates could affect such statements. We undertake no
obligation to revise or update publicly any forward-looking statements for any
reason.
General
These unaudited interim consolidated financial statements should be read in
conjunction with the annual financial statements for the Company most recently
completed fiscal year ended December 31, 2019. These unaudited interim
consolidated financial statements do not include all disclosures required in
annual financial statements, but rather are prepared in accordance with
recommendations for interim financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
These unaudited interim consolidated financial statements have been prepared
using the same accounting policies and methods as those used by the Company in
the annual audited financial statements for the year ended December 31, 2019.
Discussion on the Company's Operations and Recent Event
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, Eufloria Medical of
Tennessee, Inc. ("EMT"), a company incorporated in the state of Tennessee, and
Medahub Operations Group, Inc. and Medahub, Inc., technology companies
(collectively "Medahub") incorporated in the state of Florida.
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
which provided the Company the license to grow, manufacture, and dispense
organic hemp oil in Tennessee. The Company also had a retail store in Tennessee
selling hemp infused products. Revenue generated from retail sales was not
material to the Company based on its operating model.
On March 26, 2020, the Company announced in a current report on Form 8-k that
its operations and business have experienced disruption due to the unprecedented
conditions surrounding the COVID-19 pandemic spreading throughout the United
States and the world and thus the Company's business operations have been
disrupted and it was unable to timely review and prepare the Company's financial
statements for the 2019 fiscal year. As such, the Company would be making use of
the 45-day grace period provided by the SEC's Order and available filing
extension to delay filing of its Annual Report. Around this time, the Company
also suspended its operations, laid off all of its employees and ceased to
generate any revenue.
As a result of the insufficient cash flows from the operations of our
subsidiaries as well as the disruption of our business from the COVID-19
pandemic, as of March 31, 2020, the Company discontinued the operations of all
of its wholly-owned subsidiaries. The financial results for these subsidiaries
have been presented as discontinued operations in the accompanying consolidated
financial statements.
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On March 31, 2020, Richard K. Pertile resigned his position as Chairman of the
Board of Directors, Chief Executive Officer and Chief Financial Officer for the
Company. On the same date, the Company filed a current report on Form 8-k to
announce that it issued in escrow 1,475,000 shares of the Company's Series B
Convertible Preferred Stock (the "Preferred Stock") to ORCIM Financial Holdings,
LLC ("OFH"). Each share of the Preferred Stock has fifty (50) votes per share
and may be converted into fifty (50) $0.001 par value common shares. As of March
31, 2020, the Company had 43,290,324 shares of its common stock issued and
outstanding. There were no other shares of any capital stock outstanding except
for the common stock and Preferred Stock. As the result of the issuance of the
Preferred Stock and, upon satisfaction of the terms of the Acquisition
Agreement, OFH would have voting control over the Company with 73,750,000 votes
on all matters submitted to stockholders for a vote. The parties agree that the
change in control would not be effective until all conditions of the Acquisition
Agreement are satisfied, including, but not limited to, the acquisition of
funding by OFH to satisfy certain debts of the Company and the resignation of
its existing board of directors. On May 20, 2020, the Company's existing board
of directors resigned.
Pursuant to the terms of the Acquisition Agreement, the parties agree that the
Company will transfer to Richard K. Pertile ("Pertile"), our former CEO, all the
issued and outstanding shares of each of the Company's wholly-owned subsidiaries
and Pertile agreed to forgive all amounts due him or his related parties from
the Company. The forgiveness of debt was approximately $910,000 and the value of
the net assets of the subsidiaries was approximately $267,000 (net of $240,000
of liabilities). The Acquisition Agreement also specified which accounts
payable, accrued liabilities and convertible notes would remain as liabilities
of the Company. OFH has agreed to the payment of the followings:
Professional fees $ 110,000
Accounts payable 28,050
Accrued compensation to our former CEO 187,000
Accrued compensation to our former COO 91,000
Convertible notes
250,000
$ 666,050As of the date of the issuance of the consolidated financial statements, the
Company settled professional fees in the amount of $110,000 and other
liabilities remained outstanding.
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 $666,000. The funds to satisfy
the outstanding debt of the Company were acquired by OFH through a loan from a
hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., was appointed as a director for
Acacia Diversified Holdings, Inc. (the "Company"). Mr. Simpson also was
appointed to the position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula
each resigned their respective positions as a director for Acacia Diversified
Holdings, Inc.
Operating results for the three months ended June 30, 2020 and 2019:
Continuing Operations
For the three months ended June 30, 2019, selling, general and administrative
expenses were $174,110, compared to $24,906 during the three months ended June
30, 2020, a decrease of $149,204 or 86%. The decrease in these expenses is a
result of the Company winding down its operations and laid off its workforce.
During the three months ended June 30, 2019, the Company incurred interest
expense of $25,544, compared to $19,255 for the three months ended June 30,
2020, a decrease of $6,289, or 25%. Interest expense decreased because a related
party settled certain outstanding balances of his notes through issuance of the
Company's common stock, therefore, reducing the overall balance of the notes
during the current period.
During the three months ended June 30, 2019, the Company recognized $214,308 of
derivative expense, compared to $79,894 derivative expense for the three months
ended June 30, 2020, a decrease of $134,414, or 63%. The increase in the amount
of outstanding convertible notes payable with variable conversion feature that
gave rise to derivative liability, coupled with the reduction in our share price
during the current period gave rise to the decrease of the derivative expense.
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As a result of the changes described above, the Company incurred a net loss from
continuing operations of $413,962 for the three months ended June 30, 2019,
compared to a net loss from continuing operations of $124,055 for the three
months ended June 30, 2020, the loss decreased by $289,907, or 70%.
Based on operating losses and negative cash from operations and the discontinued
operations of the Company's operations, substantial doubt exists about the
Company's ability to continue as a going concern. Management's plan in this
regard is to find new operations to enter into and focus on building profitable
operations. To finance operations while it finds new operations, the Company
will continue financing activity such as entering into loan agreements and
issuing new shares of the Company's common stock. Therefore, the Company expects
to continue to incur operating losses and to incur professional fees to maintain
its reporting company status. Until such time that the Company is able to
generate revenue and become profitable or find new sources of capital, the
Company will find it difficult to continue to meet its obligations as they come
due. There can be no assurance that the Company will be successful in its
efforts to raise capital, or if it were successful in raising capital, that it
would be successful in meeting its business plans. Management's plans include
attempting to raise funds from the public through an equity offering of the
Company's common stock and identifying and developing new opportunities.
However, the recent COVID-19 pandemic has presented unprecedented challenges to
businesses and the investing landscape around the world. Therefore, there can be
no assurance that Management's plans will be successful.
Discontinued Operations
For the three months ended June 30, 2019, the Company's subsidiaries generated
revenues of $140,724 from operations and incurred costs of goods sold of
$169,413. As a result, the Company's subsidiaries gross loss was $28,689.
For the three months ended June 30, 2019, selling, general and administrative
expenses were $68,369. The Company's subsidiaries also incurred interest expense
of $2,613 and earned other income of $3,719.
As a result of the changes in revenues, costs and expenses, the Company's
subsidiaries incurred net loss from discontinued operations of $95,952 for the
three months ended June 30, 2019.
The Company discontinued its subsidiaries operations on March 31, 2020.
Therefore, there was no operations to report for the three months ended June 30,
2020.
Operating results for the six months ended June 30, 2020 and 2019:
Continuing Operations
For the six months ended June 30, 2019, selling, general and administrative
expenses were $378,885, compared to $191,070 during the six months ended June
30, 2020, a decrease of $187,815 or 50%. The decrease in these expenses is
primarily attributable to the Company winding down its operations and laid off
its workforce during the current period.
During the six months ended June 30, 2019, the Company incurred interest expense
of $46,306, compared to $40,755 for the six months ended June 30, 2020, a
decrease of $5,551, or 12%. Interest expense decreased because a related party
settled certain outstanding balances of his notes through issuance of the
Company's common stock, therefore, reducing the overall balance of the notes
during the current period.
During the six months ended June 30, 2019, the Company recognized $187,128 of
derivative expense, compared to $42,512 of derivative income for the six months
ended June 30, 2020, an increase of $229,640, or 123%. The increase in the
amount of outstanding convertible notes payable with variable conversion feature
that gave rise to derivative liability, coupled with the reduction in our share
price during the current period gave rise to derivative income and its increase.
As a result of the changes described above, the Company incurred a net loss from
continuing operations of $612,319 for the six months ended June 30, 2019,
compared to a net loss from continuing operations of $189,313 for the six months
ended June 30, 2020, a decrease in the loss of $423,006, or 69%.
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Based on operating losses and negative cash from operations and the discontinued
operations of the Company's operations, substantial doubt exists about the
Company's ability to continue as a going concern. Management's plan in this
regard is to find new operations to enter into and focus on building profitable
operations. To finance operations while it finds new operations, the Company
will continue financing activity such as entering into loan agreements and
issuing new shares of the Company's common stock. Therefore, the Company expects
to continue to incur operating losses and to incur professional fees to maintain
its reporting company status. Until such time that the Company is able to
generate revenue and become profitable or find new sources of capital, the
Company will find it difficult to continue to meet its obligations as they come
due. There can be no assurance that the Company will be successful in its
efforts to raise capital, or if it were successful in raising capital, that it
would be successful in meeting its business plans. Management's plans include
attempting to raise funds from the public through an equity offering of the
Company's common stock and identifying and developing new opportunities.
However, the recent COVID-19 pandemic has presented unprecedented challenges to
businesses and the investing landscape around the world. Therefore, there can be
no assurance that Management's plans will be successful.
Discontinued Operations
For the six months ended June 30, 2020, the Company's subsidiaries generated
revenues of $1,622 from operations as compared to $304,229 for the six months
ended June 30, 2019, a decrease of $302,607, or 99%. The decrease is a result of
the Company winding down of its subsidiaries' operations.
For the six months ended June 30, 2020, the Company's subsidiaries incurred
costs of goods sold of $110,103, compared to $254,540 for the six months ended
June 30, 209, a decrease of $144,437, or 57%. As a result of winding down its
operations, the subsidiaries incurred minimal costs related to production but
continued to employ a workforce until it laid off its workers. During the
current period, the subsidiaries also wrote down its inventory to its net
realizable value.
As a result of the changes in revenues and costs of good sold above, the
Company's subsidiaries incurred a gross loss of $108,481 during the six months
ended June 30, 2020, compared to a gross profit of $49,689 during the six months
ended June 30, 2019, a decrease of $158,170, or 318%.
For the six months ended June 30, 2020, selling, general and administrative
expenses were $28,309, compared to $145,855 for the six months ended June 30,
2019, a decrease of $117,546, or 81%. The decrease is due to the subsidiaries
winding down its operations and laying off its workforce.
As a result of the changes in revenues, costs and expenses, the Company's
subsidiaries incurred net loss from discontinued operations of $140,353 for the
six months ended June 30, 2020, compared to a net loss from discontinued
operations of $95,620 for the six months ended June 30, 2019.
Liquidity and Capital Resources
The Company's cash position at June 30, 2020 decreased by $2,195 to $421, as
compared to a balance of $2,616, as of December 31, 2019. The net decrease in
cash for the six months ended June 30, 2020 was primarily attributable to cash
used by operating activities from increase in accounts payable and accrued
expenses.
As of June 30, 2020, the Company had negative working capital of $658,848
compared to negative working capital of $1,475,211 at December 31, 2019, an
increase of $816,363, attributable primarily to disposing its subsidiaries'
assets and liabilities from discontinued operations during the current period.
Net cash used in operating activities of $96,161 during the six months ended
June 30, 2020, was lower compared to the prior period of $286,745, primarily due
to the wind down of the subsidiaries' operations and an increase in accounts
payable and accrued expenses during the current period.
Net cash provided by financing activities of $49,928 during the six months ended
June 30, 2020, decreased by $158,272 compared to $208,200 during the six months
ended June 30, 2019. In the current period, as the Company's share price was
decreasing, the Company turned to its related parties to generate cash flows
from issuance of notes payable to related parties. In the prior period, the
Company was able to generate cash flows through sale of its common stock and
issuance of convertible notes payable.
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During the six months ended June 30, 2020, the Company issued shares of its
common stock to settle $107,050 of principle and accrued interest of its
convertible notes payable and the related derivative liability of $101,763. The
Company also issued a convertible note payable to settle accounts payable with
certain vendors and issued Series B Convertible Preferred Stock valued at $1,475
as a result of a change in control. During the six months ended June 30, 2019,
the Company issued shares of its common stock to settle $174,200 of principle
and accrued interest of its convertible notes payable and the related derivative
liability of $230,938. In addition, the Company also issued common stock to
settle $8,000 of accrued expense with a related party and $122,984 of notes
payable and accrued interest with a related party.
As reported in the accompanying consolidated financial statements, for the six
months ended June 30, 2020 and 2019, the Company incurred net losses from
continuing operations of $189,313 and $612,319, respectively. Management's plan
in this regard is to find new operations to enter into and focus on building
profitable operations. To finance operations while it finds new operations, the
Company will continue financing activity such as entering into loan agreements
and issuing new shares of the Company's common stock. Therefore, the Company
expects to continue to incur operating losses and to incur professional fees to
maintain its reporting company status. Until such time that the Company is able
to generate revenue and become profitable or find new sources of capital, the
Company will find it difficult to continue to meet its obligations as they come
due. There can be no assurance that the Company will be successful in its
efforts to raise capital, or if it were successful in raising capital, that it
would be successful in meeting its business plans. Management's plans include
attempting to raise funds from the public through an equity offering of the
Company's common stock and identifying and developing new opportunities.
However, the recent COVID-19 pandemic has presented unprecedented challenges to
businesses and the investing landscape around the world. Therefore, there can be
no assurance that management's plans will be successful.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has incurred losses
from continuing operations for all periods presented and has a substantial
accumulated deficit. As of June 30, 2020, these factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Financial Condition
The Company's total assets at June 30, 2020 was $4,755, compared to total assets
at December 31, 2019 of $654,237, a decrease of $649,482, or 99%. As a result of
discontinuing its subsidiaries operations, the Company reclassified $507,774 and
$646,445 of the subsidiaries total assets as assets of discontinued operations
on March 31, 2020 and December 31, 2019, respectively, and disposed of them
during the three months ended June 30, 2020.
Total liabilities at June 30, 2020 consisted of current liabilities of $663,603
and derivative liability of $237,055. Total liabilities at December 31, 2019
consisted of current liabilities of $1,611,529 and long-term liabilities of
$556,446, a decrease of $1,267,317, or 58%. As a result of discontinuing its
subsidiaries operations, the Company reclassified $240,828 and $335,463 of the
subsidiaries liabilities as liabilities of discontinued operations on March 31,
2020 and December 31, 2019, respectively, and disposed of them during the three
months ended June 30, 2020.
The change in the Company's financial condition is a result of discontinuing and
disposing its subsidiaries operations in the six months ended June 30, 2020. The
Company continues to incur professional fees in order to maintain its reporting
company status. As a result of these changes, the Company's cash position of its
continuing operations decreased from $2,616 on December 31, 2019 to $421 on June
30, 2020.
Off-Balance Sheet Arrangements
We have made no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
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ACACIA DIVERSIFIED HOLDINGS, INC. 