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
Prior to March 31, 2020, the Company 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 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 also had a hemp farm and a retail store
in Tennessee, growing, manufacturing and 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 43,290,331 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. 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 $450,000. The funds to satisfy
the outstanding debt of the Company were acquired by OFH through a loan from a
hedge fund entity known as Geneva Capital.
On March 31, 2020, Mr. Larnell C. Simpson, Jr., was appointed as a director for
Acacia Diversified Holdings, Inc. (the "Company"). Mr. Simpson also was
appointed to the position of Vice President.
On May 20, 2020, directors Danny Gibbs, Neil B. Gholson and Dr. Richard Paula
each resigned their respective positions as a director for Acacia Diversified
Holdings, Inc.
Operating results for the three months ended March 31, 2020 and 2019:
Continuing Operations
For the three months ended March 31, 2019, selling, general and administrative
expenses were $204,775, compared to $166,164 during the three months ended March
31, 2020, a decrease of $38,611 or 19%. The decrease in these expenses is
primarily attributable to an decrease in salaries and wages for our former CEO
and COO during the current period.
During the three months ended March 31, 2019, the Company incurred interest
expense of $20,762, compared to $21,500 for the three months ended March 31,
2020, an increase of $738, or 4%. Interest expense remained consistent because
the Company had comparable amounts of convertible notes and notes payable to
related parties outstanding during both periods.
During the three months ended March 31, 2019, the Company recognized $27,180 of
derivative income, compared to $122,406 derivative income for the three months
ended March 31, 2020, an increase of $95,226, or 350%. 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 $198,357 for the three months ended March 31, 2019,
compared to a net loss from continuing operations of $65,258 for the three
months ended March 31, 2020, an decrease of $133,099, or 67%.
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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 three months ended March 31, 2019, the Company's subsidiaries generated
revenues of $163,505 from operations, compared to $1,622 for the three months
ended March 31, 2020, an decrease of $161,883 or 99%. The decrease in revenues
was primarily due to no extraction contracts in the current period. The minimal
revenues generated during the current period was from sale of hemp-infused
products.
For the three months ended March 31, 2019, costs of goods sold was $72,199,
compared to $110,103 for the three months ended March 31, 2020, an increase of
$37,904, or 52%. Costs of goods sold was higher during the current period is
primarily due to (1) the write down of inventory of $15,000 to its net
realizable value, and (2) an increase in depreciation in property and equipment.
As a result of the changes in revenues and costs of goods sold discussed above,
the Company's subsidiaries gross margin decreased from a profit of $91,306, or
56% of revenues for the three months ended March 31, 2019 to a loss of $108,481,
or (6,688%) of revenues for the three months ended March 31, 2020. The decrease
in gross profit is primarily due to no extraction contracts.
For the three months ended March 31, 2019, selling, general and administrative
expenses were $90,414, compared to $28,309 during the three months ended March
31, 2020, a decrease of $62,105, or 69%. The decrease in these expenses is
primarily attributable to a gradual lay off of our workforce and the wind down
of these operations.
During the three months ended March 31, 2019, the Company's subsidiaries
incurred interest expense of $2,643, compared to $3,221 for the three months
ended March 31, 2020, an increase of $578, or 22%. Interest expense remained
consistent and it is attributable to the subsidiaries' finance lease obligation.
As a result of the changes in revenues, costs and expenses, the Company's
subsidiaries generated a net income from discontinued operations of $332 for the
three months ended March 31, 2019, compared to a net loss from discontinued
operations of $140,354 for the three months ended March 31, 2020, an decrease of
$140,686, or 42,375%.
Liquidity and Capital Resources
Continuing Operations
The Company's cash position at March 31, 2020 decreased by $2,201 to $415, as
compared to a balance of $2,616, as of December 31, 2019. The net decrease in
cash for the three months ended March 31, 2020 was primarily attributable to
cash used by operating activities from increase in accounts payable and accrued
expenses.
As of March 31, 2020, the Company had negative working capital of $1,375,299
compared to negative working capital of $1,475,211 at December 31, 2019, an
increase of $99,912, attributable primarily to reporting its assets and
liabilities from discontinued operations as current assets and current
liabilities since these amounts are expected to be settled within the next
twelve months.
Net cash used in operating activities of $96,165 during the three months ended
March 31, 2020, was lower compared to the prior period of $133,613, primarily
due to the wind down of the operations and an increase in accounts payable and
accrued expenses during the current period.
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Net cash provided by financing activities of $49,928 during the three months
ended March 31, 2020, decreased by $41,272 compared to $91,200 during the three
months ended March 31, 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.
During the three months ended March 31, 2020, the Company issued shares of its
common stock to settle $72,200 of principle and accrued interest of its
convertible notes payable and the related derivative liability of $69,271.
During the three months ended March 31, 2019, the Company issued shares of its
common stock to settle $45,000 of principle and accrued interest of its
convertible notes payable and the related derivative liability of $41,933.
As reported in the accompanying consolidated financial statements, for the three
months ended March 31, 2020 and 2019, the Company incurred net losses from
continuing operations of $65,258 and $198,357, 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 March 31, 2020, these factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Discontinued Operations
The Company's subsidiaries cash position at March 31, 2020 decreased by $26,573
to $576, as compared to a balance of $27,149, as of December 31, 2019. The net
decrease in cash for the three months ended March 31, 2020 was attributable to
cash used by operating activities through cash collected from accounts
receivable, offset by payments on accounts payable and accrued expenses.
As of March 31, 2020, the Company's subsidiaries had assets of $507,774 and
liabilities of $240,828. These assets and liabilities from discontinued
operations are reported as current assets and current liabilities since these
amounts are expected to be settled within the next twelve months.
Net cash used in operating activities of $20,756 during the three months ended
March 31, 2020 decreased by $52,962 compared to the prior period of $73,718,
primarily due to decrease in operating expenses during the current period as the
Company was winding down the operations of the subsidiaries.
Net cash used in investing activities was $24,102 during the three months ended
March 31, 2019.
Net cash used by financing activities of $3,293 during the three months ended
March 31, 2020 increased by $99 compared to $3,194 during the three months ended
March 31, 2019. The Company's subsidiaries financing activities consisted of
monthly payments of long-term debt and its finance lease obligations which
remained consistent during the periods.
During the three months ended March 31, 2019, the Company's subsidiaries
acquired a finance lease by assuming a lease liability in the amount of
$182,041. In addition, it acquired an operating lease by assuming a lease
liability in the amount of $29,655.
Financial Condition
The Company's total assets at March 31, 2020 was $515,774, compared to total
assets at December 31, 2019 of $654,237, a decrease of $138,463, or 21%. As a
result of discontinuing its subsidiaries operations, the Company reclassified
$507,774 and $129,367 of the subsidiaries assets as current assets of
discontinued operations on March 31, 2020 and December 31, 2019, respectively,
and $517,078 of the subsidiaries assets as non-current assets of discontinued
operations on December 31, 2019.
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Total liabilities at March 31, 2020 consisted of current liabilities of
$1,891,073 and derivative liability of $189,653. Total liabilities at December
31, 2019 consisted of current liabilities of $1,611,529 and long-term
liabilities of $556,446, a decrease of $87,249, or 4%. As a result of
discontinuing its subsidiaries operations, the Company reclassified $240,828 and
$160,347 of the subsidiaries liabilities as current liabilities of discontinued
operations on March 31, 2020 and December 31, 2019, respectively, and $175,116
of the subsidiaries assets as non-current assets of discontinued operations on
December 31, 2019.
The change in the Company's financial condition is a result of winding down its
operations in the three months ended March 31, 2020. The Company's subsidiaries
collected its accounts receivable, suspended its investments in the farm and
leasehold improvements, wrote down its inventory to its net realizable value,
suspended payments to its vendors, increased its borrowings from related parties
while the convertible note holders converted some of the notes into the
Company's common stock. As a result of these changes, the Company's cash
position of its continuing operations decreased from $2,616 on December 31, 2019
to $415 on March 31, 2020. In addition, the Company's subsidiaries' cash
position of discontinued operations decreased from $27,149 on December 31, 2019
to $576 on March 31, 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. 
