ACACIA DIVERSIFIED HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other sections of this Annual Report, including our consolidated financial statements and related notes set forth in Item 8. This discussion and analysis contains forward-looking statements, including information about possible or assumed results of our financial condition, operations, plans, objectives and performance that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated and set forth in such forward-looking statements.
Forward-Looking Statements
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 Securities 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-K and from time to time in the Company's
Executive Overview
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On
In 2016, following the acquisition, the Company formed two new subsidiaries to
conduct its new medical hemp business activities, being
On
On
OFH is a limited liability company domiciled in
On
On
MariJ Pharmaceuticals, Inc.
MariJPharma engaged in the extraction and processing of very high quality, high-CBD/low-THC content medical grade hemp oils from medical hemp plants. MariJPharma specialized in utilizing organic strains of the hemp plant, setting itself apart from the general producers of non-organic products. In addition, MariJPharma had the technical expertise and capability to process and formulate the oils and to employ them in its compounding operations. MariJPharma sought to become engaged as owner or co-owner of a grow facility such as to produce its own plants for processing. The Company intended to acquire, through its MariJ Pharma subsidiary, portions or complete ownership of licenses and grow operations in one or more states and sought to cultivate, organically extract and process its medicinal hemp crops year around in indoor facilities. The acquisition of these licenses was anticipated to provide the Company with the opportunity to compound medicinal products using mixtures of high cannabinoid profile oils that have very little hallucinogenic properties but have significantly improved medicinal properties. This GeoTracking Technology was designed to provide a full-channel patient care tracking system that is fully compliant under today's strict HIPAA regulations that require privacy and security of the patient's information. Beginning with RFID labeling and tracking of every single seed employed in the grow program and continuing through the sale of medicinal products in a sophisticated retail Point of Sale delivery system.
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MariJ Pharma's revenues were anticipated to be generated primarily from several activities, including but not limited to the following:
a. Hemp oil extraction and processing. MariJ Pharma had a unique mobile hemp oil
processing and extraction unit designed into a heavy-duty trucks. That unit
performed extractions and processing of medical hemp oils at various sites
and was developing additional contracts for services. b. Wholesale of raw and processed medical hemp oils. c. Compounding and manufacturing. MariJ Pharma constructed a mobile laboratory
and testing unit, also on a heavy-duty truck chassis, intended to address the
growing demand for these services in the medical hemp industry. d. Licensing and support of the Company's GeoTracking Technology systems e. Processing and compounding services for medical grade hemp oils
On
The Company sought additional investments and financing to pay the costs of
building its second mobile oil extraction and processing unit, to finance final
construction of its mobile compounding and manufacturing unit for the same
industry, and to complete the roll-out of its GeoTracking Technology system.
Unfortunately, the Company's operations and business have experienced disruption
due to the unprecedented conditions surrounding the COVID-19 pandemic spreading
throughout
The Company acquired the assets and the business of
In addition to its extraction operations, the Company was invited to be part of
the hemp pilot program in
The Company also acquired land in
EMT sought to align itself with institutions of higher learning in working to develop new products and to identify and develop additional uses for its medical hemp products. It was anticipated that EMT could generate revenues from the following activities:
1) EMT sought to enter into product development projects with institutions of
higher learning in efforts to develop new and better strains of medical hemp related products for dispensing as medications, nutraceuticals, cosmeceuticals, and probably dietary supplements. EMT anticipated participating in state and federal grants in conjunction with one or more
universities as a means to defray part of its costs in these efforts. 2) Private label packaging services - the Company obtained a majority of the
equipment required to engage in the business of packaging and labeling of
medical hemp oils, oil-infused products, and related items. 3) Retail sales of medical hemp oils, oil-infused products, and other
merchandise through its web-based portal or retail dispensaries planned for that purpose. These activities depended in large part upon meeting FDA regulations and criteria relating to the sale and distribution of hemp-infused products, and the Company was in the process of determining the status of those criteria. 4) Retail, and wholesale distributor, sales of cosmeceutical and nutraceutical
products and dietary supplements containing its high-quality hemp oil
extracts, subject to compliance with FDA and other regulations. 5) Growing high quality hemp plants and extracting oil for sale or for
manufacturing of oil-infused products.
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The Company required additional capital to execute these plans and there can be
no assurance that the Company will be successful in its plans to generate that
capital. Unfortunately, the Company's operations and business have experienced
disruption due to the unprecedented conditions surrounding the COVID-19 pandemic
spreading throughout
Discussion Regarding the Company's Consolidated Operating Results
The results of operations are based on preparation of financial statements in
conformity with accounting principles generally accepted in
During the year ended
During the year ended
As a result of the above, operating losses decreased by
The Company's other expenses were
As a result of the above, our consolidated net loss for the year ended
Total Assets. Total assets at
Total Liabilities. Total liabilities at
Liquidity and Capital Resources
Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. For the year ended
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As previously mentioned, since inception, we financed our operations largely
from the sale of common stock, notes payable and advances from our majority
stockholder and entering into financing agreements with unrelated parties.
During the year ended
We incurred significant net losses and negative cash flows from operations since
its inception. As of
During the year ended
During the year ended
During the year ended
As a result of the above, as of
Discussions Regarding Operating Leases and Commitments
As of
The Company rented administrative space in
On
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In
Financing of Planned Expansions and Other Expenditures
We anticipated seeking additional capital through the sale of our equity securities in a private placement offering, but no assurance can be made that we would be able to find willing buyers for such securities. Moreover, as we contemplated selling our securities by way of an exemption from registration, there can be no assurance that we would be able to identify a satisfactory number of suitable buyers to whom we may legally offer such securities, or if we were successful in identifying suitable buyers that we would be successful in raising capital, or if successful in raising capital that we could be successful in implementing any plan for acquisitions or adding or expanding any operations.
Unfortunately, the Company's operations and business have experienced disruption
due to the unprecedented conditions surrounding the COVID-19 pandemic spreading
throughout
Going Concern
The Company has not generated profit to date. The Company expects to continue to incur operating losses. The Company expects to incur professional fees to maintain its reporting company status. Until such time that the Company is able to generate revenue and become profitable or find new sources of capital, the Company will find it difficult to continue to meet its obligations as they come due. There can be no assurance that the Company will be successful in its efforts to raise capital, or if it were successful in raising capital, that it would be successful in meeting its business plans. Management's plans include attempting to raise funds from the public through an equity offering of the Company's common stock and identifying and developing new opportunities. However, the recent COVID-19 pandemic has presented unprecedented challenges to businesses and the investing landscape around the world. Therefore, there can be no assurance that Management's plans will be successful.
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
Off-Balance Sheet Arrangements
The Company does not have any 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.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes have been prepared
in accordance with accounting principles generally accepted in
We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. A complete summary of these policies is included in Note 4 of the notes to our financial statements. We believe that the following accounting policies are those most critical to the judgment and estimates used in preparation of our consolidated financial statements.
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.
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. Finished goods inventories are separated into two discernible product lines of organic and non-organic products. 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.
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DEFERRED FARM EXPENSE - The Company's subsidiary EMT grew hemp plants in both its indoor and outdoor facilities. In accordance with Accounting Standards Codification 905 - Agriculture, all direct and indirect costs of growing the plants are accumulated until the time of harvest. These deferred cost cannot exceed the realizable value of the oil processed from the hemp plants. Crop costs such as soil preparation incurred before planting are deferred and allocated to the growing crop. Deferred farm expense is included as inventory costs.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized, while minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the straight-line method over the estimated useful lives, which are generally two to seven years.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with Accounting Standards Codification 360-10-05 - Impairment or Disposal of Long-Lived Assets, long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment at least annually or whenever facts and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. The Company did not recognize any impairment losses for any periods presented.
DEBT ISSUANCE COSTS - The Company follows Accounting Standard Update 2015-03 - Simplifying the Presentation of Debt Issuance Costs, which requires direct costs associated with the issuance of convertible note to be presented in the balance sheet as a direct reduction from the carrying value of the associated debt liability. These costs are amortized into interest expense over the contractual term of the note or a shorter amortization period when deemed appropriate. The Company amortizes debt issuance costs for its convertible note immediately upon issuance since the note is convertible on demand.
OFFERING COSTS - The Company follows the
REVENUE RECOGNITION - In
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
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STOCK BASED COMPENSATION - The Company accounts for stock-based compensation
under Accounting Standards Codification 718 - Compensation-Stock Compensation
("ASC 718"). ASC 718 requires that all stock-based compensation be recognized as
expense in the financial statements and that such cost be measured at the fair
value of the award at the grant date and recognized over the period during which
an employee is required to provide services (requisite service period). An
additional requirement of ASC 718 is that estimated forfeitures be considered in
determining compensation expense. Estimating forfeitures did not have a material
impact on the determination of compensation expense during the years ended
The Company accounts for stock-based awards based on the fair market value of the instrument using the Black-Scholes option pricing model and utilizing certain assumptions including the followings:
Risk-free interest rate - This is the yield on
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.
MEDAHUB ACQUISITION - In
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
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
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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
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