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ACCA > SEC Filings for ACCA > Form 10-Q on 19-Nov-2012All Recent SEC Filings

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Form 10-Q for ACACIA DIVERSIFIED HOLDINGS, INC.


19-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-Q contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates, and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal 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.

General

The Company believes that vehicle auctions have historically shown that units they sell do not generally decline substantially during recession. We believe this is attributable to, among other facts, that in a recession the overall demand for used vehicles does not decline as significantly, or at least declines less than new car production would indicate, because some consumers that would otherwise purchase new vehicles purchase used vehicles, acquiring vehicles traditional purchasers of used vehicles may otherwise forgo or delay. For those reasons and more, we believe that the auto auction industry is more dependent upon the number of actual used vehicles in operation (VIO) in the U.S., rather than upon retail vehicle sales and manufacturing output. However, the recent recession proved to be quite severe, and resulted in a greater loss of units for sale or sold at most auto auctions than in recent recessionary periods, even though our auction operations have actually seen an increase in volumes in most instances.

As is common with other auto auctions, the Company has experienced and expects to continue to experience fluctuations in its quarterly results of operations due to a number of factors, many of which are beyond the Company's control and which are common to the auto auction industry. Generally, the volume of vehicles sold at the Company's auctions is highest in the first and second calendar quarters of each year and slightly lower in the third quarter. Fourth quarter volume of vehicles sold is generally lower than all other quarters. This seasonality is affected by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affect the demand side of the auction industry. Used vehicle auction volumes tend to decline during prolonged periods of winter weather conditions. Among the other factors that have in the past and/or could in the future affect the Company's operating results are: general business conditions; trends in new and used vehicle sales and incentives, including wholesale used vehicle pricing; economic conditions including fuel prices and interest rate fluctuations; trends in the vehicle remarketing industry; the introduction of new competitors; competitive pricing pressures; and costs associated with the acquisition of businesses or technologies. As a result of the above factors, operations are subject to significant variability and uncertainty from quarter to quarter, and revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis.

Background

Acacia Automotive, Inc. ("we", "us", or the "Company") was incorporated in Texas 1984 as "Gibbs Construction, Inc.,". In the following years, the Company grew to a full service, national commercial construction company and completed an initial public offering of its Common Stock pursuant to a registration thereof on Form S-1 in January 1996. In April 2000, Gibbs Construction, Inc. sought protection under Chapter 11 of the United States Bankruptcy Code following a similar filing by the Company's largest client, which led to significant losses on several of the Company's projects.

Prior to filing its petition for relief, Gibbs Construction, Inc. had 4,060,000 shares of Common Stock issued and outstanding. The plan of reorganization filed by the Company placed the then-existing assets of the Company in a liquidating trust, issued 501,000 shares of Common Stock to such trust, and agreed to issue 1,000,000 shares of preferred stock to its primary creditor, Thacker Asset Management, LLC ("TAM"). TAM thereafter agreed to sell to the Company certain existing contracts, furniture, fixtures and equipment in exchange for an additional 4,000,000 shares of Common Stock. Following these transactions, there were 8,561,000 shares of the Company's Common Stock issued and outstanding, the majority of which were held by TAM.

TAM was unsuccessful in its efforts to bring the Company back to profitability and out of bankruptcy. Accordingly, all operating activities ceased in 2002. On June 26, 2006, the bankruptcy trustee requested and received an Order for Final Decree. On October 5, 2006, the 501,000 shares of common stock issued to the Trust were abandoned, returned to the Company, and thereupon cancelled leaving 8,060,000 shares issued and outstanding.


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Post Bankruptcy Restructuring

On August 15, 2006, for the sum of $50,000.00, Steven L. Sample acquired 4,000,000 shares, or 46.7%, of the 8,561,000 issued and outstanding shares of Common Stock of the Company from TAM and its associates. Mr. Sample also satisfied several outstanding liabilities of the company such as those associated with completing the bankruptcy proceedings, professional costs related to the Company's ongoing SEC reporting requirements and expenses associated with recapitalizing the Company. These expenses totaled $138,862. As consideration for the payment of these expenses, by Mr. Sample, the Company agreed to effect a one for eight reverse stock split, to issue to Mr. Sample an additional 8,117,500 shares of Common stock and 500,000 shares of Preferred stock. For the assistance of Harry K. Myers, Jr., a principal of Baker #1, Ltd., the entity owning TAM, the registrant agreed to issue to him 25,000 shares of preferred stock and 450,000 shares of Common Stock.

In order to further restructure and rehabilitate the Company and to satisfy its obligations to Mr. Sample, its board of directors recommended that its stockholders amend the Articles of Incorporation to effect a one for eight reverse stock split, thereby increasing the number of authorized shares of Common Stock to 150,000,000. The board of directors also recommended the authorization of a series of preferred stock. On February 1, 2007, the Company's shareholders approved these actions and also approved changing the Company's name from Gibbs Construction, Inc. to Acacia Automotive, Inc. These amendments to the Company's Articles of Incorporation were effective February 20, 2007.

Immediately following the approval of these amendments, the Company adopted a stock option plan, which was ratified by the Company's stockholders in November 2007; reserving 1,000,000 shares thereunder. In February 2007, pursuant to such plan, the directors granted 500,000 shares of its Common Stock to Mr. Tony Moorby, who was at that time the Company's president, as well as 15,000 total shares to two then-officers. With these grants, the exercise of warrants to purchase 250,000 shares of Common Stock, the exchange of the preferred stock issued to a creditor in the bankruptcy proceeding for 100,000 shares of Common Stock, and the payment of 10,000 shares of Common Stock to a consultant, there were 11,997,524 shares of Common Stock issued and outstanding on March 31, 2008.

History of Augusta Auto Auction

Augusta Auto Auction, Inc. (the "Augusta Auction") is an automotive auction located in North Augusta, South Carolina, part of the Augusta, Georgia, metropolitan area, and is located three miles from the center of that city. The auction was originally formed and operated for many years in its present location as Hilltop Auto Auction. In 2002 the group of three individuals from which the registrant purchased the auction formed Augusta Auto Auction, Inc. after acquiring it from the owners of Hilltop Auto Auction. The auction consists of a leased premises of approximately five acres, as well as additional rented property directly across the street. The main facility consists of a two-lane auction arena housed within one of two administration buildings that total some 4,900 square feet, three smaller outbuildings consisting of two storage buildings, and a security building also utilized for vehicle check-in and check-out. The additional rented property provides several additional acres of parking and an indoor storage facility of some 1,800 square feet.

In July, 2007, the Company caused to be formed Acacia Augusta Vehicle Auction, Inc., a South Carolina corporation and wholly-owned subsidiary of the Company. ("AAVA"). AAVA was formed for the sole purposes of acquiring the assets of the Augusta Auto Auction, which it did in July of 2007 and operating the auction.

History of Chattanooga Auto Auction

Chattanooga Auto Auction (the "Chattanooga Auction") is an automotive auction located in Chattanooga, Tennessee, and is located approximately ten miles from the center of that city. The auction was originally formed January 24, 1996, as Chattanooga Auto Auction Limited Liability Company and thereafter continued to operate in its present location until its assets were acquired by the Company on December 26, 2009. The property consists of approximately 56 acres, mostly paved, with a two-lane test-driving track and several buildings. The auction arena consists of eight lanes attached to a 25,730 square foot office complex. The property includes a three lane, 14,800 square foot reconditioning center, a 4,500 square foot vehicle check-in center, and a 3,130 square foot five-bay structure intended for use as a mechanical repair center.

In August of 2009, the Company caused to be formed Acacia Chattanooga Vehicle Auction, Inc. a Tennessee corporation and wholly-owned subsidiary of the Company ("ACVA"). ACVA was formed for the sole purpose of acquiring the assets of the Chattanooga Auto Auction Limited Liability Company in December of 2009 and operating the auction.

The Company ceased to operate the Chattanooga auction effective August 31, 2010, its last full month in management and control of that facility and operation. The Company has accounted for the Chattanooga unit as discontinued operations on its consolidated financial statements in the report for the period ended June 30, 2010. (See Subsequent Events in Part II, Item 5 - Other Information.)


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Business of the Auctions

Both the Company's auctions have primarily sold "whole car" vehicles for automotive dealers and commercial concerns, and to a lesser extent, salvage units. Whole car units are usually units in reasonable repair and operating condition, while salvage units are generally, but not always, inoperative and often have been damaged or devalued as a result of exposure to water, fire, collision, theft or otherwise. The Chattanooga Auction also sold vehicles and equipment under a contract with the U.S. Government's General Services Administration (GSA), primarily offering off-lease vehicles and other units for the GSA and other governmental agencies, and the Augusta Auction sells vehicles and equipment under a contract with the United States Marshals Service. Dealers and other qualified buyers attend the weekly auctions and bid on offered units. The highest bidder owns the vehicle, subject to any limiting reserve prices established by the owner/seller of the unit(s). In most cases, the buyers and sellers of the units pick up and deliver them to the Auction property, but the Auction does provide transport services, generally for a fee. Both the Company's auctions also held Friday night auctions that have been open to public bidders in addition to dealers, and occasionally held special sales at other times.

The Auctions generate revenues from fees for services, including buyer fees, seller fees, transportation fees, title fees, draft and floor plan fees, reconditioning fees, and more. Augusta Auto Auction primarily relies upon the efforts of its management for sales and marketing, but anticipates adding additional personnel in the future to increase the scope of those operations. Chattanooga Auto Auction, the larger of the two, had a separate sales and marketing staff, while both auctions also marketed their activities through their employees and commercial media.

Discussion Regarding Costs of Fees Earned (Same as Costs of Goods Sold)

As is generally consistent with reporting in the auto auction industry, the Company has designed its financial reports to reflect total revenues less costs of goods sold (indicated in our financial reports as "Costs of Fees Earned") in arriving at a gross profit before deducting operating expenses. Costs of goods sold include costs similar to "production costs", including certain subscribed services; auctioneers and ringmen; contract labor for lot operations, sale day drivers, arbitration mechanic, and related; outside services, contract towing, pick up and delivery, rental of vehicles or equipment to facilitate operations, direct tools/supplies/equipment; fuel expense for auction operations; maintenance - lot operations; parts for lot operations (as with maintenance); vehicle lot damage associated with lot operations; vehicle transport damage; keys as outside services; title expense; shipping costs, bailout/reimbursement (contra) expenses - particularly relating to repossession operations; marshaling expense; gain/loss on sale of inherited vehicles; ASI costs of good sold - being an account ASI utilized in the software operating system for certain applications (not material); buyer's fee policy allowance; sellers fee policy allowance; vehicles return allowances; miscellaneous operations expenses. The Company's independent accounts have elected to class the salaries, including related taxes, of auction production personnel to the "salary" classification in its consolidated reports.

Discussion Regarding Management Fees

In the same fashion as some other auction holding companies, the Company generates revenues to pay its corporate overhead by assessing fees to its operating units. These fees, designated as intercompany charges or management fees "Management Fees"), appear as "Other Expense" below the Net Ordinary Income line on the operating units' income statements and as income on the parent company's operating statements. In 2009, the Company's Augusta Auto Auction unit, its only operating unit for all but 6 days of that year, generated a profit of $271,892 before assessment of Management Fees at $25,000 per month, and sustaining a net loss of $28,108 for the year after the assessment of Management Fees. In 2010, the Company has continued assessing the same $25,000 monthly Management Fee to its Augusta auction, anticipating an additional assessment at year end, and effective January 1st also allocated a $35,000 monthly Management Fee to its Chattanooga auction unit assessed as its share of the Company's corporate overhead with an anticipation of additional year-end assessments based on performance. As a result of the newness of the Chattanooga operation, the complexities of combining that material acquisition into our management system and consolidated financial reporting, and a final decision on the Management Fee allocation for that auction not being announced to the Company's management until February 2010, the Management Fee for the Chattanooga auction was not yet reflected as an operating expense in that auction's financial reports for Q1 of 2010, although amounts were allocated as Intercompany Charges on the Company's balance sheet during that period with provisions to report those costs going forward. Management Fees, as with all significant intercompany accounts and transactions, are eliminated in consolidation.

Discussion Regarding the Company's First and Second Acquired Operating Entities

With the acquisition of the Augusta Auto Auction on July 10, 2007, the Company commenced operations and conducted its first weekly auction on July 11, 2007, under Acacia's management. The Company's only operations were those operations until the acquisition of its second automotive auction in late December of 2009. With the acquisition of Chattanooga Auto Auction on December 26, 2009, the Company had two operating entities. The Chattanooga action conducted its first weekly auction under the Company's ownership on December 29th. In subsequent events, the Company ceased to operate the Chattanooga auction effective August 31, 2010, its last full month in management and control of that facility and operation. The Company has accounted for the Chattanooga unit as discontinued operations on its consolidated financial statements. (See Subsequent Events in

Part II, Item 5 - Other Information.)


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Operating Results of the Auctions

Three months ended September 30, 2010

Augusta Auto Auction

The Augusta auction incurred, before $75,000 in Management Fees to the parent, a profit of $133,573 on revenues of $492,756 for the three months ended September 30, 2010, compared to a profit of $77,698 on revenues of $371,166 in the same period of 2009. Of that Q3 2010 profit, $21,309 represented non-cash expenses for amortization and depreciation and $1,605 represented interest charges, compared to $19,784 in non-cash expenses for amortization and depreciation and $2,078 in interest charges during the same period of 2009, leaving the auction in a positive cash-flow posture for both periods. Similar to other auction holding companies, the Company assesses Intercompany Charges in the form of Management Fees to its auction operating units to cover the operating overheads of the parent Company. The Management Fee allocation at the Augusta auction unit was set at $25,000 per month in 2010 and 2009. After Management Fees payable to the parent Company during the period, the auction earned a net profit of $58,573 and $2,698 in 2010 and 2009, respectively.

The third quarter of 2010 saw a 1.0% decrease in the number of vehicles sold on a decrease of 9.0% in units offered at our Augusta Auto Auction operation versus the same period in the previous year.

                    Augusta Auto Auction Q3                        2010
          Units Offered vs. Q3 2009                                -9.0 %
          Units Sold vs. Q3 2009                                   -1.0 %
          Conversion Rate Q3 2009                                  49.6 %
          Conversion Rate Q3 2010                                  50.6 %
          Change in Buy/Sell Fee Revenues vs. Q3 2009       15.7% +12.1 %

The Augusta auction continued to display strong growth under Acacia's management versus previous periods. This was evidenced by the auction's Q3 2010 year-over-year buy/see fee revenue increase of 12.1% and overall revenue increase of 32.7% versus Q3 2009 after seeing 4.2% lower overall revenues in Q3 2009 versus 2008.

Chattanooga Auto Auction

The Company discontinued operations at its Chattanooga auction location after August 31, 2010, reporting a loss of $14,667 on those discontinued operations in the three months ended June 30, 2010. The Chattanooga auction did not have comparative financial results to 2009 performance under prior ownership.

The Company has accounted for the Chattanooga unit as discontinued operations on its consolidated financial statements in the report for the period ended June 30, 2010. In September and October of 2010 the Company entered into litigation with the parties related to the sale of the Chattanooga Auction. (See Part II, Item 5 - Other Information - Subsequent Events and Part II Other Information - Legal Proceedings.)

The Parent Company

We incur expenses at the corporate level in addition to those incurred at our auto auction operations. In the three month period ended September 30, 2010, compensation for our executives was about $15,000 per month and our option and warrant expense averaged about $5,500 per month. For the same three-month period the Company incurred a net ordinary loss of approximately $161,700 before booking Intercompany Charges of $75,000 as Management Fees from its Augusta operating unit, resulting in a net loss of approximately $86,700 for the period before adjustments for discontinued operations of $315,000. Corporate G&A expenses accounted for approximately $161,000 in the third quarter of 2010, and included a charge for legal and accounting fees of approximately $46,400, office rental costs of approximately $2,700, non-cash warrant and option expenses of approximately $16,560, and other traditional expenses for travel, convention expenses, equipment lease/rental, postage and shipping, printing and office supplies, insurance, telephone, light heat power, etc.


Table of Contents

Consolidated Operations

The Company's consolidated Q3 net profit of $11,556 compares to a consolidated net loss in the same period of 2009 of $86,602. Of this consolidated Q3 2010 net profit, $60,892 represented a loss from continuing operations, $2,993 represented income from discontinued operations in Chattanooga. $24,754 represented non-cash expenses for amortization and depreciation during the period, and $2,111 represented net interest charges. The Company also incurred a charge of $16,560 in non-cash operating expenses for options and warrants issued under the Company's 2007 Stock Incentive Plan as the ratable expense for Q3 2010 resulting from options and warrants issued in 2006, 2007, 2008, and 2009 but not yet fully vested or exercised. (See Liquidity and Need for Additional Capital.)

Nine months ended September 30, 2010

Augusta Auto Auction

The Augusta auction incurred, before Intercompany Charges, a profit of $441,187 on revenues of $1,457,377 for the nine months ended September 30, 2010, compared to a profit of $297,017 on revenues of $1,168,582 in the same period of 2009. Of that 2010 profit, $63,394 represented non-cash expenses for amortization and depreciation and $7,523 represented interest charges, compared to $126,291 in non-cash expenses for amortization and depreciation and $12,213 in interest charges during the same period of 2009, leaving the auction in a positive cash-flow posture for both periods. Similar to other auction holding companies, the Company assesses Intercompany Charges in the form of Management Fees to its auction operating units to cover the operating overheads of the parent Company. The Management Fee allocation at the Augusta auction unit was set at $25,000 per month in 2010 and 2009, and may be increased or decreased as the Company sees fit. After a deduction for the $225,000 in Management Fees payable to the parent Company during the period, the auction earned a profit of $216,187 and $72,017 in 2010 and 2009, respectively.

The first nine months of 2010 saw a 14.2% increase in the number of vehicles sold and an increase of 6.2% in units offered at our Augusta Auto Auction operation versus the same period in the previous year. This signaled an improvement in the conversion rate in the 2010 period, being the percentage of units sold versus those offered for sale, or one measure of efficiency in the selling process. The Company considered these increases as a noteworthy result in consideration of the fact that it has consistently shown growth before, during, and after the recessionary periods and compared to all years since the Company acquired the auction in July of 2007. In addition, the auction registered a year-over-year increase in buy/sell fee revenues of 15.7% and an increase in overall revenues of 24.7% for the first nine months of 2010 versus the same period in 2009.

                   Augusta Auto Auction Nine Months                 2010
         Units Offered vs. Nine Months 2009                        +6.2%
         Units Sold vs. Nine Months 2009                           +14.2 %
         Conversion Rate Nine Months 2009                           50.0 %
         Conversion Rate Nine Months 2010                           53.9 %
         Change in Buy/Sell Fee Revenues vs. Nine months 2009     +15.7% %

Chattanooga Auto Auction

The Company discontinued operations at its Chattanooga auction location after August 31, 2010, reporting a loss of $14,667 on those discontinued operations in the three months ended June 30, 2010. The Chattanooga auction did not have comparative financial results to 2009 performance under prior ownership.

The Company has accounted for the Chattanooga unit as discontinued operations on its consolidated financial statements in the report for the period ended June 30, 2010. In September and October of 2010 the Company entered into litigation with the parties related to the sale of the Chattanooga Auction. (See Part II, Item 5 - Other Information - Subsequent Events and Part II Other Information - Legal Proceedings.)

The Parent Company

The Company incurs expenses at the corporate level in addition to those incurred at our auto auction operations. Those expenses for the nine month period ended September 30, 2010, included compensation for our executives at about $13,200 per month and our option and warrant expense averaged about $5,500 per month. For the nine-month period we incurred a loss of approximately $399,000 before accounting for Management Fees of $225,000 generated from the Company's operating units, and a net gain of approximately $546,000 on discontinued operations, resulting in a net income of approximately $147,000 for the period. Corporate G&A expenses were approximately $399,000, and included a charge for legal and accounting fees of approximately $68,500, office rental costs of approximately $6,500, non-cash warrant and option expenses of approximately $50,000, and other traditional expenses for travel, convention expenses, equipment lease/rental, postage and shipping, printing and office supplies, insurance, telephone, light heat power, etc.


Table of Contents

Consolidated Operations

Consolidated revenues for the three months and nine months ended September 30, 2010, were up $131,086, or 35.3% and $289,696, or 24.8%, respectively, versus the same periods in 2009, as a result of increased revenue performance at the Company's Augusta auction location.

Total consolidated operating expenses for the three months ended September 30, 2010, versus the same period in 2009 increased $104,817 or 22.9%, and increased $173,186 or 13.6% versus the same nine month period in 2009, generally reflecting the higher costs associated with the higher revenues in the period which more than offset the increased expenses.

The Company posted a loss from continuing operations of $60,892 for the three-month period, while generating an income of $5,375 for the nine month period.. The Company discontinued operations at its Chattanooga auction location . . .

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