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ACCA > SEC Filings for ACCA > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for ACACIA DIVERSIFIED HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for ACACIA DIVERSIFIED HOLDINGS, INC.


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Limited Discussion

The following summarizes the factors affecting the operating results and financial condition of Acacia Diversified Holdings, Inc., formerly known as Acacia Automotive, Inc. This discussion should be read together with the financial statements and the notes to financial statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contain forward-looking statements.

The Company sold its Augusta auction operations, its only revenue producing operations, in the Augusta, Georgia, area on July 31, 2012, and has accounted for those operations as discontinued effective with its Annual Report on Form 10-K for the year ended December 31, 2011 and on its Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 2012. Accordingly, the Company will provide only limited components of its operational information in this report's Discussion and Analysis of Financial Condition and Results of Operations, and has elected to eliminate certain information and comparative results to prior periods in this report, as they would not be reflective of similar results or provide a proper basis for review.

Forward-Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements 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 may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, 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. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Executive Overview

With the acquisition of the Augusta Auto Auction on July 10, 2007, the Company commenced operations at that location and conducted its first weekly auction under the Company's ownership and management on July 11th of that year. The Company's Augusta auction sold vehicles and equipment for automotive dealers and commercial accounts, as well as for the United States Marshals Service. The Company sold the business and related assets of the Augusta auction on July 31, 2012, and first accounted for those operations as discontinued on its Annual Report of Form 10-K for the year ended December 31, 2011.


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The Company acquired its second auto auction in December, 2009, located in Chattanooga, Tennessee. Following disputes with the seller of those operations and certain related parties, the Company discontinued operations at that location effective August 31, 2010, after which the Company and its CEO, the Seller of the Chattanooga auction, and its related parties entered into litigation in September of that same year. The ongoing litigation between the parties was settled on February 28, 2012. Accordingly, the Company considered those as discontinued operations effective August 31, 2010, as first accounted for them as discontinued in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2010. These events were further reported in the Company's Current Report on Form 8-K filed on November 19, 2012, its Amended Annual Report on Form 10-K /A for the period ended December 31, 2009, and its Annual Report on Form 10-K for the period ended December 31, 2010, which described those events in detail, and which reports are incorporated herein by reference. (See Part I, Item 3 - "Legal Proceedings", and Part II, Item 9B - "Other Information")

Discussion Regarding the Company's Consolidated Operating Results

Consolidated Operating Results in 2012 and 2011

In 2012 our consolidated net income was $186,630 compared to a loss of $455,678 in 2011. This 2012 income was primarily due to a net gain from discontinued operations of $909,411 resulting from the sale of the Company's Augusta auction operations, offsetting a loss from continuing operations of $722,781. Our 2012 consolidated costs and expenses were $713,890 compared to $859,606 in 2011.

As a result of the fact that the Company sold the business and related assets of its Acacia Augusta Vehicle Auction subsidiary on July 31, 2012, those operations were have been accounted for as discontinued since the Company's Annual Report on Form 10-K for the year ending December 31, 2011.

Consolidated employee expense, which included the corporate compensation expenses and the compensation expenses at the auction, fell about 22% from 2011, primarily due to the sale and discontinuation of operations in Augusta.

Consolidated general and administrative expense also decreased by about 11% in 2012, reflecting decreased costs associated with operations at Augusta.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in Note 2 of the notes to our financial statements. In general, management's estimates are based on historical experience, information from third party professionals, and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Liquidity and Capital Resources

Our accountants have issued, in their audit report, a going concern opinion reflecting a conclusion that our operations may not be able to continue because of a lack of financial resources.

The Company looks to its operations to provide cash flow and cash return on our investment. However, the operating cash flow from our Augusta operation was not sufficient to support the Parent Company's operations on a consolidated basis as of the close of the fiscal years 2012 and 2011, requiring the intervention of the CEO as stated above. Going forward, the Company must reduce overhead and costs and/or acquire additional operations sufficient to cover the costs of overheads in order to maintain a positive cash flow.

Following the loss of the Augusta auction's line of credit at the Wells Fargo Bank in January 2011, he Company's CEO personally arranged for and guaranteed various interventional financing for the Company to accommodate the Augusta auction's needs and the Parent Company's needs, including direct injections of capital, loans from his immediate family and related parties, and further deferral of his salary and expenses. As a result of those activities by the Company's CEO, Mr. Sample, the auction's financial posture was stabilized and it was able to continue its operations. Over time, the Company increased its deposits as a direct and proximate result of the favorable cash flow of the auction operation until the Augusta auction was sold on July 31, 2012.


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On November 6, 2011, the Company identified a potential candidate for sale of its Augusta auction, and entered into a non-binding Letter of Intent for that purpose. That Letter of Intent was dependent upon the buyers finding success in obtaining financing and other factors. Following protracted delays in the buyers finding suitable financing, a change in the structure of the buyer's group, and changes in the original terms of the sale, the buyer's group completed the purchase on July 31, 2012. Those operations were accounted for as discontinued in the Company's Annual Report on Form 10-K for the year ending December 31, 2011. Following the sale of those assets, the Company had no operations or corresponding operating revenues. As such, the Company will need to raise capital or find new sources of revenues to support its expenses in order to continue as a going concern. (See Part II - Item 9B - "Other Information")

The Company's cash in fiscal year 2012 prior to the sale of its Augusta auction unit on July 31st was provided by management fee revenues assessed to the Company's Augusta auction operations and by personal financial support from the Company's CEO. In that same period, the cash flow from our Augusta operation was sufficient to support those operations, but was not sufficient to also support the Parent Company's operations on a consolidated basis. Our operations in 2012 did not provide sufficient cash flow to cover our corporate activity on an ongoing basis, essentially our executive officers, administrative overhead, and overhead that includes the cost of lawyers and accountants required to be publicly held. Following the sale of its Augusta auction, the Company no longer had the income from its operating subsidiary as a source of revenue to meet its expenses. As a result of those deficiencies and the loss of its revenue-producing operations, the Company will have to raise capital or institute or acquire additional operations with revenues sufficient to cover the costs of overheads. There can be no assurance the Company will be successful in raising capital or identifying appropriate candidates for acquisition of merger, or if it is successful in identifying appropriate candidates, there is no assurance the Company will be successful in completing any acquisitions or mergers.

As of December 31, 2012, the Company had a positive consolidated cash flow of about $189,000 for the year. This resulted from a negative net cash flow of approximately $1,298,000 used in continuing operations, which was offset by a positive net cash flow of about $1,487,000 provided by discontinued activities. The Augusta auto auction was sold for $1,237,500, which was the source of the positive cash flow from discontinued operations.

The Company will require substantial infusions of working capital together with a managed cost structure to insure long-term liquidity. The Company may be compelled to seek infusions of working capital in the form of equity or debt capital, the former being considered most beneficial to the Company, or instituting or acquiring other operations. There is no assurance the Company will be successful in obtaining infusions of capital to fuel its plans, or that it can be successful in identifying or acquiring other operations. The Company's corporate overhead is relatively small by industry standards, and management believes that such expense could ultimately be covered if it were successful in identifying and acquiring new operations.

Stock-Based Compensation

The Company accounts for stock options in accordance with FASB ASC 505, "Equity," and FASB ASC 718, "Compensation-Stock Compensation." Accordingly, stock compensation expense has been recognized in the statement of operations for the year ended December 31, 2012 based on the grant date fair value of the options.

Under ASC 718 and 505, the fair value of options is estimated at the date of grant using a Black-Scholes-Merton ("Black-Scholes") option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option.

The Company adopted the provisions of Statement of Financial Accounting Standards No. 123R "Share-Based Payment" ("SFAS No. 123(R)") to account for stock-based compensation under ASC 718 and ASC 605, Compensation-Stock Compensation. The Codification 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. 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 in 2012 and 2011. ASC 718 requires cash flows resulting from tax deductions from the exercise of stock options in excess of recognized compensation cost (excess tax benefits) to be classified as financing cash flows. This requirement had no impact on our consolidated statement of cash flows in 2012 and 2011, as no options were exercised. During the years ended December 31, 2012 and 2011, respectively, the Company issued no stock awards to employees.

The Company did not issue any stock options in 2012 or 2011. However, in calculating its option and warrant expense, the Company relies upon the following parameters:

Risk-free interest rate - This is the yield on U.S. Treasury Securities posted at the date of grant (or date of modification) having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected life-years - This is the period of time over which the options granted are expected to remain outstanding. Options granted by the Company had a maximum term of ten years. An increase in the expected life will increase compensation expense.


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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 fair values of options issued are being amortized over the respective vesting periods (primarily four years). The amortized cost recognized for the years ended December 31, 2012 and 2011 were $48,577 and $62,396, respectively. Future amortization of the fair value of options is as follows:

Year Amount 2013 $ 24,259 2014 $ 1,700 $ 25,959

                                 Stock Options

                                                  2012                                2011
                                                        Weighted
                                                        Average
                                       Number of        Exercise        Number of       Weighted Average
                                        Shares           Price           Shares          Exercise Price
Options outstanding at beginning of
the year                                  480,000     $       0.43         480,000     $             0.43
Granted                                         -                -               -                      -
Exercised                                       -                -               -                      -
Forfeited or cancelled                    (60,000 )           0.48               -
Outstanding at end of year                420,000             0.43         480,000                   0.43
Exercisable                               388,750     $       0.41     $   407,500     $             0.38

                                 Stock Warrants

The exercisable outstanding stock purchase warrants was 1,826,250 and 1,956,250
for the years ended December 31, 2012 and 2011, with a weighted average exercise
price of $2.15 and 2.13, respectively. The following summarizes the warrant
activity in 2012 and 2011.

                                                     2012                                     2011
                                       Number of        Weighted Average        Number of        Weighted Average
                                        Warrants         Exercise Price         Warrants          Exercise Price
Warrants outstanding at beginning
of the year                              1,956,250     $             2.13         1,956,250     $             2.13
Granted                                          -                      -         1,000,000                   3.00
Exercised                                        -                      -                 -                      -
Forfeited or cancelled                    (130,000 )                 1.77        (1,000,000 )                 3.00
Expired                                          -                      -         1,956,250                      -
Warrants outstanding at end of year      1,826,250                   2.15                                     2.13
Exercisable                              1,826,250     $             2.15         1,956,250     $             2.13


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Liquidity and Need for Additional Capital

Overall, our operations were self-funding in 2012 as a result of the cash generated by the Augusta auction until its sale on July 31, 2012, and the gains related to discontinuing operations. The Company ended the year with a positive net cash flow of $189,260. Through July 31, 2012, the Company had accrued compensation of $528,510 owed to Mr. Steven Sample, the Company's Chief Executive Officer, which remained unpaid as of that date. This deferred compensation represented amounts due to Mr. Sample beginning with January of 2010 and for that entire year, also including all of 2011, and for 2012 through July, those amounts after January 1, 2011, being pursuant to his Employment Agreement. This deferral of compensation for most of three years reflected an accommodation by Mr. Sample to assist the Company's liquidity and cash management through those periods, as he had also done in prior years. Following the closing of the sale of the Augusta auction, the Company paid its obligations to Mr. Sample and others. The Company did not pay Mr. Sample in either preferred or common stock, and does not currently anticipate doing so in the future.

The Company will have to raise capital or acquire new sources of revenues through acquisitions or mergers, and will probably have to raise additional capital to fund those acquisitions. There can be no assurance the Company will be successful in raising capital or in identifying new acquisition of merger targets, and if it is successful in identifying acquisition or merger candidates, there is no assurance the Company can be successful in completing any of those transactions.

The Company is currently engaged in its plan of seeking to grow through acquisitions, mergers or business combinations. To succeed in doing so, the Company will require additional capital, which the Company anticipates raising through sale of Common stock. There is no assurance the Company can be successful in doing so.

The Company did not attempt to secure capital through a private placement of its securities in 2012 or 2011.

The Company anticipates seeking additional capital through the sale of its equity securities, but has not yet determined the size, structure or timing of the contemplated offering, and no guarantees can be made that, should the Company endeavor to sell its equity securities, that it will be able to find willing buyers for such securities. Moreover, as the Company contemplates selling its securities by way of an exemption from registration, there can be no guarantees that the Company will be able to identify suitable buyers to whom the Company may legally offer such securities. The Company would anticipate using the proceeds from any capital raise to acquire new business operations that could provide revenue streams to meet the Company's expenses. The Company has contracted for limited long-term obligations as of December 31, 2012 as set forth in the following table.

                                              Less Than 1                                          More Than 5
  Contractual Obligations        Total            Year          1-3 Years        4-5 Years            Years
Long-Term Debt Obligations     $   63,025     $     39,000     $    24,025     $            -     $           -
Capital Lease Obligations           9,725            9,725               -                  -                 -
Operating Lease Obligations*        7,452            7,452               -                  -                 -
Totals                         $   80,202     $     56,177     $    24,025     $            -     $           -

* The Company rents administrative space in Ocala is on a month-to-month basis at about $600 per month in 2012 and 2011, which has been reflected above as if a lease on an annual basis for one future year.

Financing of Planned Expansions and Other Expenditures

The Company currently has no plans to arrange for financing of planned expansions or other expenditures, but may elect to raise capital through the sale of its securities at a future date. There can be no assurance the Company can be successful in doing so.

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