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ACCA > SEC Filings for ACCA > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for ACACIA DIVERSIFIED HOLDINGS, INC.

Form 10-Q for ACACIA DIVERSIFIED HOLDINGS, INC.


13-Aug-2013

Quarterly Report


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

The Company sold its Augusta auction on July 31, 2012, first accounting for those operations as discontinued effective with its Annual Report on Form 10-K for the year ended December 31, 2011, and has not yet implemented its manufacturing operations in the new Citrus Extracts subsidiary. Accordingly, the Company will provide only limited components of operational information in this Discussion and Analysis of Financial Condition and Results of Operations, and has elected to eliminate certain narrative 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 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 sold its Augusta auction on July 31, 2012, and will have no operating revenues after that date until it commences operations at its new Citrus Extracts, Inc. subsidiary in Fort Pierce, Florida in the latter part of 2013. As such, the Company will need to implement those new sources of revenues to support its expenses in order to continue as a going concern. The Company changed its name from Acacia Automotive, Inc. to Acacia Diversified Holdings, Inc. effective October 18, 2012, to reflect the Company's determination to employ a broader scope and direction in expanding its business model into more diversified service and product offerings, and on July 10, 2013 completed the acquisition on a majority of the assets of Red Phoenix Extracts, Inc. in Fort Pierce, Florida. The Company is also evaluating other merger, acquisition, or business combination opportunities. Accordingly, the Company is now seeking new opportunities for acquisitions, mergers, or other business combinations to expand its business operations and revenue opportunities.. The Company may have to raise additional capital to meet its plans, and there can be no assurance it will be successful in its attempts.

Background

Acacia Diversified Holdings, Inc., formerly known as Acacia Automotive, Inc. was incorporated in Texas on October 1, 1984 as Gibbs Construction, Inc. The Company changed its name from Gibbs Construction, Inc. to Acacia Automotive, Inc. effective February 20, 2007, and subsequently changed its name again from Acacia Automotive, Inc. to Acacia Diversified Holdings, Inc. effective October 18, 2012 in an effort to exemplify the Company's desire to expand into alternative industries as well as more diversified service and product offerings.

In the years following 1984, Gibbs grew to become 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, trading on the NASDAQ Exchange under the symbol GBSE. However, in April, 2000, immediately following a period in which the Federal Reserve raised interest rates six times between June 1999 and May 2000 in an effort to cool the economy to a soft landing, seeing the NASDAQ crash in March 2000, the financial failure of its largest client, and Gibbs' subsequent loss of bonding for its construction projects, Gibbs faced financial insolvency. In conjunction with these events, Gibbs lost its accreditation on the NASDAQ Exchange and was removed to the OTC Pink Sheets. In August of 2006, Thacker Asset Management ("TAM"), the company holding the controlling interest in Gibbs, sold its shares to Acacia's current CEO. Under his new management, the board of directors recommended a restructuring of the Company, including giving effect to a one for eight reverse split of the common stock, increasing the number of authorized shares to 150,000,000 with a par value of $0.001 per share, authorizing a series of preferred stock to 2,000,000 shares, and issuing new common and preferred shares to the Company's CEO and another individual associated with TAM for his assistance in the matters. All the preferred shares were converted to common shares on May 29, 2007, and no preferred shares remain issued or outstanding.


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Initial Restructuring of the Company

On February 1, 2007, at a Special Meeting of Shareholders, the shareholders of the Company ratified all the actions recommended by its board of directors and took the specified actions. In that meeting, the shareholders approved, among other things, amending the Company's articles of incorporation and changing the Company's name from Gibbs Construction, Inc. to Acacia Automotive, Inc. Those amendments to the Company's Articles of Incorporation were effective February 20, 2007. In conjunction with these events, the Company changed its stock-trading symbol to from GBSE to ACCA to better reflect its new name.

Immediately following the approval of these amendments, the Company adopted its Acacia Automotive, Inc. 2007 Stock Incentive Plan, which was ratified by the Company's stockholders in its Annual meeting held November 2007, initially reserving 1,000,000 shares thereunder. In 2012 the Company revised certain aspects of the Plan and approved the Acacia Diversified Holdings, Inc. 2012 Stock Incentive Plan, which remains in effect.

In its restructuring the Company retained its substantial tax loss carryforward, which has grown to become approximately $12,140,000 as of December 31, 2012. (See NOTE 5 to December 31, 2012 Financial Statements - "Income Taxes" in the Company's Annual Report on Form 10-K for the period ended December 31, 2012, which is incorporated herein by reference.)

Background and History of the Company's Operations from 2007 to 2012

From February 2007 through July of 2012, the Company's primary objective had been to identify and acquire going concerns in the automotive auction industry, with a focus on whole vehicle automobiles and light trucks. Whole vehicle refers to vehicles that are frequently in good repair, are roadworthy, and operate under their own power as opposed to salvage units, being damaged vehicles that are often considered total losses for insurance or business purposes.

On July 10, 2007, the Company completed the acquisition of all of the assets and business of Augusta Auto Auction, Inc., an automotive auction located in North Augusta, South Carolina, part of the Augusta, Georgia, metropolitan area, located three miles from the center of that city, issuing 500,000 shares of its common stock and warrants to purchase 50,000 additional shares to its three owners in exchange. The warrants, which have now expired, had a term of five years and an exercise price of $1.00 per share. In addition, the Company issued to two of those individuals separate warrants to purchase 75,000 shares of common stock each as consideration for entering into a non-compete agreement with the Company. Those 75,000 warrants issued to each of those individuals for non-compete agreements gave them the right to purchase 25,000 shares of Common stock at $1.00, $2.00 and $4.00 per share, respectively, for an average aggregate price of $2.33 per share within five years of issuance. Those warrants have now expired as well. The Company formed a wholly-owned South Carolina subsidiary to accept the assets acquired in that transaction, and operated the auction as Acacia Augusta Vehicle Auction, Inc.

In late 2011, after successfully operating the auction since its acquisition, the Company determined that it was in its best interests to sell the Augusta auction and thereafter entered into a Letter of Intent with two individuals for that purpose. Following lengthy delays in the buyers obtaining financing, adding another principal to their core buyer group, and changes to the original terms and conditions of the sale, the transaction was completed on July 31, 2012. Those events were reported in their entirety by the Company on its Current Report on Form 8-K on August 27, 2012, which is incorporated herein by reference.

On December 26, 2009, the Company completed the acquisition of certain assets of Chattanooga Auto Auction Limited Liability Company and thereafter operated it as Acacia Chattanooga Vehicle Auction, Inc., a wholly-owned Tennessee subsidiary of Acacia Automotive, Inc. Disputes arose between the Company and the seller of those assets in September of 2010, and the Company discontinued operations there effective August 31, 2010. The Company first accounted for those as discontinued operations in its Quarterly Report on Form 10-Q for the period ended June 30, 2010. Following litigation in that matter that concluded on February 28, 2012, those events were further reported in the Company's Current Report on Form 8-K filed on November 19, 2012 which described those events in detail, all of which reports are incorporated herein by reference.

Following the discontinuation of operations at Chattanooga in August 2010, and the sale and disposal of the Augusta auction in July 2012, the Company thereafter became actively engaged in the identification and potential acquisition of operating assets and/or businesses across a myriad of industries.

On October 18, 2012, the Company changed its name from Acacia Automotive, Inc. to Acacia Diversified Holdings, Inc. in an effort to exemplify the Company's desire to expand into alternative industries as well as more diversified service and product offerings, and on July 10, 2013 the Company acquired the assets of Red Phoenix Extracts, Inc., after which its primary focus became the operation of Citrus Extracts, Inc., its new wholly-owned Florida subsidiary engaged in the production of citrus byproducts.


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Contemplated Business of Acacia's New Citrus Extracts Subsidiary

Coincidental with the Company's acquisition of the majority of the assets of Red Phoenix Extracts, Inc. on July 10, 2013, including its manufacturing equipment and machinery, trade secrets, processes and name, the Company anticipated also naming its new wholly-owned manufacturing subsidiary Red Phoenix Extracts, Inc. However, the Company determined that the utilization of the same name could create unnecessary confusion and signal that the two corporations were one and the same, which they are not. Consequently, the Company subsequently elected to instead name its new subsidiary Citrus Extracts, Inc.

The Company, through its new wholly-owned Florida subsidiary, Citrus Extracts, Inc., intends to utilize the acquired trade secreted processes and the other manufacturing assets it acquired from Red Phoenix Extracts, Inc. on July 10, 2013 in its bid to fill existing sales contracts, and will simultaneously seek to obtain additional, new clients. The Company is preparing to commence its citrus extract manufacturing operations prior to the beginning of the Florida citrus season - approximately November 1, 2013.

As part of the Red Phoenix assets acquisition, the Company assumed the lease of the facility previously leased and utilized by Red Phoenix, consisting of two adjacent units located at 3495 S. U.S. Highway 1, Bldgs. 12-E and 12-W, Fort Pierce, FL 34982. The Company will pay a combined $4,691 per month for the two leased units, after qualifying for Florida agricultural lease credits, should such qualification continue to occur, to the Florida State Farmer's Market in Fort Pierce, Florida. The Farmers Market is owned and operated by the State of Florida. The leases are subject to additional 1-year lease renewals, that being the maximum extension allowed under Florida law. The leased facility consists of approximately 14,525 square feet and houses the former manufacturing equipment of Red Phoenix acquired in the transaction. The current lease expired at June 30, 2013 and was renewed for the maximum one year term, now set to expire on June 30, 2014.

In conjunction with the acquisition of the Red Phoenix assets, the Company retained two of their employees. Mr. William J. Howe has been retained as President of the Company's Citrus Extracts subsidiary, and Mr. Clarence Shivers has been retained as Vice President of the subsidiary. Mr. Howe previously served as President of Red Phoenix and Mr. Shivers served as its Operations Manager. Those two officers are charged with managing the day to day operations of the new Citrus Extracts subsidiary.

Recent Events and Direction of the Company in 2013

The Company's immediate objective is to commence operations in the citrus extract manufacturing industry by and through its wholly-owned subsidiary, Citrus Extracts, Inc., by employing the manufacturing equipment and other assets acquired from Red Phoenix Extracts. The events related to that acquisition were first reported on the Company's Current Report on Form 8-K dated July 10, 2013, which in incorporated by reference herein. The Company intends to seek and evaluate other acquisitions, business combinations and mergers related to its acquisition of the Red Phoenix assets in an effort to further its entrance into the citrus industry. The Company anticipates that it will need substantial working capital to provide for expenses related to the start-up of its manufacturing operations, extinguishment of certain debt it incurred in conjunction with the acquisition of the Red Phoenix Extracts assets, and to cover general overhead expense in the short term. The Company anticipates that it will required additional capital to meet its short term business objectives. There can be no assurance, however, that the Company will be successful in its efforts to raise capital, or if it is successful that the amounts of capital raised will be sufficient to meet its needs and obligations.

In conjunction with the acquisition of the Red Phoenix assets, the Company had the option to, and did, retain a number of the original Red Phoenix employees, including, among others, its President, William J. Howe, and its Operations Manager, Clarence Shivers, now appointed to serve as President and Vice President, respectively, of Acacia's new Citrus Extracts, Inc. subsidiary. Those two individuals have been charged with managing the day-to-day operations of the Company's new citrus extracts business. However, there can be no assurance the Company will be successful in its management of the new citrus extracts business, or that it will be successful in identifying or successfully acquiring new businesses or expanding its current business. Accordingly, the Company is currently evaluating other merger, acquisition, or business combination opportunities, including opportunities related to the citrus industry and others, but without limiting its evaluations to any particular industry or business sector. There can be no assurance that any such evaluations will result in viable acquisition opportunities, or that any viable acquisition opportunities could result in a formal business combination or relationship. There have been no tentative or definitive plans for acquisition or merger agreements resulting from any evaluations. If the Company were to be successful in attaining any definitive agreement relative to an acquisition or business combination, it may require additional capital to consummate any such transaction. Future acquisitions may be effected for either cash or stock or both. In the event additional capital is required, such capital may be sought through an offering of debt or equity securities of the Company. There can be no assurance that the Company, if compelled to raise additional capital, would be successful in obtaining the requisite amounts.


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Discussion Regarding the Company's Operations

The Company sold its Augusta auction operations in the Augusta, Georgia, area, its only revenue-producing operations, on July 31, 2012, first accounting for those operations as discontinued effective with its Annual Report on Form 10-K for the year ended December 31, 2011. On July 10, 2013 the Company acquired the majority of the assets of Red Phoenix Extracts, Inc. in Fort Pierce, Florida, and intends to implement manufacturing operations at its Citrus Extracts, Inc. manufacturing facility following July, 2013. Until the Company generates revenues at that facility, it will not report on those operations. Accordingly, the Company will provide only limited components of its discussion and analysis of financial condition and results of operations herein, and has elected to eliminate certain narrative 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. (See Item 5. Other Information - "Subsequent Events")

Three months ended June 30, 2013

Operating Results of the Parent Company

The Parent Company incurs expenses at the corporate level in addition to those incurred at our auto auction operations. In the three month period ended June 30, 2013, compensation for our executives was about $9,000 per month and our option and warrant expense averaged about $2,350 per month, incurring a net ordinary loss of approximately $118,000 for the period. Other corporate G&A expenses accounted for approximately $80,000 in the second quarter of 2013, and included a charge for legal and accounting fees of approximately $42,000, office rental costs of approximately $2,000, and other traditional expenses for travel, convention expenses, equipment lease/rental, postage and shipping, printing and office supplies, insurance, telephone, light, heat, power, etc.

Consolidated Operations

After selling its Augusta auction, the Company's only remaining revenue-producing operations, in July of 2012, the Company first accounted for those operations as discontinued beginning with its Annual Report on Form 10-K for the year ending December 31, 2011. As a result of accounting for its operations as discontinued, the Company does not report revenues or costs of fees earned in it current financial reports, but does report certain other operating expenses associated with the Parent Company. Revenues and other components are reflected in the consolidated statements of operations as gains or losses from discontinued operations.

In the three month period ended June 30, 2013, the Company generated a consolidated net loss of approximately $118,000 from continuing operations. The net loss from continuing operations included several components: (i) about $40,000 representing employee compensation; (ii) about $3,000 representing expenses for amortization and depreciation; (iii) about $77,000 in general and administrative expense, which included a charge of about $7,000 in non-cash operating expenses for options and warrants issued under the Company's 2007 Stock Incentive Plan as the ratable expense for the period resulting from options and warrants issued since 2007 but not yet fully vested or exercised; and, (iv) interest expense of about $2,000.

Six months ended June 30, 2013

Operating Results of the Parent Company

The Parent Company incurs expenses at the corporate level in addition to those incurred at our auto auction operations. In the six month period ended June 30, 2013, compensation for our executives was about $13,000 per month and our option and warrant expense averaged about $2,350 per month, incurring a net ordinary loss of approximately $315,000 for the period. Other corporate G&A expenses accounted for approximately $213,000 in the first six months of 2013, and included a charge for legal and accounting fees of approximately $132,000, office rental costs of approximately $4,000, and other traditional expenses for travel, convention expenses, equipment lease/rental, postage and shipping, printing and office supplies, insurance, telephone, light, heat, power, etc.

Consolidated Operations

After selling its Augusta auction, the Company's only remaining revenue-producing operations, in July of 2012, the Company first accounted for those operations as discontinued beginning with its Annual Report on Form 10-K for the year ending December 31, 2011. As a result of accounting for its operations as discontinued, the Company does not report revenues or costs of fees earned in it current financial reports, but does report certain other operating expenses associated with the parent company. Revenues and other components are reflected in the consolidated statements of operations as gains or losses from discontinued operations.


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In the six month period ended June 30, 2013, the Company generated a consolidated net loss of approximately $315,000 from continuing operations.

The net loss of about $315,000 from continuing operations included several components: (i) about $102,000 representing employee compensation; (ii) about $5,500 representing expenses for amortization and depreciation; (iii) about $4,000 representing interest expense; and, (iv) about $213,000 in general and administrative expense, which included a charge of about $14,000 in non-cash operating expenses for options and warrants issued under the Company's 2007 Stock Incentive Plan as the ratable expense for the period resulting from options and warrants issued since 2007 but not yet fully vested or exercised.

Liquidity and Capital Resources

Our accountants have issued, in their prior 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's liquidity in 2012 was provided by management fee revenues assessed to the Company's Augusta Auto Auction operations and by personal financial support from the Company's CEO. The Company's liquidity during the second three months of 2012 was again provided by revenues of the Augusta operations assessed as fees by the parent company, and again by personal financial support from the Company's CEO.

Until July 31, 2012, the Company looked to its operations to provide cash flow and cash return on our investment. During the first six months of 2012, 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 the second quarter of 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 discontinuation of its remaining auction operations in July, 2012, 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 will have to institute or acquire additional operations with revenues sufficient to cover the costs of overheads.

Following the divestiture of the Company's remaining auction operations after the sale of its Augusta auction, the Company no longer had any operating or revenue-producing assets. As a result of that divestiture and the lack of its revenue-producing operations, the Company will have to raise capital through the sale of its debt or equity securities in an effort to institute or acquire additional operating assets with revenues sufficient to cover the Company's operating expenses. The Company is currently evaluating opportunities for business combinations or acquisitions. There can be no assurances that any such opportunities will present viable revenue-producing assets for the Company, or that the Company will be able to raise sufficient capital to acquire or combine with any such opportunity.

As of June 30, 2013, the Company had a negative consolidated net cash flow of about $185,000 for the year to date. This resulted from a negative net cash flow of approximately $166,000 used in operating activities, and a negative net cash flow used in financing activities of about $19,000. The negative cash flow of about $166,000 used in operating activities represented operating losses by the Company resulting from continuing overheads related to 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, but the Company but no operating revenues to offset those costs. The negative cash flow of about $19,000 used in investing activities reflected cash flow used in continuing activities of about that same amount resulting from payments made on notes and lease borrowings. The Company had no revenue-producing operations in the first six months of 2013 to offset those activities. As such, the liquidity of the Company in the first six months of 2013 was provided by capital generated from the sale of the Augusta auction assets and by personal financial support from the Company's CEO.

In subsequent events, the Company acquired substantially all of the assets of Red Phoenix Extracts, Inc. in Fort Pierce, Florida on July 10, 2013. The Company plans to implement citrus byproduct manufacturing operations at the same location beginning in the fall of 2013, which will provide a new source of revenues for the Company, again as "management fees, through its Florida subsidiary named Citrus Extracts, Inc. (See Note 2 to Financial Information - "Subsequent Events")

In additional subsequent events, the Company's Board of Directors authorized a private placement offering of its common stock effective August 1, 2013 to raise up to $1,000,000 in cash for operating capital to fund its overheads and its new citrus subsidiary operations. There can be no assurance the Company will be successful in raising all or any part of the amount it is seeking in that offering. (See Item 5. Other Information - "Subsequent Events")


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Cash Balances

The Company will require substantial infusions of working capital or a substantial increase in the cash generated from new operations to insure long-term liquidity, and may seek infusions of working capital in the form of equity or debt capital, the former being considered most beneficial to the Company. There is no assurance the Company will be successful in obtaining infusions of capital to fuel its growth.

In additional subsequent events, the Company's Board of Directors authorized a private placement offering of its common stock effective August 1, 2013 to raise up to $1,000,000 in cash for operating capital to fund its overheads and its new citrus subsidiary operations. There can be no assurance the Company will be successful in raising all or any part of the amount it is seeking in that offering. (See Item 5. Other Information - "Subsequent Events")

Financing of Planned Expansions and Other Expenditures

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