Acacia Diversified Holdings, Inc. - FORM 10-Q

Attached files

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EX-32.1 - Acacia Diversified Holdings, Inc.	ex32-1.htm
EX-31.1 - Acacia Diversified Holdings, Inc.	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

	(Mark One)

	x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2010

	r	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

		For the transition period from __________________ to ______________

Commission file number: 1-14088

Acacia Automotive, Inc.

(Exact name of small business issuer as specified in its charter)

Texas
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

3515 East Silver Springs Blvd. - #243 Ocala, FL	34470
(Address of principal executive offices)	(Zip Code)

(877) 513-6294

(Registrant's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes r No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (Check one):

Large accelerated filer r		Accelerated filer r

Non-accelerated filer r		Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes r No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No r

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of June 30, 2010: 12,082,524.

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TABLE OF CONTENTS

		Page
PART I. Financial Information

Item 1.	Financial Statements	F-1
Item 1B.	Unresolved Staff Comments	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1
Item 4(T).	Controls and Procedures	12

PART II. Other Information

Item 5.	Other Information	14
Item 6.	Exhibits	15

Signatures		16

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ACACIA AUTOMOTIVE, INC.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
Cash	$	9,957		$	21,035
Certificate of Deposit (Restricted)		150,152			150,041
Accounts receivable		580,703			208,546
Deposits and prepaid expenses		12,344			18,006
Assets of discontinued operations		-			250,416
Total Current Assets		753,156			648,044
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $121,202 and $92,005 in 2010 and 2009, respectively		173,211			185,487

OTHER ASSETS
Goodwill		427,929			427,929
Customer list and Non-Compete Agreement, net of amortization of $378,480 and $359,884, respectively		262,654			281,250
Total Other Assets		690,583			709,179
TOTAL ASSETS	$	1,616,950		$	1,542,710

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft	$	155,652		$	20,400
Accounts payable		505,438			318,814
Accrued liabilities		248,424			354,622
Line of credit		100,000			265,000
Capital lease obligations, current portion		19,411			31,362
Liabilities of discontinued operations		150,000			240,461
Total Current Liabilities		1,178,925			1,230,659
NONCURRENT LIABILTIES
Capital lease obligations, less current portion		43,084			47,320
TOTAL LIABILITIES		1,222,009			1,277,979
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 150,000,000 shares authorized; 12,082,524 shares issued and outstanding.		12,082			12,082
Additional paid-in capital		11,310,788			11,277,668
Retained deficit		(10,927,929	)		(11,025,019	)
TOTAL STOCKHOLDERS' EQUITY		394,941			264,731

TOTAL STOCKHOLDERS' EQUITY AND LIABILITES	$	1,616,950		$	1,542,710

The accompanying notes are an integral part of these financial statements.

F-1

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ACACIA AUTOMOTIVE

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Unaudited)			(Not Reviewed)			(Unaudited)			(Not Reviewed)
REVENUES	$	548,568		$	476,366		$	956,626		$	798,016
OPERATING EXPENSES
Cost of services (exclusive of depreciation and amortization)		181,000			127,265			226,774			208,616
General and administrative expenses		329,036			278,372			607,838			495,637
Loss on sale of assets		-			2,749			-			3,510
Depreciation and amortization		24,570			55,607			47,793			109,783
Total operating expenses		534,606			463,993			882,405			817,546
Operating income (loss) before other income (expense) and income taxes		13,962			12,373			74,221			( 19,530	)
Interest income		58			775			113			1,219
Interest expense		(3,281	)		(5,781	)		(8,067	)		( 11,766	)
Total other income (expense)		(3,223	)		(5,006	)		(7,954	)		(10,547	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		10,739			7,367			66,267			(30,077	)
Discontinued operations:
Loss from operations from discontinued Chattanooga subsidiary, net of income taxes		(14,667	)		-			(188,069	)		-
Gain on disposal of Chattanooga subsidiary, net of income taxes		218,892			-			218,892			-
INCOME FROM DISCONTINUED OPERATIONS		204,225			-			30,823			-
Income Tax (benefit) expense		-			-			-			-
NET INCOME (LOSS)	$	214,964		$	7,367		$	97,090		$	(30,077	)
BASIC AND FULLY DILUTED
INCOME PER SHARE
Income (Loss) from continuing operations	$	0.00		$	0.00		$	0.00		$	0.00
Income (Loss) from discontinued operations, net of income taxes	$	0.02		$	0.00		$	0.01		$	0.00
TOTAL	$	0.02		$	0.00		$	0.01		$	-
Weighted Average Number of Common Shares Outstanding		12,082,524			12,017,524			12,082,524			12,017,524

The accompanying notes are an integral part of these financial statements.

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ACACIA AUTOMOTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

	2010			2009
	(Unaudited)			(Not Reviewed)

Cash Flow From Operating Activities
Net Income (loss)	$	97,090		$	(30,077	)
Less income (loss) from discontinued operations, net of income taxes		(30,823	)		-
Net income (loss) before discontinued operations		66,267			(30,077	)
Adjustment to reconcile net loss before discontinued operations to net cash provided by( used in) operating activities:
Depreciation and amortization		47,793			109,783
Loss on disposal of asset		-			3,510
Stock options and warrants issued for services		33,120			32,354
Changes in Operating Assets and Liabilities
Certificate of Deposit (restricted)		(111	)
Accounts Receivable		(372,157	)		16,925
Accounts Payable		186,624			(62,262	)
Accrued Liabilities		(106,197	)		(27,845	)
Employee receivable		-			-
Due to (from) Stockholder		-			(9,938	)
Prepaid Expense		5,662			1,681
Cash provided by (used in) continuing activities		(138,999	)		34,131
Cash provided by (used in) discontinuing activities		(237,351	)		-
Net Cash Flow Provided by Operating Activities		(376,350	)		34,131
Cash Flow Provided by (Used from) Investing Activities
Restricted CD interest earned (withdrawn)		-			6,530
Proceeds from sale of equipment		-			9,640
Purchase of Equipment/Leasehold Improvements		(16,921	)		(73,787	)
Cash provided by (used in) continuing activities		(16,921	)		(57,617	)
Cash provided by (used in) discontinuing activities		(77,166	)		-
Net Cash Flow Provided by (Used in) Investing Activities		(94,087	)		(57,617	)
Cash Flow Provided (Used) by Financing Activities
Cash Overdraft		135,252			-
Borrowings and repayments from/on line of credit and revolver		(165,000	)		(5,000	)
Capital lease borrowings (payments)		(16,187	)		50,819
Cash provided by (used in) continuing activities		(45,935	)		45,819
Cash provided by (used in) discontinuing activities		505,294			-
Net Cash Flow Provided (Used by) Financing Activities		459,359			45,819
Change in Cash		(11,078	)		22,333
Cash at Beginning of Period		21,035			5,586
Cash at End of Period	$	9,957		$	27,919
Supplemental Cash Flow Disclosures
Cash paid during year for:
Interest	$	8,067		$	11,766
Non-Cash Investing and Financing Activities
Additional paid-in capital	$	33,120		$	32,354
Legal fees payable		(630	)		(620	)
Accounts payable		(4,576	)		(3,344	)
Officer salaries payable		-			(4,133	)
Directors fees payable		(27,914	)		(24,257	)
	$	-		$	-

The accompanying notes are an integral part of these financial statements.

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ACACIA AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010 AND 2009

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Acacia Automotive, Inc. (“Acacia” or the “Company”) is engaged in acquiring and operating automotive auctions, including automobile, truck, equipment, boat, motor home, RV, motorsports, and other related vehicles.

BASIS OF PRESENTATION

The Company has elected to prepare its financial statements in accordance with generally accepted accounting principles (United States) with December 31st as its year-end. The financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for annual financial information and with the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a full presentation have been included. All such adjustments are of a normal and recurring nature.

CONSOLIDATION

The Company owns 100% of the capital stock of Acacia Augusta Vehicle Auction, Inc. The consolidated financial statements include the accounts of the Company and Acacia Augusta Vehicle Auction, Inc. dba / Augusta Auto Auction, Inc. The Company also owns 100% of the capital stock of Acacia Chattanooga Vehicle Auction, Inc. Following December 26, 2009, the Company’s consolidated financial statements include the accounts of the Company, Acacia Augusta Vehicle Auction, Inc., and Acacia Chattanooga Vehicle Auction, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. (See Note 2 – Subsequent Events)

NOTE 2 – SUBSEQUENT EVENTS

On July 10, 2007, Acacia Automotive, Inc. (the “Company”) purchased certain assets and liabilities of Augusta Auto Auction, Inc. through its wholly-owned subsidiary Acacia Augusta Vehicle Auction, Inc., which operates an auto auction in the Augusta, Georgia area from a leased facility located in North Augusta, South Carolina. The purchase was accounted for under the purchase method of accounting. The results of operations for the Acacia Augusta Vehicle Auction, Inc. business are included in these financial statements from the date of the purchase. That auction also does business under the trade name Augusta Auto Auction, Inc.

On August 31, 2009, the Company entered into a Management Agreement with the owners of Chattanooga Auto Auction Limited Liability Company, which provided for the Company to temporarily act as manager of that auction for the Seller from September 1, 2009, through December 25, 2009, as it awaited the transfer of ownership of the assets it was to acquire in an Asset Purchase Agreement (see below). Under the terms of the Management Agreement, the Company was to receive 50% of the net profits of the auction for the period. However, the Company soon entered into a verbal agreement with the Seller that it would forego the right to any portion of the profits during that period if the Seller would agree to fund certain maintenance, repair, and improvements to the physical plant and premises prior to the Company’s assumption of a lease thereon. Additionally, there was no accounting of the operations of the Seller for that period provided to the Company until approximately April 1, 2010. The final result was that there were no profits shared.

On August 31, 2009, simultaneous with execution of the Management Agreement, the Company executed documents to purchase certain assets and the related business of Chattanooga Auto Auction Limited Liability Company through the Company’s newly-formed wholly-owned subsidiary, Acacia Chattanooga Vehicle Auction, Inc., which then began operating the auction from a leased facility in Chattanooga, Tennessee following the transfer of assets on December 26, 2009. The Company commenced operations at that location under the name of Acacia Chattanooga Vehicle Auction, Inc. dba/Chattanooga Auto Auction, and the acquisition was accounted for under the purchase method of accounting. The results of operations for the Acacia Chattanooga Auto Auction, Inc. business have been included in the Company’s financial statements beginning with the Annual Report 10-K for the period ended December 31, 2009.

F-4

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In an 8-K filed on September 16, 2009, the Company included copies of all the execution documents and related forms of other documents available as of the execution of the Asset Purchase Agreement and the Management Agreement on August 31, 2009, including anticipated financing agreements, lease, etc., all of which were to be executed at a final closing effective December 26, 2009.

In a subsequent 8-K filed 12-30-09, the Company indicated that the acquisition transaction had closed on the date planned, that the line of credit was increased from $1.5 to $2.0 million with the terms of that credit line eased to allow the Company to use the funds for “general corporate purposes in the normal course of business”, and also referenced that the original transaction documents were filed with the 8-K dated 9-16-09. The Company, through an unintentional oversight, failed to include certain changed or updated documents with that 8-K, and has since filed a Current Report on Form 8-K/A dated October 19, 2012 including those updated documents.

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.)

This report supplements information provided in the Quarterly Report on Form 10-Q for the three months and six months ended June 30, 2009 filed on November 16, 2009 by Acacia Diversified Holdings, Inc. f/k/a Acacia Automotive, Inc. in order to fully disclose information then-disclosed in its financial results and in its Management’s Discussion and Analysis of Financial Condition and Results of Operations. On July 26, 2012, the shareholders of the Company voted to change the name of the Company to Acacia Diversified Holdings, Inc.

We have determined that our previously reported financial results for the three months and six months ended June 30, 2009 were not reviewed by the Company’s auditors. However, by reason of unintentional oversight, the Company erroneously failed to label those results as having been “Not Reviewed”. Notwithstanding the foregoing, the annual financial results of the Company were audited in 2009 and 2008.

Moreover, we have further determined that management's discussion provided in various parts of the quarterly report was not adequate to provide an accurate basis for review.

Accordingly, we have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of these errors, and have labeled certain 2009 financial information as “Not Reviewed” where applicable.

Management does not consider any of the previously reported financial information to have contained material deficiencies. As such, this report does not reflect any material changes to the financial statements of the Company, but is set forth to properly reflect previous periods in which the quarterly financial statements were not reviewed by the Company’s outside auditors.

NOTE 3 – GOING CONCERN

As of December 31, 2009, the Company had limited disposable cash and its revenues were not sufficient to and cannot be projected to cover operating expenses and expansion by the Company. These factors raise substantial doubt as to the ability of the Company to continue as a going concern. Management’s plans include attempting to find additional operational auto auctions to buy and raising funds from the public through a stock offering. Management intends to make every effort to identify and develop sources of funds. There is no assurance that Management’s plans will be successful.

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Item 1B. Unresolved Staff Comments

The Company is in receipt of a comment letter from the Securities and Exchange Commission dated November 22, 2010 (the “Comment Letter”). The Comment Letter propounds thirty (30) comments relating to the Company's: (a) Annual Report on Form 10-K filed for the period ending December 31, 2009; (b) Quarterly Report on Form 10-Q for the period ending September 30, 2009; (c) Quarterly Report on Form 10-Q for the period ending March 31, 2010; and (d) Current Report on Form 8-K dated October 25, 2010. The first amendment on Form 10-K/A, the first amendment on Form 10-Q/A for the period ended September 30, 2009, the first amendment on Form 10-Q/A for the period ended March 31, 2010, and the first amendment to Form 8-K/A for events first reported on September 16, 2009 are filed concomitant herewith in response to the Comment Letter in connection with the presentment of our financial statements, management's discussion and analysis thereof, controls and procedures and information presented on Forms 8-K.

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.

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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.

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.

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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.

Business of the Auctions

Both the Company’s auctions primarily sell “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 sells 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 hold a Friday night auction that is open to public bidders in addition to dealers, and occasionally holds 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, has a separate sales and marketing staff, while both auctions also market 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.

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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, 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 has 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.)

Operating Results of the Auctions

Three months ended June 30, 2010

Augusta Auto Auction

The Augusta auction incurred, before Intercompany Charges, a profit before Management Fees paid to the parent Company of $138,452 on revenues of $551,828 for the three months ended June 30, 2010, compared to a profit of $156,368 on revenues of $476,366 in the same period of 2009. Of that Q2 2010 profit, $21,726 represented non-cash expenses for amortization and depreciation and $2,142 represented interest charges, compared to $53,434 in non-cash expenses for amortization and depreciation and $4,639 in interest charges during the same quarter of 2009, leaving the auction in a positive cash-flow posture for both periods. The decrease in profits in the comparative quarter versus 2009 resulted primarily from an increase of $118,000, or 93%, in the costs of goods sold but a reduction of $22,000, or 12%, in ordinary expenses. The increase in costs of goods sold were primarily the result of a $117,337 increase in the costs of outside services and subcontract towing associated in large part with the sale of a substantial number of travel trailers in the period. After Management Fees paid to the parent Company, the Augusta auction incurred a profit of $63,452 for the period, versus an equivalent profit of $81,368 after an allowance for Management Fees in the same period of 2009.

The second quarter of 2010 saw an 11.5% increase in the number of vehicles sold and an increase of 8.3% in units offered at our Augusta Auto Auction operation versus the same period in the previous year. The Company considered this 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 previous periods since the Company acquired the auction in July of 2007.

Augusta Auto Auction Q2	2010
Units Offered vs. Q2 2009	+ 8.3	%
Units Sold vs. Q2 2009	+11.5	%
Conversion Rate Q2 2009	51.2	%
Conversion Rate Q2 2010	52.7	%
Change in Buy/Sell Fee Revenues vs. Q2 2009	+5.6	%

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The Augusta auction continued to display strong growth under Acacia’s management as evidenced by the auction's 2010 and 2009 Q2 year-over-year revenue increases of 15.8% and 20.97% in 2010 and 2009, respectively, versus the same period in previous years, despite a continuing weak general economy and comparatively poor performance by auto manufacturers and retailers.

Similar to other auction holding companies, the Company assesses Intercompany Charges, in the form of Management Fees or otherwise, 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 a deduction for the $75,000 in Management Fees payable to the parent Company during the period, the auction earned a net profit of $63,452 and $81,368 in 2010 and 2009, respectively.

Chattanooga Auto Auction

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 and Part II, Item 5 - Other Information.)

Operating Results of 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 June 30, 2010, we incurred a loss of approximately $9,700 which included compensation for our executives as shown under Employee Compensation of about $20,000 per month and non-cash option and warrant expense, which is amortized, of about $5,500 per month. Corporate G&A expenses accounted for approximately $123,000 in the second quarter of 2010, and included a charge for legal and accounting fees of approximately $31,449, office rental costs of approximately $3,725, 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

The Company's consolidated Q2 net income of $214,964 compares to a consolidated net income in the same period of 2009 of $7,367. Of this consolidated Q2 2010 net income, $204,225 represented a gain from discontinued operations in Chattanooga, $24,570 represented non-cash expenses for amortization and depreciation, and $3,223 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 Q2 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, and Subsequent Events in Part II, Item 5 - Other Information)

Operating Results of the Auctions

Six months ended June 30, 2010

Augusta Auto Auction

The Augusta auction incurred, before Intercompany Charges as Management Fees, a profit of $307,614 on revenues of $964,621 for the six months ended June 30, 2010, compared to a profit of $219,319 on revenues of $797,416 in the same period of 2009. Of that 2010 profit, $42,085 represented non-cash expenses for amortization and depreciation and $5,919 represented interest charges, compared to $106,507 in non-cash expenses for amortization and depreciation and $10,135 in interest charges during the same period of 2009, leaving the auction in a positive cash-flow posture for both periods. The increase in profits in the period were primarily the result of $167,000 in higher revenues versus a $128,000 increase in the costs of goods sold (see discussion in “Three months ended June 30, 2010” above), and a decrease in ordinary expenses of $48,000 versus the year earlier period. The Company assessed Management Fees against the Augusta auction in the amount of $150,000 for the six months ended June 30, 2010, resulting in a net profit of $157,614 for the period after other gain or loss.

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The first six months of 2010 saw a 17.3% increase in the number of vehicles sold and an increase of 13.4% in units offered at our Augusta Auto Auction operation versus the same period in the previous year. The Company considered this 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 previous periods since the Company acquired the auction in July of 2007.

Augusta Auto Auction Six Months	2010
Units Offered vs. Six Months 2009	+ 13.4	%
Units Sold vs. Six Months 2009	+17.3	%
Conversion Rate Six Months 2009	51.1	%
Conversion Rate Six Months 2010	52.8	%
Change in Buy/Sell Fee Revenues vs. Six months 2009	+22.3	%

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 2009 and remained the same through Q2 2010. After a deduction for the $150,000 in Management Fees payable to the parent Company during the periods, the auction earned a profit of $157,614 and $69,319 in 2010 and 2009, respectively.

Chattanooga Auto Auction

Operating Results of the Parent Company

Expenses incurred at the corporate level in addition to those incurred at our operations at our auto auction operations for the six month period ended June 30, 2010, included compensation for our executives at about $15,000 per month and non-cash our option and warrant expense averaged about $5,500 per month. For the same six-month period we incurred a loss of approximately $123,000. Corporate G&A expenses accounted for all of that loss, and included a charge for legal and accounting fees of approximately $23,100, office rental costs of approximately $3,725, non-cash warrant and option expenses of approximately $33,120, 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

The Company's consolidated six months net income of $97,090 compares to a consolidated net loss in the same period of 2009 of $30,077. Of this consolidated net income, $30,823 represented a gain from discontinued operations in Chattanooga, $47,793 represented non-cash expenses for amortization and depreciation, and $7,954 represented net interest charges. The Company also incurred a charge of $33,120 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 in 2006, 2007, 2008, and 2009 but not yet fully vested or exercised.

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The Company generated a negative cash flow from operations of $376,350 compared to a positive operating cash flow of $34,131 in the same period of 2009; a negative cash flow of $94,087 from investing activities in 2010 versus a negative cash flow of $57,617 from investing activities in 2009; and a positive cash flow from financing activities of $459,359 in 2010 versus $45,819 in the same period of 2009, resulting in an overall negative net cash flow of $11,078 for the six months ended June 30, 2010 versus a positive net overall cash flow of $22,333 in the same period of 2009. The operating cash flow was benefitted by a increase in accounts receivable of $372,157, but which does not signal a shortcoming in that area. Frequently, when the Company holds an auction near the end of a quarter, our receivables and payables will be large compared to prior quarters or as a ratio of receivables or payables to revenues for that quarter and the other quarters. Normally, receivables and payables for a given auction are substantially liquidated within days of the auction process, but appear distorted when occurring close to the end of an accounting period. When there are especially large sales occurring in conjunction with that timing, the results appear especially skewed. While this does not signal any lack of efficiency or operating shortcoming, it can nonetheless distort financial reporting for a short term in these regards, (See Liquidity and Need for Additional Capital and Subsequent Events in Part II, Item 5 - Other Information)

Discussion Regarding EBITDA

EBITDA, as presented herein, is a supplemental measure of our performance that is not required by, or presented in accordance with, generally accepted accounting principles in the United States, or GAAP. It is not a measurement of our financial performance under GAAP and should not be considered as a substitute for net income (loss) or any other performance measures derived in accordance with GAAP or as substitutes for cash flow from operating activities as measures of our liquidity.

EBITDA is defined as net income (loss), plus interest expense net of interest income, depreciation and amortization. Use of EBITDA as an evaluation of performance is commonly used in the vehicle auction industry.

Management uses the EBITDA measure to evaluate our performance, to compare our performance to major auction companies' results, and to evaluate our results relative to certain incentive compensation targets. Management believes its inclusion is appropriate to provide additional information to investors for purposes of comparisons. EBITDA has limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of the results as reported under GAAP. While the Company believes that EBITDA may be a useful tool in comparing the financial performance of the Company to other auto auction entities, it may not be comparable to similarly titled measures reported by other companies.

The following tables represent the consolidated EBITDA results for the Company during the second quarter of 2010 and 2009 and for six months 2010 and 2009:

	Three Months Ended
	June 30, 2010 (Unaudited)		June 30, 2009 (Not reviewed)
Net income (loss)	$	214,964	$	7,367
Add back:
Income taxes		-		-
Interest expense, net of interest income		3,223		5,006
Depreciation and amortization*		24,570		55,607

EBITDA	$	242,757	$	69,780

* In addition to the non-cash expenses for depreciation and amortization, we accrued for the issuance of stock options and warrants $16,560 in Q2 of 2010 and $16,177 in Q2 2009, which is included with depreciation and amortization (above).

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	Six Months Ended
	June 30, 2010 (Unaudited)		June 30, 2009 (Not Reviewed)
Net income (loss)	$	97,090	$	(30,077	)
Add back:
Income taxes		-		-
Interest expense, net of interest income		7,954		10,547
Depreciation and amortization*		47,793		109,783

EBITDA	$	152,837	$	90,253

*In addition to the non-cash depreciation and amortization, we accrued for the issuance of stock options and warrants $33,120 in 2010 and $32,354 in 2009, which is not included with depreciation and amortization as indicated above.

Discontinued Operations

For the three months ended June 30, 2010, the Company booked a profit from operations of $10,379, while reporting a loss of $14,667 on discontinued operations at its Chattanooga auction location after August 31, 2010. As a result of the required accounting in the same period, the Company gained $218,892 on disposal of the Chattanooga subsidiary assets for a net income of $214,964.

For the six months ended June 30, 2010, the Company booked a profit from operations of $66,267 while booking a loss of $188,069 on discontinuation of operations at the Chattanooga subsidiary and a gain of $218,892 from disposal of the Chattanooga subsidiary for a net income of $97,090. Consolidated revenues for the three months and six months ended June 30, 2010, were up $72,202, or 15.2% and $158,610, or 19.9%, respectively, versus the same periods in 2009, as a result of increased sales performance at the Company’s Augusta auction location. (See Subsequent Events in Part II, Item 5 - Other Information)

Total consolidated operating expenses for the six months ended June 30, 2010, versus the same period in 2009 increased $64,859 or 7.9%, generally reflecting $73,768 in increased expense associated with transporting more than 200 travel trailers to the Augusta auction location for sale in the second quarter. Most of those trailers were sold in Q2, generating higher revenues in the period to more than offset the increased expenses.

Liquidity and Need for Additional Capital

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’s liquidity in 2007 and 2008 was provided through the closing of private placements of common stock in the amounts of $1,112,500 and $130,000 respectively, and from the Company's auction operations since July 10, 2007.

As of June 30, 2010, the Company has accrued salaries of $241,942 owed to Mr. Steven Sample, the Company’s Chief Executive Officer and Mr. Tony Moorby, the Company’s President and Chief Operating Officer until December 31, 2008. This deferral of salary is not pursuant to any employment agreement but reflects an accommodation by Messrs. Sample and Moorby to assist the Company’s cash management in 2008 and beyond, and Mr. Sample’s accommodations for periods thereafter. The Company does not anticipate paying either Mr. Moorby or Mr. Sample in either Preferred or Common stock.

On an operating basis, the Company was cash flow positive as a consolidated entity in 2009, largely as a result of the operating and financial successes at its Augusta auction unit. The Company’s cash in fiscal year 2009 was provided mostly by Management Fee revenues assessed to the Company's Augusta Auto Auction operations as Intercompany Charges. The Company’s cash in fiscal year 2010 has been provided mostly by Management Fee revenues assessed to the Company's Augusta and Chattanooga Auto Auction operations as Intercompany Charges. In both years the Company’s cash was augmented to a lesser extent by personal financial support from the Company’s CEO. The Company has not attempted to secure capital through a private placement of its securities in 2009 or 2010.

We look to our operations to provide the cash flow and cash return on our investment. The operating cash flow from our Augusta operation has proven sufficient to support those operations in the current manner, and had been sufficient to also support the Parent Company’s operations on a consolidated basis as of the close of the fiscal year 2009. With the addition of the new Chattanooga auction operation, cash flow has not been sufficient at that auction to support its own operations, and in conjunction with the Augusta auction is not currently able to support the Company’s consolidated operations. Going forward, the Company will have to reduce overheads, increase cash flow from operations, and/or acquire additional operations sufficient to cover the costs of overheads in order to maintain a positive cash flow. This will depend in large part on the success or lack of success of operations at the new Chattanooga auction combined with continuing successful operations at the Augusta auction.

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The Parent Company’s liquidity in 2009 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 had a positive operating cash flow as a consolidated entity in 2009, largely as a result of these factors. The Parent Company’s liquidity in the first and second quarters of 2010 was provided by management fee revenues assessed to both its operating auction units and by personal financial support of the Company’s CEO.

The Company’s liquidity in 2010 will be supplemented by a $300,000 line of credit negotiated with Wachovia Bank, N.A. secured against the assets of its North Augusta location. The bank charged an interest rate on the line of credit equal to prime plus 1.5% on the outstanding daily balance, if any, and the greater of (i) the sum of the one month London interbank offered rate (Libor) as published in the Wall Street Journal (or such other publication or reference reasonably selected by the Lender if no longer published in the Wall Street Journal) plus 500 basis points, or (ii) 6.0% percent per annum, respectively. The Augusta line of credit was secured by all of the Company’s deposits at the bank and a certificate of deposit with Wachovia Bank of just over $150,000 which the Company has held since mid-2007.

The Company’s Augusta auction operations continue to expand, and ultimately could outgrow the present physical facility. As a result, the Company may ultimately be forced to seek a larger operating facility for its auction operations there, since the auction cannot accommodate the desired growth at its present location. In that event, the Company will be faced with a need to raise additional capital to fund the changes. There is no assurance the Company will be able to secure the funding to do so, and as a result its future growth may ultimately be limited.

Additionally, a $2,000,000 line of credit was negotiated the seller of the Chattanooga Auction at First Volunteer Bank for general corporate purposes in the normal course of business by the Company’s subsidiary there. That line of credit is secured by the assets of the Chattanooga auction, all of which are further guaranteed by the parent Company and personally guaranteed by the Company's CEO, Mr. Sample. The lender, Alexis Ann Jacobs, placed $2,000,000 cash on deposit with the bank that was linked to the Company’s Chattanooga auction CAR account, such that any cash requirement created on a day-to-day basis would be automatically covered through drafts on the lender’s account at that same bank. Financing at the Augusta unit has been satisfactory, and liquidity there has been sufficient to maintain the auction’s operations. In 2009, the Company only operated the Chattanooga operation for the last five days of that year, utilizing its credit resources at that location very little. The Company’s Chattanooga subsidiary utilized the credit line at that location to a fuller extent in the normal course of business in 2010. This credit line matures December 28, 2012.

The lender at Chattanooga charges an interest rate equal to: (a) prime plus 1.5% on the outstanding daily balance, if any; and, (b) the greater of (i) the sum of the one month London interbank offered rate (Libor) as published in the Wall Street Journal (or such other publication or reference reasonably selected by the Lender if no longer published in the Wall Street Journal) plus 500 basis points, or (ii) 6.0% percent per annum, respectively.

Both those lines of credit in Augusta and Chattanooga are used for general corporate purposes in the normal course of business and to cover some instances in which payments to dealers selling vehicles through the auctions are advanced prior to collecting payments from buyers of those vehicles. The Company anticipates increasing the size of the available line of credit at Augusta as its sales volume grows.

A given auction will generate large receivables and payables, only part of which are revenues and expenses, representing receivables from purchasers of vehicles and payables to those selling vehicles. Settling these transactions, not only the cash transfers between buyers and sellers but administrative tasks such as title clearance on vehicles, typically takes only a few days after an auction. Frequently, when we hold an auction near the end of a quarter, those unsettled receivables and payables will appear large relative to revenues, particularly since these receivables and payables reflect not only our fees but the sales price of the vehicles, and may distort the ratio of receivables or payables to revenues, causing them to appear exceptionally large. We must have readily available funds to facilitate these transactions, funds which are made available to our operations in the forms of the lines of credit.

Frequently, when we hold an auction near the end of a quarter, our receivables and payables will be large compared to prior quarters or as a ratio of receivables or payables to revenues for that quarter and the other quarters. Receivables and payables for a given auction are substantially liquidated within days of the auction process, but may appear distorted when occurring close to the end of an accounting period.

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The Company is currently engaged in its plan of seeking to grow through acquisitions as well as through organic means. To succeed in doing so, the Company will require additional capital, which the Company anticipates raising through sale of Common stock, but does not yet have a planned date or target amount for any such offering. Moreover, 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. The Company did not attempt to secure capital through a private placement of its securities in 2009 or 2010, and does not expect to secure capital in that manner in the short term in 2010.

Cash Balances vs. Overdraft

Our auction operating software accounts for checks made as payments to sellers when written, even though they may not actually be issued to the seller, since the sellers are only paid when they actually present to the auction a title representing ownership in any unit sold. Additionally, the auction’s rules require that it cannot deposit the buyer’s funds until we provide him with the title representing ownership of the vehicle purchased. The auction’s operating software systems, however, creates a check or “virtual” check immediately following sale of the unit, whether or not the title has been presented. Hence, the operating and thus, financial, systems reflect that we have issued a large number of checks to sellers when, in fact, they have on been “virtually” issued but not “physically” issued, resulting in the appearance that funds have been paid to sellers when in fact they have not yet been released. In those instances where the title has not yet been presented, and where the system indicates that a virtual payment has been made to the seller, the auction is also not allowed to deposit the purchase payment funds from the buyers of those units, thus making it appear as if our CAR (checking) account is overdrafted – when in truth and in fact it is not. Thus, we actually have a cash balance in the CAR account, generally quite significantly so, while the system shows as a virtual concept that the account is overdrafted. The software system used by the auction is provided by Auction Software, Inc. (ASI), is in use by nearly 100 independent auctions, is the most common independent auction operating system in use in the United States, and is in the opinion of the auction the best software available for its use at this time. One must therefore review the balance sheet to see the number of ASI payables and ASI receivables and look at the cash in the account to determine the actual status. That appears to be common practice in this type of industry. The actual overdraft account as depicted in the Company’s financial reporting is reviewed by the Company’s auditors to reflect outstanding checks to the Car Account and insure accurate reporting.

The Company will require substantial infusions of working capital or a substantial increase in the cash generated from 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, but not being considered a viable option in the economic conditions the country has experienced in 2009 and 2008 and continuing into the current period. There is no assurance the Company will be successful in obtaining infusions of capital to fuel its growth. As such, the Company determined to concentrate on maximizing its opportunities at the auction level, and has heretofore been quite successful in that effort. The Company’s corporate overhead is not large by industry standards, but it nonetheless will require additional revenues or reduced overheads, or both, so achieve liquidity in the absence of additional injections of capital.

Accounts Receivable

Trade receivables include the unremitted purchase price of vehicles purchased by third parties at the auctions, fees to be collected from those buyers and amounts for services provided by the Company related to certain consigned vehicles in our possession. These amounts due with respect to the consigned vehicles are generally deducted in settlement from the sales proceeds upon the eventual auction or other disposition of the related vehicles. Due to the nature of the Company's business, substantially all trade and finance receivables are due from vehicle dealers, salvage buyers and sellers, institutional, commercial and fleet sellers, governmental agencies, and insurance companies. The Company has possession of vehicles or vehicle titles collateralizing a significant portion of the trade and finance receivables. The Company’s receivables are recorded when billed, advanced, or accrued and represent claims against third parties that will be settled in cash. The carrying value of the Company’s receivables, net of allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts based on historical collection trends, the age of the outstanding receivables and existing economic conditions. The allowances for doubtful accounts and credit losses are based on management’s evaluation of the receivables portfolio under current conditions, the volume of the portfolio, overall portfolio credit quality, review of specific collection issues and such other factors which in management’s judgment deserve recognition in estimating losses.

Revenue Recognition

Revenues and the related costs are recognized when the services are performed. Auction fees from sellers and buyers are recognized upon the sale of the vehicle through the auction process. Most of the vehicles that are sold at auction are consigned to the Company by the seller and held at the Company's facilities. The Company does not take title to these consigned vehicles and recognizes revenue when a service is performed as requested by the owner of the vehicle. The Company does not record the gross selling price of the consigned vehicles sold at auction as revenue. Instead, the Company records only its auction fees as revenue because it does not take title to the consigned vehicles, has no influence on the vehicle auction selling price agreed to by the seller and buyer at the auction and the fees that the Company receives for its services are generally based on fixed amounts according to locally-published rate schedules. Revenues from reconditioning, logistics, vehicle inspection and certification, titling, and salvage recovery services are generally recognized when the services are performed.

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Chattanooga Auto Auction, having only been recently acquired, was not profitable and not operating on a cash flow positive basis at the time the Company discontinued operations there effective August 31, 2010 and as reported in the Company’s financial results in this report. As a result of the negative cash flow posture at Chattanooga, our current operations do not provide sufficient cash flow to cover fully 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. (See Subsequent Events in Part II, Item 5 - Other Information.)

Discussion Regarding Allowance for Bad Debts.

The Company estimates its allowance for doubtful accounts based on historical collection trends, the age of the outstanding receivables and existing economic conditions. The allowances for doubtful accounts and credit losses are based on management’s evaluation of the receivables portfolio under current conditions, the volume of the portfolio, overall portfolio credit quality, review of specific collection issues and such other factors which in management’s judgment deserve recognition in estimating losses. At December 31, 2009 and 2008, there was no allowance for doubtful accounts required based on management's estimates. For the years ended December 31, 2009 and 2008, the Company recognized uncollectable accounts receivable losses of $25,685 and $27,370, respectively.

The Company’s significant charge-offs are only those temporarily required to be made by its independent accountants due to aging, all of which have been subsequently recovered, resulting in no loss to the Company or its subsidiaries. There were two charge-offs in 2009 totaling $16,090. Those amounts were charged off at the direction of our independent accounting firm due to their aging, but both were subsequently collected, again resulting in no loss to the Company.

Financing of Planned Expansions and Other Expenditures

The Company is currently engaged in its plan of seeking to grow through acquisitions as well as through organic means. To succeed in doing so, the Company will require additional capital, anticipated to be through sale of Common Stock. There is no assurance the Company will be successful in its attempts to locate and secure additional funding or additional acquisitions.

Financial Reporting and New Technologies

As part of its commitment to improve our operating and reporting efficiencies, the Company engaged a certified public accountant and is currently seeking a Controller and/or Chief Financial Officer.

Contemplated Business

The Company’s primary objective is 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 generally 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. In addition, the Company believes that if the acquired auction or auctions do not service the boat, recreational or motor home segments or the medium and heavy-duty truck and equipment segments, it will seek to add one or more of those services to the auction’s activities, assuming the local market will support such additional services.

With the acquisition of the Chattanooga auction in December of 2009 to augment its Augusta auction operation, the Company considers those first two automobile auctions as indicative of the basis of services rendered by the Company. The Company will have to raise cash to acquire additional automobile auctions, possibly through the sale of Common Stock.

Implementation of Business Plan

The Company currently does not have sufficient working capital to pursue our business plan in its entirety as described herein. Our ability to implement our business plan will depend on our ability to obtain sufficient working capital and to execute the business plan. No assurance can be given that we will be able to obtain additional capital, or, if available, that such capital will be available at terms acceptable to us, or that we will be able to generate profit from operations, or if profits are generated, that they will be sufficient to carry out our business plan, or that the plan will not be modified.

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Conflicts of Interest.

The Company is or may be subject to various conflicts of interest. The Company does not have a fully-independent management staff, and will be relying on its management for the day-to-day management and operations of the Company and the Company’s assets. As such, certain employees may have conflicts of interest in allocating time, services and functions to the Company in deference to their other activities.

The Company’s full-time salaried Vice President and COO is engaged in ownership of a used car operation in Georgia and buys and finances vehicles for that operation, and also engages in various real estate transactions, all of which may compete for his time and attention in the Company’s core auction business and related operations.

The Company’s Secretary, a non-salaried position with the Company, is employed full-time in Nashville, Tennessee in a diverse business. The Company does not make heavy demands on its Secretary, who is not expected to give substantial time to the affairs of the Company.

Except for its Vice President/COO, the Company has no other full-time corporate managerial staff except for its President and CEO, who devotes the majority of his business time and efforts to the management and direction of the Company. As such, there is not now, nor has there previously been considered to be, any material conflict of interest on his part.

The President and Vice-President of the company serve as directors of the Company as well as officers and directors of the Company’s subsidiary corporations. Service in those capacities with the subsidiaries is not considered in itself to constitute a conflict of interest on the part of those employee/directors.

Investment in the Company will not carry with it the right to invest in any other property or venture of the President or other officers, employees, and directors of the Company.

Dependence on Steven L. Sample

The Company depends in large part upon the continuing service of its President and CEO, Steven L. Sample. Mr. Sample was responsible for bringing the corporate shell out of bankruptcy after being in the court of some six years, through the payment of expenses and taking actions to guide the Company into the future. Mr. Sample has invested significant capital into the Company, assisted the Company with capital during periods of shortages, allowed the Company to defer pay and expenses when necessary, and worked substantially more hours than expected of a normal management employee. If Mr. Sample were to become unable to manage the affairs of the Company for any reason, the Company may suffer materially from the loss of his leadership, guidance, and financial support.

Item 4T. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer who acts as our Chief Financial Officer, to allow timely decisions regarding required disclosure. During the 90-day period prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures.

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We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, for the reasons set forth above, and the fact that certain of the prior comparative financial statements contained herein were not reviewed by the Company’s independent accountants, the Chief Executive Officer concluded that the Company's disclosure controls and procedures were not effective. As such, we have identified areas that we are addressing and which we believe need to be rectified.

Changes in Internal Control over Financial Reporting

In the course of conducting our audit for the fiscal year 2009, our auditor, Killman, Murrell & Company, P.C. indicated that we have three material weaknesses: (i) Reconciliations and account analysis were not performed in a timely manner as the Company did not have fully trained financial accounting personnel, which resulted in adjusting journal entries; (ii) The sales and accounts receivable software is not integrated with the financial accounting software and accounting personnel did not perform routine reconciliations of data entered on the sales reporting system to appropriate control accounts in the general ledger system with reconciliations made in the aggregate without individual account scrutiny regardless of materiality; and (iii) Before the audit sign off date the Company suffered a system failure. Even though there was no apparent loss of data, there was a failure of operations personnel to perform systematic and recurring data backups on a routine basis.

During fiscal 2009 at the Company's Augusta and parent Company operations, the Company performed reconciliations and account analysis in a timely manner using a fully trained financial accountant. However, with the acquisition of its Chattanooga subsidiary on December 26, 2009, and personnel issues associated with the accounting staff and supervision at that location, the Company attempted to reconcile Chattanooga's software and data with the parent Company's software and data, but has been unsuccessful in achieving a timely and efficient melding of the systems. In addition, the Company was unsuccessful in locating financial personnel who were proficient with Chattanooga's software, all of which resulted in failures to reconcile its accounts to the Annual Report and Quarterly Reports in a timely manner. Ultimately the Company discontinued use of the financial software and server it acquired in the Chattanooga asset purchase and installed its own software at the Chattanooga location, establishing a parallel accounting system with its parent Company and other operating unit, allowing for proper reconciliations and consolidation of the operating units. During this period, many reconciliations and account analysis were not performed in a timely or efficient manner by the auction’s personnel and management. The Company worked to train the appropriate personnel at all locations to improve the speed and accuracy of reconciliations, and hired a qualified controller to its corporate team. The Company had considered that those actions would mitigate these issues in the future.

As with most independent vehicle auction companies of its size, the Company’s sales and accounts receivable software, as a part of its auction operating software, is not integrated with its financial accounting software. The integration requires additional meticulous steps to be undertaken on a regular basis as well as general business review of business practices reflected by the information. We continue to press for efficient integration of information and seek qualified personnel to effect these processes.

The Company suffered a server failure at its Augusta location in February of 2010, and discovered that its practices in backing up and protecting certain digital financial data were insufficient. While the Company currently backs up its digital data from the auction operating systems on a daily basis, it had not been making daily backups of its financial data. The data in question covered a period from mid-February to mid-April of 2010, was protected by hard copy financial records, was fully restored within a short time after the anomaly, and resulted in no compromise or loss of financial data, either digital or otherwise. Although there was no loss or damage, the Company recognized its deficiency in that area and immediately initiated new and improved provisions for protecting and preserving its digital data and information at all locations.

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PART II OTHER INFORMATION

Item 5. Other Information.

The Company’s Balance Sheets as of June 30, 2009, the Statement of Operations for three months and six months ended June 30, 2009, and the Statement of Cash Flows for the three months ended June 30, 2009 were not reviewed by the Company’s independent accountants and as such are deemed deficient. The Company believes that this information, nonetheless, is not materially inaccurate and the information for the periods referred to are included in the audited information set forth in the Company’s Annual Report on Form 10-K for the period ended December 31, 2009. As such, the Company has no current plan to address this deficiency.

During Q1 2010, the Company's CEO acquired 20,114 shares of the Company's Common stock by purchasing them on the open market at an average price per share of $0.302. Those transactions were reported by him as the Reporting Person on SEC Forms 4 dated 1/15, 1/19, 2/4, 2/11, 2/18, 2/23, and 3/11 of 2010. During Q2 2010, the Company’s CEO acquired an additional 500 shares of the Company’s stock by purchasing them on the open market at an average price per share of $0.927 per share. Those transactions were reported by him as the Reporting person on SEC Forms 4 dated 4/6, 5/4, and 5/14 of 2010. The CEO, as the Reporting Person, has never sold any shares of the Company and does not currently have any plans to do so.

Subsequent Events.

On August 31, 2009, the Company entered into a Management Agreement with the owners of Chattanooga Auto Auction Limited Liability Company. The Management Agreement provided that the Company would temporarily act as manager of that auction (commonly known as the “Chattanooga Auto Auction”) for the Seller from September 1, 2009, through December 25, 2009, as the Company awaited the transfer of ownership of the assets it was to acquire in an Asset Purchase Agreement with Seller (see below). Under the terms of the Management Agreement, the Company was to receive 50% of the net profits of the auction for the period. However, the Company soon entered into a verbal agreement with the Seller that it would forego the right to any portion of the profits during that period if the Seller would agree to fund certain maintenance, repair, and improvements to the physical plant and premises prior to the Company’s assumption of a lease thereon. Additionally, there was no accounting of the operations of the Seller for that period provided to the Company until approximately April 1, 2010. The final result was that there were no profits generated or shared.

On August 31, 2009, simultaneous with execution of the Management Agreement, the Company executed documents to purchase certain assets and the related business of Chattanooga Auto Auction Limited Liability Company through the Company’s newly-formed wholly-owned subsidiary, Acacia Chattanooga Vehicle Auction, Inc., which then operated the auction from a leased facility in Chattanooga, Tennessee. The assignment of assets occurred on December 26, 2009, as the Company commenced operations at that location under the name of Acacia Chattanooga Vehicle Auction, Inc. d/b/a Chattanooga Auto Auction, and was accounted for under the purchase method of accounting. The results of operations for the Acacia Chattanooga Auto Auction, Inc. business were included in the Company’s financial statements beginning with the Annual Report 10-K for the period ended December 31, 2009.

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In its Current Report on Form 8-K filed on September 16, 2009, the Company disclosed copies of all the execution documents and related forms of other documents available as of the execution of the Asset Purchase Agreement and the Management Agreement on August 31, 2009, including, without limitation, the anticipated financing agreements and ground lease. Each such document was to be executed at a final closing effective December 26, 2009.

In its Current Report on Form 8-K filed December 30, 2009 the Company indicated that: (a) the acquisition of the Chattanooga Auction had closed; (b) that the line of credit provided to the Company’s Chattanooga subsidiary (as borrower) by Alexis Ann Jacobs (as lender) was increased from $1.5 to $2.0 million with the terms of that credit line amended to allow the Company to use the finds for “general corporate purposes in the normal course of business”; and, (c) that the original transaction documents were in fact filed with the Form 8-K dated September 16, 2009. The Company, through an unintentional oversight, failed to include changed or updated documents with that Form 8-K. The Company filed concomitant herewith an Amended Current Report on Form 8-K/A dated October 19, 2012 to fully disclose the amended documents.

The Company has determined that its previously reported financial results for the three months and nine months ended September 30, 2009 and three months ended September 30, 2008 were not reviewed by the Company’s auditors, but by reason of unintentional oversight the Company erroneously failed to label those results as “Not Reviewed”. The annual financial results of the Company were audited in 2009 and 2008. We further determined that the discussion provided in various parts of the report were not adequate to properly set forth the Company’s views.

Accordingly, we have made necessary conforming changes in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” resulting from the correction of these errors, and have made disclosures of certain prior quarterly financial information as “Not Reviewed” where applicable.

Management does not consider any of the prior reported quarterly financial information to contain material deficiencies and the Company’s annual financial information was audited in 2009 and 2008. As such, this Amendment does not address any material changes to the financial statements of the Company, but is changed to properly reference those periods in which the quarterly financial statements were not reviewed by the Company’s outside auditors.

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, and $188,069 for the six months ended June 30, 2010.. As a result of the required accounting, the Company gained $218,892 on discontinuation of operations at the Chattanooga subsidiary for the three month and six month period, resulting in a net consolidated gain of $204,225 and $30,823 in the three months and six months, respectively..

For the six months ended June 30, 2010, the Company booked a profit from consolidated continuing operations of $66,267 for a net consolidated income of of $97,090.

Legal Proceedings.

None.

Item 6. Exhibits

Exhibit

Number Exhibit Description

31.1 Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant to Section 302 of Sarbanes-Oxley Act Of 2002

32.1 Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of Sarbanes-Oxley Act Of 2002

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SIGNATURES

Pursuant to the requirements of the Securities exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned.

	Acacia Automotive, Inc.

Date: October 19, 2012	By:	/s/ Steven L. Sample
		Steven L. Sample
		Chief Executive Officer and
		Principal Financial Officer

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Acacia Diversified Holdings, Inc. - FORM 10-Q - October 19, 2012

Attached files

Acacia Diversified Holdings, Inc. Reports