Notes to Condensed Consolidated Financial Statements (Unaudited)
Nine Months Ended December 31, 2013 and 2012
The accompanying condensed consolidated financial statements of Saleen Automotive, Inc. and subsidiaries (“Saleen,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending March 31, 2014, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2013, which are included in the Company’s Current Report on Form 8-K for such year filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013. The combined balance sheet as of March 31, 2013, has been derived from the audited financial statements included in the Form 8-K filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013.
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
History of the Company
Saleen Automotive, Inc. (formerly W270, Inc., the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011. The Company issued 5,000,000 shares of its common stock to Mr. Wesley Fry (“Fry”) at inception in exchange for organizational costs/services incurred upon its incorporation. Following our formation, we issued an additional 1,000,000 shares of our common stock to Mr. Fry, in exchange for a business plan along with a client/customer list related to his information technology consulting services.
On June 21, 2012, the Company issued 2,000,000 shares of its common stock for a total of $20,000.
On November 30, 2012, Wesley Fry (“Fry”) and W-Net Fund I, L.P. ( “W-Net”), entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Fry would sell to W-Net, and W-Net would purchase from Fry, an aggregate of 6,000,000 shares of the W270, Inc.’s common stock (the “Shares”), which Shares represented 75.0% of the issued and outstanding shares of the Company’s common stock, (2) Fry would release the Company from any and all existing claims, (3) Fry would settle various liabilities of the Company and (4) Fry would indemnify W-Net and the Company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Fry. The closing occurred on November 30, 2012. W-Net paid for the Shares with personal funds. Simultaneous with the closing, W-Net sold to Verdad Telecom, Inc. one half of the Shares. There are no arrangements or understandings by and among members of both the former and new control groups and their associates with respect to election of directors or other matters of the Company.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our common stock (on a fully-diluted basis) was owned, collectively, by Saleen (including shares of our Super Voting Preferred Stock issued to Saleen pursuant to the Assignment and License Agreement discussed below) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors (which currently has two vacancies). In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.
On May 23, 2013, we also entered into an Assignment and License Agreement with Saleen pursuant to which Saleen agreed, as of the effective time of the Merger, to contribute certain intellectual property that relates to the “Saleen” brand name and related
rights which are currently owned by him to us, license to us the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand, and assign to us all shares of the capital stock of SMS Retail – Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. On June 21, 2013, we amended the Assignment and License Agreement to terminate the obligation to assign to us all shares of the capital stock of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. and Saleen agreed to dissolve those entities within 30 days after the Closing. Concurrently with the Closing, pursuant to the Assignment and License Agreement, as amended, Saleen assigned certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, and licensed the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand to us, and commenced the process of dissolving each of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. The aforementioned license may only be terminated in the event we file a petition for relief under Chapter 7 of the U.S. Bankruptcy Code, or a petition for relief is converted to a Chapter 7 proceeding under the U.S. Bankruptcy Code. In exchange for entering into the Assignment and License Agreement, as amended, we issued to Saleen, as of the effective date of the Merger, 341,943 shares of our Super Voting Preferred Stock.
On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc.
We are presently authorized under our articles of incorporation, as amended to date, to issue 500,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share. Prior to January 13, 2014, 896,000 shares were designated Super Voting Preferred Stock. The rights of our Super Voting Preferred Stock were set forth in a Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock (the “Certificate of Designations”) which became effective on June 17, 2013. As of the Closing, we had 8,000,000 shares of common stock issued and outstanding and 896,000 shares of Super Voting Preferred Stock issued and outstanding.
Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for 554,057 shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen 341,943 shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock was convertible into 125 shares of our common stock. Accordingly, as a result of the Merger and the transactions effectuated pursuant to the Assignment and License Agreement, as amended, Saleen and the former shareholders of Saleen Automotive owned approximately 112,000,000 shares of our common stock on an as-converted basis, and our existing stockholders owned 8,000,000 shares of our common stock.
On July 9, 2013, holders of a majority of the outstanding shares of our Super Voting Preferred Stock voted to amend the Certificate of Designations to provide that (1) each share of our Super Voting Preferred Stock will immediately and automatically convert into 125 shares of our common stock at such time that we file, at such time as determined by our board of directors, an amendment to our articles of incorporation (a) effecting a reverse stock split of our common stock or (b) effecting an increase in the authorized shares of our common stock, in each case so that we have a sufficient number of authorized and unissued shares of our common stock to permit the conversion of all outstanding shares of our Super Voting Preferred Stock into our common stock, and (2) the holders of a majority of the outstanding shares of our Super Voting Preferred Stock may elect to convert less than all but at least 50% of the outstanding shares of our Super Voting Preferred Stock, with the applicable percentage designated by such holders. On July 9, 2013, holders of a majority of the outstanding shares of our Super Voting Preferred Stock also voted to convert, upon the effectiveness of the aforementioned amendment to the Certificate of Designations, 696,000 shares of our Super Voting Preferred Stock into 87,000,000 shares of our common stock, representing approximately 77.68% of the outstanding shares of our Super Voting Preferred Stock. Such conversion became effective on July 18, 2013, upon the filing of the amendment to the Certificate of Designations. On January 13, 2014, pursuant to an amendment to our articles of incorporation increasing our authorized shares of common stock to 500,000,000, all of the outstanding shares of our Super Voting Preferred Stock automatically converted into shares of our common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
Upon completion of the Merger and assuming the conversion of all the remaining Super Voting preferred stock into shares of common stock, the former stockholders of Saleen Automotive owned approximately 93% of the outstanding shares of our common stock (including shares of Super Voting Preferred Stock convertible into shares of our common stock) and the holders of the outstanding shares of our common stock prior to the Merger owned the balance. As the owners and management of Saleen Automotive have voting and operating control of the Company after the Merger, the transaction has been accounted for as a recapitalization with the Saleen Entities deemed the acquiring companies for accounting purposes, and our company deemed the legal acquirer. Due to the change in control, the consolidated financial statements reflect the historical results of the Saleen Entities prior to the Merger and that of the combined company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. The amount of debt assumed upon the reverse merger of $39,547, legal and closing costs of $46,000, and a dividend of an aggregate amount of $280,000 paid to our stockholders as of May 23, 2013 have been reflected as a cost of the Merger in the statement of operations.
The Company develops, manufactures and sells high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
Consolidation policy
The consolidated financial statements for the nine month period ended December 31, 2013 include the accounts of the Company and its wholly owned subsidiaries, Saleen Automotive, Inc. a Florida corporation, Saleen Signature Cars, a California corporation and Saleen Sales Corporation, a California corporation. Intercompany transactions and balances have been eliminated in consolidation.
Reclassification of Certain Prior Period Information
We have reclassified certain prior period amounts to conform to the current period presentation, including the reclassification of engineering salaries of $6,438 to research and development expenses and sales and marketing salaries of $40,769 to sales and marketing expenses from general and administrative operating expenses. The reclassification of these amounts had no impact on consolidated net income or cash flows.
Going Concern
The Company’s combined financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine months ended December 31, 2013, the Company incurred a net loss of $5,117,754 and utilized $3,375,364 of cash in operations. The Company also has a stockholders' and working capital deficit of $8,066,266 and $7,192,703, respectively, as of December 31, 2013, and as of that date, the Company is delinquent in payments of $729,314 of payroll taxes and $1,402,889 of outstanding notes payable are in default. The current cash resources of the Company are insufficient to meet its planned business objectives and operational needs without additional financing. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company's independent registered public accounting firm issued a report on our March 31, 2013 financial statements that raised substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013, the Company had cash on hand in the amount of $10,840. On October 8, 2013, the Company entered into a Secured Promissory Note with W-Net pursuant to which W-Net loaned an aggregate of $500,000 to the Company. The note bears interest at the rate of 8% per annum, which is payable along with all principal under the note on October 7, 2014, unless earlier repaid. The Company’s obligations under the note are secured by a second priority security interest in all of its assets, other than an S7 automobile in which W-Net has a first priority security interest. In addition, during the nine months ended December 31, 2013, the Company entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 3,786,666 shares of its restricted common stock at a per share price of $0.15 for aggregate proceeds of $544,000, net of issuance costs of $24,000. Additional Subscribers purchased restricted common shares of 1,316,667 and 686,666 in January and February 2014, respectively, at a per share price of $0.15 for aggregate proceeds of $197,500 and $103,000, respectively. However, additional funding will be needed to continue operations through March 31, 2014, which the Company currently anticipates raising through the consummation of additional Stock Subscriptions. In addition, management will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the Company’s business beyond March 31, 2014. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for its stockholders, in case or equity financing.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable, the valuation of long lived assets, the assumptions used to calculate its derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.
Fair value of Financial Instruments
The Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1, 2009. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s financial statements.
Financial instruments consist principally of cash, accounts payable and accrued liabilities, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.
Level 3 Unobservable inputs based on the Company’s assumptions.
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2013.
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Level 1
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Level 2
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Level 3
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Total
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Fair value of Derivative Liability at December 31, 2013
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$
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—
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|
|
|
$
|
1,694,000
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|
|
$
|
—
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|
|
|
$
|
1,694,000
|
|
Derivative financial instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company used a Monte Carlo option pricing model to value the derivative instruments at inception, and on subsequent valuation dates is using a weighted average Black–Scholes Model. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Cash held in trust by related party
During the year ended March 31, 2013, the Company instituted a policy of having new investor funds held a trust account at Michaels Law Group, a law firm owned by a shareholder and board member. Funds held in trust are released as requested by the Company by agreement of a management committee. As of March 31, 2013, $175,000 of funds was held in trust by Michaels Law Group. As of December 31, 2013, all funds held in trust have been disbursed to the Company.
Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectability. For the most part, the company generally requires advance payments for cars and credit card payments for parts. As a result, the Company had an allowance for doubtful accounts of $37,869 at December 31, 2013 and none at March 31, 2013.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist primarily of parts for both resale and conversion of automotive chassis. The Company will typically buy the automobile chassis of the vehicle to be converted from the dealer placing the order and then modify the vehicle as ordered. The Company typically has no finished goods inventory as the Company builds to order.
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December 31, 2013
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|
March 31,
2013
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|
Parts and work in process
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$
|
197,752
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|
|
$
|
288,224
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|
|
S7 Supercar held for sale
|
250,000
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|
|
250,000
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|
|
Total inventories
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$
|
447,752
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|
|
$
|
538,224
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|
Long-lived Assets
In accordance with ASC 350-30 (formerly SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
), the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
The Company had no such asset impairments at December 31, 2013 or March 31, 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
Revenue Recognition
Sales of High Performance Cars and Parts
The Company generates revenues primarily from the sale of high performance automobiles and parts. The Company recognizes revenue from the sale of completed high performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer.
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs upon acceptance by the customer when the Company places the cars or products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations.
Contract Revenue and Cost Recognition on Design Services
During the year ended March 31, 2013, the Company completed a contract with a movie producer to develop and manufacture working replicas of high performance racing “supercars” that are to be featured in a new movie. The Company recognizes revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because management considers costs to be the best available measure of progress on its contracts. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. The Company also recognizes as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. As of December , 2013, and March 31, 2013, there were no contracts in progress.
Warranty Policy
The Company provides a three-year or 36,000 miles New Vehicle Limited Warranty with every Saleen 302 and 302SC Mustang, Saleen 570 Challenger, and Saleen 620 Camaro high performance vehicle. We provide a one-year or 12,000 miles New Vehicle Limited Warranty with every Saleen 351 Mustang, Saleen 570X Challenger, and Saleen 620X Camaro high performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen high performance cars. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, and Dodge). The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at December 31, 2013 or March 31, 2013.
Business Segments
The Company currently has one operating business segment that is converting automobiles into high performance vehicles.
Research and Development Costs
Research and development costs consist of expenditures for the research and development of new products and technology. Research and development costs were $489,723 and $29,815 during the nine months ended December 31, 2013 and 2012, respectively, and were expensed as incurred.
Income Taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry forward period under the Federal tax laws.
Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Stock Compensation
The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes-Merton option pricing model to calculate the fair value of any equity instruments on the grant date.
The Company also uses the provisions of ASC 505-50, “
Equity Based Payments to Non-Employees,
” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
At December 31, 2013 and March 31, 2013, the Company had no common stock options or warrants outstanding.
Earnings (Loss) per Share
The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items.
Weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented. Weighted average shares outstanding also includes the equivalent number of common shares that will be converted upon conversion of all the Super Voting Preferred Stock as of the earliest period presented as these shares have the same characteristics of common stock and for which management expects to convert (see Note 9).
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:
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Computer equipment and software
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3 years
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Furniture
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3 years
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Machinery
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|
3-10 years
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Tooling
|
|
10 years
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Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
Recently Issued Accounting Standards
Recent accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2013 and March 31, 2013:
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December 31, 2013
|
|
March 31, 2013
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Tooling
|
$
|
453,969
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|
|
$
|
384,293
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|
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Equipment
|
262,692
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|
|
121,186
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Leasehold improvements
|
203,311
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|
|
129,402
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Total, cost
|
919,972
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|
|
634,881
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|
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Accumulated Depreciation and Amortization
|
(359,995
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)
|
|
(294,662
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)
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Total Property, Plant and Equipment
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$
|
559,977
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|
|
$
|
340,219
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Depreciation and amortization expense for the nine months ended December 31, 2013 and 2012 was $65,332 and $60,944, respectively.
NOTE 3 – NOTES PAYABLE - IN DEFAULT
Notes payable are comprised as follows:
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December 31, 2013
|
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March 31, 2013
|
|
Senior secured note payable to a bank, secured by all assets of Saleen Signature Cars, guaranteed by the U.S. Small Business Administration and personally guaranteed by the Company’s CEO, payable in monthly installments of $5,833, including interest at a rate of 6% per annum payable monthly, through October 26, 2019, currently in default (1)
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$
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527,216
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|
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$
|
582,258
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Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (2)
|
414,500
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|
414,500
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Subordinated secured note payable, interest at 10% per annum, payable December 16, 2010, currently in default (3)
|
65,972
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|
|
|
105,312
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|
|
Subordinated secured note payable, interest at 10% per annum payable March 31, 2009, in default as of March 31, 2013, paid in full
|
—
|
|
|
|
124,513
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|
Subordinated secured note payable for legal services rendered, non interest bearing, payable on October 25, 2013, currently in default (4)
|
42,749
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|
47,749
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|
Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default
|
320,000
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|
320,000
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Total notes payable
|
1,370,437
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|
|
|
1,594,332
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|
Less: current portion of notes payable
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(1,370,437
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|
)
|
|
(1,044,074
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)
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|
Notes payable, net of current portion
|
$
|
—
|
|
|
|
$
|
550,258
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1)
|
On February 6, 2014, Saleen Signature Cars received a Complaint from the bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. The Company currently is involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.
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2)
|
Bonds issued on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The Bonds accrue interest at 6% per annum and are secured by the personal property of Saleen Signature Cars. As of December 31, 2013 and March 31, 2013, respectively, the bonds were in default due to non-payment.
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3)
|
Note payable issued on December 16, 2010 due in full on December 16, 2011. The note accrues interest at 10% per annum and was secured by three vehicles held in inventory by Saleen Signature Cars. On June 7, 2013, the Company entered into
|
a Settlement Agreement and Mutual General Release by canceling this note and issuing a new unsecured 6% note payable due on or before August 19, 2013. The note was in default on December 31, 2013 due to non-payment.
|
|
|
|
4)
|
Non-interest bearing note payable dated January 25, 2013 due in full on October 25, 2013 or earlier upon the occurrence of certain events that have not occurred. The note is secured by interest in certain intellectual property. The note was in default as of December 31, 2013 due to non-payment. The Company made a payment of $5,000 during the nine months ended December 31, 2013.
|
Total interest expense was $362,784 and $138,281 for the nine months ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and March 31, 2013, $350,630 and $318,836, respectively, of interest on notes payable remains unpaid.
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
|
Unsecured note payable to a shareholder, non interest bearing, due on April 1, 2014. (1)
|
$
|
102,000
|
|
|
|
$
|
100,500
|
|
|
|
Note payable to a shareholder, secured by S7 Supercar automobile, interest at 10% per annum payable quarterly, due and paid off on May 23, 2013.
|
—
|
|
|
|
200,000
|
|
|
|
Unsecured note payable to a shareholder, interest at 10% per annum payable at various maturity dates, currently in default. (2)
|
32,452
|
|
|
|
60,000
|
|
|
|
Note payable to a shareholder, secured by S7 Supercar automobile, interest at 8% per annum payable in full on October 7, 2014.
|
500,000
|
|
|
|
—
|
|
|
|
Unsecured $100,000 revolving primissory note to a shareholder, interest at 12% per annum payable in full on November 14, 2014. $50,000 available at December 31, 2013.
|
50,000
|
|
|
|
—
|
|
|
|
Total notes payable, related parties
|
$
|
684,452
|
|
|
|
$
|
360,500
|
|
|
|
|
|
|
(1)
|
As of March 31, 2013, the Company had a bond payable of $63,000 issued to a shareholder on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The bond accrues interest at 6% per annum and is secured by the real and personal property of Saleen Signature Cars. The Company also had a $37,500 note payable to the same shareholder payable on various dates ranging from September 2008 to August 2010. The bond and the note were in default as of March 31, 2013. On May 21, 2013, the Company entered into a Settlement Agreement and Mutual General Release by cancelling the note and bond and agreeing to pay $135,000 on or before April 1, 2014, which represents principal plus interest to be accrued through April 1, 2014. The Company also issued 264 shares of Super Voting Preferred Stock valued at $12,500 in conjunction with this Agreement and accounted for this issuance of shares as interest expense.
|
|
|
|
|
(2)
|
Unsecured note payable to a related party issued on November 3, 2008 for original principal of $60,000 with interest bearing at 10% per annum and due in full on February 10, 2009. The note was in default at March 31, 2013. On May 22, 2013, the Company entered into a Settlement Agreement and Mutual General Release by agreeing to pay $35,000, of which $5,000 is due by June 3, 2013, $10,000 due by July 31, 2013, $10,000 due by October 31, 2013, and $10,000 by December 31, 2013. The Company also issued 739 shares of Super Voting Preferred Stock in conjunction with this Agreement valued at $35,000, of which $22,803 was applied toward the principal balance of the note and $12,197 was accounted for interest expense. The note was in default as of December 31, 2013 due to non-payment.
|
NOTE 5- SENIOR SECURED CONVERTIBLE NOTES PAYABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
|
Senior secured convertible notes payable to private accredited investor group, convertible into 40,000,000 shares of common stock, interest accrued at 3% per annum, notes mature on June 25, 2017
|
$
|
2,924,422
|
|
|
$
|
—
|
|
|
|
Less: discount on notes payable
|
(1,448,524
|
)
|
|
—
|
|
|
|
Notes payable, net of discount
|
$
|
1,475,898
|
|
|
$
|
—
|
|
|
On June 26, 2013, pursuant to a Securities Purchase Agreement, the Company issued senior secured convertible notes, having a total principal amount of $3,000,000, to 12 accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements. The Notes will pay 3.0% interest per annum with a maturity of 4 years (June 25, 2017). No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each Note is convertible at any time into common stock at a specified conversion price, which currently is $0.075 per share The Note conversion price is subject to specified adjustments for certain changes in the numbers of outstanding shares of the Company's common stock, including conversions or exchanges of such. If the Company's shares are issued, except in specified exempt issuances, including the conversion of the Super Voting Preferred Stock, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance. During the nine months ended December 31, 2013, certain note holders converted $75,578 of principal and $3,216 of interest for 1,050,593 shares the common stock.
Each of the agreements governing the notes includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion prices of the notes are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of these conversion features as derivative liabilities upon issuance. The Company determined that upon issuance on June 26, 2013, the initial fair value of the embedded beneficial conversion feature of the notes to be $1,660,656. These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation option pricing model. As such, the Company recorded a $1,660,656 derivative liability with an offsetting change to valuation discount upon issuance for financial reporting purposes (see note 6). During the nine months ended December 31, 2013, the Company amortized $215,348 of the valuation discount, and the remaining unamortized valuation discount of $1,448,524 as of December 31, 2013, has been offset against the face amount of the notes for financial statement purposes. The remainder of the valuation discount will be amortized as interest expense over the remaining four year term of the senior secured convertible notes payable.
NOTE 6 - DERIVATIVE LIABILITY
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s senior secured convertible notes (described in Note 5), do not have fixed settlement provisions because their conversion prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the notes from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of June 26, 2013, the date of issuance and December 31, 2013, the derivative liability was valued using a Monte Carlo option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 26, 2013
Date of Issuance
|
|
Conversion feature:
|
|
|
|
|
Risk-free interest rate
|
1.75
|
|
%
|
|
1.04
|
|
%
|
|
Expected volatility
|
75.0
|
|
%
|
|
73.3
|
|
%
|
|
Expected life (in years)
|
3.48 years
|
|
4 years
|
|
Expected dividend yield
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
Conversion feature
|
$
|
1,694,000
|
|
|
|
$
|
1,660,656
|
|
|
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the volatility of five comparable guideline companies to estimate volatility for its common stock. The expected life of the conversion feature of the notes was based on the term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
NOTE 7 – RELATED PARTY TRANSACTIONS
During the nine month ended December 31, 2013 and 2012, we incurred $131,787 and $180,000, respectively, in officers’ salary expense due our Director, Chairman and CEO, Mr. Steve Saleen that is unpaid. As of December 31, 2013 and March 31, 2013, the balances of $452,287 and $300,000, respectively, were payable to Mr. Saleen for his unpaid officers’ salary. Effective March 31, 2013, Mr. Saleen agreed to defer the $300,000 of unpaid salary for payment until April 1, 2014. During the nine months ended December 31, 2013, Mr. Saleen loaned the Company $20,500 payable on demand.
During the nine month periods ended December 31, 2013 and 2012, we incurred $203,771 and $230,860, respectively, in accounting advisory and CFO services with Miranda & Associates, a firm owned by our former Chief Financial Officer, Mr. Robert Miranda. As of December 31, 2013 and March 31, 2013, the balances of $174,093 and $167,222, respectively, were payable to Miranda & Associates for these services. Effective March 31, 2013, Miranda & Associates and Mr. Miranda agreed to defer the $167,222 of unpaid fees for payment until April 1, 2014. During the nine month ended December 31, 2013, the Company and Miranda & Associates amended their payment deferral agreement and the Company commenced partial payment of the unpaid fees.
During the nine months ended December 31, 2013 and 2012, we incurred $325,488 and $314,255, respectively, in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by our Director and General Counsel, Mr. Jonathan Michaels. As of December 31, 2013 and March 31, 2013 the balances of $251,505 and $242,045, respectively, were payable to Michaels Law Group for these services. Effective March 31, 2013, Michaels Law Group and Mr. Michaels agreed to defer the $242,045 of unpaid fees for payment until April 1, 2014. During the nine months ended December 31, 2013, the Company and Michaels Law Group amended their payment deferral agreement and the Company commenced partial payment of the unpaid fees.
During the nine months ended December 31, 2013, we issued the equivalent of 5,277 shares of our Super Voting Preferred stock, to Robert J. Miranda and Jonathan Michaels (2,638.5 shares each). These shares were valued at $47.38 per share for a total value of $250,000. These shares were issued in consideration of Messrs. Miranda and Michaels service on the Company’s board of directors for the period April 1, 2013 through March 31, 2014. During the nine months ended December 31, 2013, we recorded $250,000 of these director’s fees as director’s fee expense.
Included in general and administrative costs are related party costs of $168,607 and $187,144 for the three months ended December 31, 2013 and 2012, and $529,259 and $545,115 for the nine months ended December 31, 2013 and 2012, respectively.
The amounts of accounts payable to related parties as of December 31, 2013 and March 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party
|
|
December 31, 2013
|
|
March 31, 2013
|
|
Steve Saleen
|
|
$
|
452,287
|
|
|
$
|
300,000
|
|
|
Miranda & Associates
|
|
174,093
|
|
|
167,222
|
|
|
Michaels Law Group
|
|
251,505
|
|
|
242,045
|
|
|
Totals
|
|
$
|
877,885
|
|
|
$
|
709,267
|
|
During the nine months ended December 31, 2012, we incurred $120,000 in consulting fees with a shareholder for marketing, business development, engineering, business management, and financial advisory services.
NOTE 8 – INCOME TAXES
As of December 31, 2013, we had net operating loss carry forwards for income tax reporting purposes of approximately $13,400,000 that may be offset against future taxable income. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs or a change in the nature of the business. The utilization of the losses is also limited by the fact that the combined companies prior to the reverse merger file on a separate basis and losses on one cannot offset profits on the other. Therefore, the amount available to offset future taxable income may be limited.
No tax benefit has been reported in the financial statements for the realization of loss carry forwards, as the Company believes based on the Company's past operations that there is no evidence or assurance that the carry forwards will be utilized. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
|
Deferred income tax asset:
|
|
|
|
|
Net operating loss carry forward
|
$
|
4,773,000
|
|
|
|
$
|
3,316,000
|
|
|
|
Valuation allowance
|
(4,773,000
|
|
)
|
|
(3,316,000
|
|
)
|
|
Net deferred income tax asset
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
|
Tax expense at the U.S. statutory income tax
|
(34.00
|
|
)%
|
|
(34.00
|
|
)%
|
|
State tax net of federal tax benefit
|
(5.80
|
|
)%
|
|
(5.80
|
|
)%
|
|
Increase in the valuation allowance
|
39.8
|
|
%
|
|
39.8
|
|
%
|
|
Effective tax rate
|
—
|
|
%
|
|
—
|
|
%
|
The Company is primarily subject to U.S. federal and state income tax. As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109), the Company performed an analysis of its tax liabilities and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of December 31, 2013 and March 31, 2013, respectively.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of December 31, 2013 and March 31, 2013.
NOTE 9 – SHAREHOLDERS’ EQUITY
As of December 31, 2013, the Company was authorized to issue 100,000,000 shares of common stock ($0.001 par value) and 1,000,000 shares of preferred stock ($0.001 par value), of which 896,000 shares were designated Super Voting Preferred Stock. In January 2014, the Company increased the number of common stock authorized to 500,000,000 which resulted in the automatic conversion of all outstanding shares of Super Voting Preferred Stock into common stock. After such conversion, the Super Voting Preferred Stock ceased to be designated series of preferred stock.
The rights of our Super Voting Preferred Stock were set forth in a Certificate of Designations which became effective on June 17, 2013. Pursuant to the provisions of the Certificate of Designations, each share of our Super Voting Preferred Stock was convertible into 125 shares of our common stock. The holders of shares of our Super Voting Preferred Stock were entitled to vote together with the holders of our common stock, as a single class, upon all matters submitted to holders of our common stock for a vote. Each share of Super Voting Preferred Stock was entitled to a number of votes equal to the number of shares of common stock into which it is convertible at the record date. In the event of any liquidation, dissolution or winding up of our company, the assets available for distribution to our stockholders would be distributed among the holders of our Super Voting Preferred Stock and the holders of our common stock, pro rata, on an as-converted-to-common-stock basis. The holders of our Super Voting Preferred Stock were entitled to dividends in the event that we pay cash or other dividends in property to holders of outstanding shares of our common stock, which dividends would be made pro rata, on an as-converted-to-common-stock basis.
Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for 554,057 shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen 341,943 shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock is convertible into 125 shares of our common stock pursuant to the provisions of the Certificate of Designations.
During the nine month period ended December 31, 2013, the Company issued the equivalent of 12,178 shares of its Super Voting Preferred Stock in exchange for the settlement of claims, conditions of employment, director’s fees, and payment of information technology services. These shares were valued at $47.38 per share for a total valuation of $576,981 based on management’s estimate of value of the shares issued.
On July 9, 2013, the holders of a majority of the outstanding shares of our Super Voting Preferred Stock, pursuant to a written consent, elected to convert, upon the effectiveness of the amendment to the Certificate of Designations, 696,000 outstanding shares of the Company’s Super Voting Preferred Stock (approximately 77.68%) into 87,000,000 shares of the Company’s common stock. On July 18, 2013, the Company filed an Amendment to Certificate of Designation After Issuance of Class or Series (the “Amendment”) amending the conversion rights of its Super Voting Preferred Stock. As a result of the Amendment, the Company’s board of directors will determine whether (if at all) the Company will effectuate any reverse stock split (or any increase in its authorized shares of common stock), and the appropriate time (if ever) for any such reverse stock split (or increase in its authorized shares of common stock). The remaining shares of Super Voting Preferred Stock were automatically converted into common stock on January 13, 2014.
During the nine months ended December 31, 2013, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 3,786,666 shares of its common stock at a per share price of $0.15 for aggregate proceeds of $544,000, net of issuance costs of $24,000.
As of December 31, 2013, the Company had 99,837,259 shares of common stock issued and outstanding and 200,000 shares of Super Voting Preferred Stock issued and outstanding. The Company had no warrants or options outstanding at December 31, 2013 or March 31, 2013, respectively. In conjunction with the amendment to the Company's articles of incorporation to increase the authorized shares of common stock to 500,000,000, all of the outstanding shares of Super Voting Preferred Stock automatically converted into 25,000,000 shares of common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
Omnibus Incentive Plan
In December 2013, the Company's board of directors approved the 2013 Omnibus Incentive Plan (the “Plan”), which is administered by the Company’s board of directors (“Board”) or a committee thereof (the “Administrator”) as set forth in the Plan. The Plan provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an option, other than with respect to substitute awards, shall not be less than 100% of the fair market value of the Company’s common stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). A total of 28,905,763 shares of common stock have been authorized for issuance and reserved under the Plan. As of December 31, 2013, no options have been issued or granted under the Plan. The Plan was approved by the Company's stockholders on January 13, 2014.
In connection with the appointment of two new board members in October and December 2013 and upon the approval of the Plan by the Company’s stockholders on January 13, 2014, the Company is obligated to each of these new board members to grant options to purchase 250,000 shares of the Company’s common stock at an exercise price equal to the fair market value as of the date of grant, with subsequent grants to each of these new board members of options to purchase 125,000 shares of the Company’s common stock at a price equal to the then fair market value for each subsequent year that the board members serves as a director.
|
|
|
|
|
|
|
|
12/31/2013
|
|
Common Stock Outstanding
|
99,837,259
|
|
|
|
|
NOTE 10 – COMMITMENTS AND CONTINGINCIES
Facilities Leases
The Company rents two buildings totaling approximately 76,000 square feet on triple net leases through January, 2018. Rent expense during the nine months ended December 31, 2013 and 2012 was $508,802 and $348,199, respectively. The current lease amendment provides for an annual escalation of 3% in the rent each February. Past rent will be made up with the payment of an additional $5,300 for 20 months starting in June, 2013.
The future minimum rental payments required under the non-cancelable operating leases described above as of December 31, 2013 are as follows:
|
|
|
|
|
|
|
Years ending March 31:
|
|
Lease Commitment
|
|
2014
|
|
$597,548
|
|
2015
|
|
615,154
|
|
2016
|
|
583,671
|
|
2017
|
|
599,689
|
|
2018
|
|
512,172
|
Employment Agreements
On August 1, 2011, Saleen Automotive entered into an Employment Agreement with Saleen under which he is currently compensated at the rate of $20,000 per month, which shall not be reduced. The Employment Agreement provides for increased compensation of $27,500 per month, $32,500 per month and $37,500 per month if Saleen Automotive is successful in raising a cumulative gross amount of $5 million, $7.5 million and $10 million in capital, respectively. The Employment Agreement also provides that Saleen Automotive will establish and maintain on or before September 30, 2012, a bonus program for Saleen that will compensate Saleen in amounts up to his annual bases salary, based on objective criteria. Saleen Automotive and Saleen are currently determining the parameters of that bonus plan. The Employment Agreement provides for Saleen’s service as Saleen Automotive’s Chief Executive Officer, and provides that Saleen Automotive is disallowed from changing the title of Saleen’s position or from diminishing his responsibilities of overseeing the operations of Saleen Automotive. The Employment Agreement has a term of eight years, and will automatically continue thereafter for successive 12 month periods unless and until either party gives the other party written notice of termination prior to the end of a term. In the event Saleen Automotive terminates the Employment Agreement without cause (as defined in the Employment Agreement), or otherwise materially breaches the Employment Agreement and such material breach remains uncured after 15 days’ written notice, Saleen will be entitled to a severance payment of 1.50 times his then-current annual salary plus $2 million, payable in cash or cash-equivalents within 30 days of the date of termination.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
The Company is currently a party to the several legal proceedings related to claims for payment that are currently accrued for in the financial statements as accounts or notes payable. Other legal proceedings that are pending as of December 31, 2013 are described as follows:
Saleen Signature Cars is a defendant in a case filed on November 28, 2011 in U.S. District Court in Massachusetts that alleges breach of contract related to a vehicle dispute. The case seeks $75,000 of damages, plus legal fees and costs of litigation. Saleen Signature Cars has entered into a settlement with the Plaintiffs in this matter, the terms of which are to be fulfilled on or before May 15, 2014. In the interim, the matter has been stayed.
Saleen Signature Cars is a defendant in a case filed on April 13, 2012, in California Superior Court, Riverside County, that claims breach of contract related to an engine installed by a third party vendor. The suit claims $200,000 in damages plus interest, legal fees and costs of litigation. The Company believes that the amount sought by the Plaintiff is excessive and without merit. The outcome is uncertain at the present time.
Saleen Signature Cars is a defendant in a case filed on February 6, 2014 in California Superior Court, Riverside County related to the Company's Senior Secured note payable to a bank (Note 3). The Complaint alleges, among others, breach of promissory note due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. The Company believes that the claim sought by the bank is not accurate and is without merit; The outcome is uncertain at the present time.
NOTE 11 – SUBSEQUENT EVENTS
In January and February 2014, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 2,003,333 shares of its common stock at a price of $0.15 per share, for aggregate proceeds of $300,500.
As discussed in Note 1, on January 13, 2014, the Company's stockholders approved and the Company amended it articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 500,000,000 shares. In addition and as discussed in Note 9, the Company's stockholders also approved the 2013 Omnibus Incentive Plan which provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants..
In conjunction with the amendment to the Company's articles of incorporation to increase the authorized shares of common stock to 500,000,000, all of the outstanding shares of Super Voting Preferred Stock automatically converted into 25,000,000 shares of common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
On February 6, 2014, Saleen Signature Cars received a Complaint from a bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. The Company currently is involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of Saleen Automotive, Inc. and subsidiaries for the nine months ended December 31, 2013 and 2012. The discussion and analysis that follows should be read together with the financial statements of Saleen Automotive, Inc. and subsidiaries and the notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.
We design, develop, manufacture and sell high performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros and Dodge Challengers. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by the manufacturers (Ford, Chevrolet, and Dodge)) of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it.
Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. Muscle cars are any of a group of American-made 2-door sports coupes with powerful engines designed for high performance driving. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with, Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our common stock (on a fully-diluted basis) was owned, collectively, by Saleen (including shares of our Super Voting Preferred Stock issued to Saleen pursuant to the Assignment and License Agreement discussed below) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors (which currently has two vacancies). In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.
On May 23, 2013, we also entered into an Assignment and License Agreement with Saleen pursuant to which Saleen agreed, as of the effective time of the Merger, to contribute certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, license to us the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand, and assign to us all shares of the capital stock of SMS Retail – Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. On June 21, 2013, we amended the Assignment and License Agreement to terminate the obligation to assign to us all shares of the capital stock of SMS Retail – Corona and Saleen Automotive Show Cars, Inc., and Saleen agreed to dissolve those entities within 30 days after the Closing. Concurrently with the Closing, pursuant to the Assignment and License Agreement, as amended, Saleen assigned certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, and licensed the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand to us, and commenced the process of dissolving each of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. The aforementioned license may only be terminated in the event we file a petition for relief under Chapter 7 of the U.S. Bankruptcy Code, or a petition for relief is converted to a Chapter 7 proceeding under the U.S. Bankruptcy Code. In exchange for entering into the Assignment and License Agreement, as amended, we issued to Saleen, as of the effective time of the Merger, 341,943 shares of our Super Voting Preferred Stock.
On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc. Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to ‘Saleen Automotive’ refer to Saleen Automotive, Inc., our wholly-owned Florida subsidiary.
Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for 554,057 shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen an additional 341,943 shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock is convertible into 125 shares of our common stock in accordance with the terms of the Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock (the “Certificate of Designations”), as amended. Accordingly, as a result of the Merger and the transactions effectuated pursuant to the Assignment and License Agreement, as amended, Saleen and the former shareholders of Saleen Automotive own approximately 112,000,000 shares of our common stock on an as-converted basis, and our existing stockholders own 8,000,000 shares of our common stock.
The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the historical operations of the Saleen Entities prior to the Merger and that of the combined company following the Merger. The accompanying consolidated financial statements are prepared as if we will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.
Three months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012
Our revenue, operating expenses, and net loss from operations for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 were as follows – some balances on the prior period’s consolidated financial statements have been reclassified to conform to the current period presentation:
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Three Months Ended,
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Percentage
Change
Inc (Dec)
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December 31, 2013
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December 31, 2012
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Change
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Revenue
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Vehicles and parts
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$
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1,076,153
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$
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607,490
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$
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468,663
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77.1%
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Design Services
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—
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1,245,985
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(1,245,985
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)
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(100.00)%
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Total revenue
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1,076,153
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1,853,475
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(777,322
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)
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(41.90)%
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Costs of goods sold
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Vehicles and parts
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773,467
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532,932
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240,535
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45.1%
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Design Services
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—
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859,541
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(859,541
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)
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(100.00)%
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Total Costs of Goods Sold
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773,467
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1,392,473
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619,006
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44.5%
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Gross Margin
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302,686
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461,002
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(158,316
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)
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(34.30)%
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Operating Expenses
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Research and development
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204,026
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3,269
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200,757
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6,141.2%
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Sales and marketing
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320,077
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74,224
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245,853
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331.2%
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General and administrative
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1,029,054
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646,694
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382,360
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59.1%
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Depreciation and amortization
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18,588
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20,391
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(1,803
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)
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(8.80)%
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Total operating expenses
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1,571,745
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744,578
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827,167
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111.1%
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Loss from operations
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(1,269,059
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)
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(283,576
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)
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(985,483
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)
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347.5%
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Other income (expenses)
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Interest expense
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(186,004
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)
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(37,595
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)
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(148,409
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)
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394.8%
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Gain on extinguishment of derivative liability
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40,548
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—
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40,548
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—
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Change in fair value of derivative liability
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(125,026
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)
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—
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(125,026
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)
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—
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Net Loss
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$
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(1,539,541
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)
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$
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(321,171
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)
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$
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(1,218,370
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)
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379.4%
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Revenues
: Total revenues for the three months ended December 31, 2013 were $1,076,153, a decrease of $777,322 or 41.9% from $1,853,475 for the three months ended December 31, 2012. Revenue from the sale of automotive vehicles and parts increased $468,663 or 77.1% to $1,076,153 for the three months ended December 31, 2013 from $607,490 for the three months ended December 31, 2012. The increase reflects sales efforts achieved by our expanded sales force whereby we sold a higher number of vehicles during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Growth was achieved primarily through expansion with existing dealers as well as the addition of new dealer networks. Traditionally, from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shut down of plants and shipping for several weeks causing delivery of cars to be interrupted which has an effect on our sales. During the three months ended December 31, 2012, revenues of $1,245,985 were realized from a contract completed on December 31, 2012 with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie. We did not have any design contracts during the three months ended December 31, 2013.
Cost of Goods Sold
: Total costs of goods sold for the three months ended December 31, 2013 were $773,467, a decrease of $619,006 or 44.5%, from $1,392,473 of costs of goods sold for the three months ended December 31, 2012. The decrease is primarily attributable to cost of $859,541 incurred related to a design contract completed during the three months ended December 31, 2012. We did not have any design contracts during the three months ended December 31, 2013. This decrease was somewhat
offset by $240,535 of additional costs attributable to increased vehicle and parts sales during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012.
Gross Margin
: Gross Margin from the sale of vehicles and parts increased $228,128 to $302,686 or 306.0% for a gross margin of 28% for the three months ended December 31, 2013 from a gross margin of $74,558 or 12% for the three months ended December 31, 2012. The improvement in gross margin reflects both the increase in sales net of an increase in costs of goods sold as a percentage of sales during the three months ended December 31, 2013. Gross Margin from design services contributed $386,444 for the three months ended December 31, 2012.
Research and Development Expenses
: Research and development expenses increased by $200,757 or 6,141.2% during the three months ended December 31, 2013 from $3,269 for the three months ended December 31, 2012. The increase is due to our expanded engineering team and development of our existing and new high performance vehicles including the recent introduction of our 30th year anniversary cars.
Sales and Marketing Expense
: Sales and marketing expenses relate to costs incurred to promote our existing and new products, such as through car shows and other media outlets, along with sales expenses such as commissions and incentives. Sales and marketing expense increased by $245,853 or 331.2% to $320,077 for the three months ended December 31, 2013 from $74,224 for the three months ended December 31, 2012. The increase was primarily attributable to our expanded sales and marketing team and efforts to promote our existing and new products including our attending of varies car shows and launch of our 30th year anniversary cars.
General and Administrative Expense
: General and administrative expenses include expenses for sales, marketing, engineering and administrative salaries and benefits, occupancy costs, professional fees, and other general and administrative costs. General and administrative expenses increased by $382,360 or 59.1% to $1,029,054 for the three months ended December 31, 2013 from $646,694 for the three months ended December 31, 2012. The increase was primarily comprised of $138,163 of higher salaries and benefits expense resulting from our expansion of personnel to support the increased sales volume; $48,123 increase in occupancy costs from our expansion of our campus to support our growth and new engineering and design facilities used to expand development; $115,000 settlement of a previous claim; and $81,074 increase in other general and administrative expenses incurred to support the additional sales and marketing efforts.
Depreciation and Amortization Expense
: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $1,803 or 8.8% to $18,588 for the three months ended December 31, 2013 from $20,391 for the three months ended December 31, 2012.
Interest Expense
: Interest expense increased by $148,409 or 394.8% to $186,003 for the three months ended December 31, 2013 from $37,595 for the three months ended December 31, 2012. The increase is primarily attributable to $103,791 of non-cash interest expense and $42,941 of accrued interest during the three months ended December 31, 2013 attributable to the amortization of the convertible debt discount and 3% interest on our $3,000,000 of senior secured convertible notes issued on June 27, 2013. The interest incurred on the convertible debt is convertible into common shares upon the holders request to convert.
Change in Fair Value of Derivative Liability
: In accordance with the FASB authoritative guidance, the conversion feature of our $3,000,000 convertible notes issued on June 27, 2013 was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability that is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the three months ended December 31, 2013, we recorded a $125,026 loss due to the change in the derivative liability from issuance date to December 31, 2013. We did not have a comparable gain during the three months ended December 31, 2012.
Gain on Extinguishment of Derivative Liability
: Gain on extinguishment of derivative liability of $40,548 resulted from certain note holders request to convert their convertible debt to stock in accordance with the convertible note. We did not have a comparable gain during the three months ended December 31, 2012.
Net Loss
: Net loss increased by $1,218,370, or 379.4%, to a net loss of $1,539,541 for the three months ended December 31, 2013 from a net loss of $321,171 for the three months ended December 31, 2012. This net loss reflects the increased operating expenses offset somewhat by higher gross margin discussed above.
Nine Months Ended December 31, 2013 Compared to the Nine Months Ended December 31, 2012
Our revenue, operating expenses, and net loss from operations for the nine months ended December 31, 2013 as compared to the nine months ended December 31, 2012 were as follows – some balances on the prior period’s consolidated financial statements have been reclassified to conform to the current period presentation:
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Nine Months Ended,
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Percentage
Change
Inc (Dec)
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December 31, 2013
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December 31, 2012
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Change
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Revenue
|
|
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Vehicles and parts
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$
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3,570,722
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$
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1,277,476
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$
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2,293,246
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179.5%
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Design services
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—
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1,245,985
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(1,245,985
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)
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(100.00)%
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Total revenue
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3,570,722
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2,523,461
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1,824,583
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72.3%
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Costs of goods sold
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Vehicles and parts
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2,852,665
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1,056,141
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1,796,524
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170.1%
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Design services
|
—
|
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859,451
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(859,451
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)
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(100.00)%
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Total Costs of Goods Sold
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2,852,665
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1,915,592
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|
937,073
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48.9%
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Gross Margin
|
718,057
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607,869
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|
|
|
110,188
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18.1%
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Operating expenses
|
|
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|
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|
|
Research and development
|
489,723
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29,815
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|
459,908
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1,542.5%
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Sales and marketing
|
942,238
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115,710
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826,528
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714.3%
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General and administrative
|
3,576,843
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|
|
|
1,984,012
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|
|
|
1,592,831
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80.3%
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Depreciation and amortization
|
65,332
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|
60,944
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|
4,388
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7.2%
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Total operating expenses
|
5,074,136
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|
|
|
2,190,481
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|
|
2,883,655
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131.6%
|
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Loss from operations
|
(4,356,079
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)
|
|
(1,582,612
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)
|
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(2,773,467
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)
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|
175.2%
|
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Other income (expenses)
|
|
|
|
|
|
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Interest expense
|
(362,784
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)
|
|
(138,281
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)
|
|
(224,503
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)
|
|
162.4%
|
|
Expenses of reverse merger transaction
|
(365,547
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)
|
|
—
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|
|
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(365,547
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)
|
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—
|
|
Gain on extinguishment of derivative liability
|
40,548
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|
|
|
—
|
|
|
|
40,548
|
|
|
—
|
|
Change in fair value of derivative liability
|
-73,892
|
|
—
|
|
|
|
-73,892
|
|
—
|
|
Net Loss
|
$
|
(5,117,754
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)
|
|
$
|
(1,720,893
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|
)
|
|
$
|
(3,396,861
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)
|
|
197.4%
|
Revenues
: Total revenues for the nine months ended December 31, 2013 were $3,570,722, an increase of $1,824,583 or 72.3% from $2,523,461 for the nine months ended December 31, 2012. Revenue from the sale of automotive vehicles and parts increased $2,293,246 or 179.5% to $3,570,722 for the nine months ended December 31, 2013 from $1,277,476 for the nine months ended December 31, 2012. The increase reflects sales efforts achieved by our expanded sales force whereby we sold a higher number of vehicles during the nine months ended December 31, 2013 as compared to the nine months ended December 31, 2012. Growth was achieved primarily through expansion with existing dealers as well as the addition of new dealer networks. Traditionally, from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shut down of plants and shipping for several weeks causing delivery of cars to be interupted which has an effect on our sales. During the nine months ended December 31, 2013, revenues of $1,245,985 were realized from a contract completed on December 31, 2012 with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie. We did not have any design contracts during the nine months ended December 31, 2013.
Cost of Goods Sold
: Total costs of goods sold for the nine months ended December 31, 2013 were $2,852,665, an increase of $937,073 or 48.9%, from $1,915,592 of costs of goods sold for the nine months ended December 31, 2012. The increase was primarily attributable to $1,796,524 of higher costs attributable to increased vehicle and parts sales during the nine months ended December 31, 2013 as compared to the three months ended December 31, 2012. The increase was partly offset by the decrease in costs of design services of $859,541 incurred related to a design contract during the nine months ended December 31, 2012. We did not have any design contracts during the nine months ended December 31, 2013.
Gross Margin
: Gross Margin from the sale of vehicles and parts increased $496,722 to $718,057 or 224.4% for a gross margin of 20% for the nine months ended December 31, 2013 from a gross margin of $221,335 or 17% for the nine months ended December 31, 2012. The improvement in gross margin reflects both the increase in sales net of an increase in costs of goods sold as a percentage of sales during the nine months ended December 31, 2013. Gross Margin from design services contributed $386,444 for the nine months ended December 31, 2012.
Research and Development Expenses
: Research and development expenses increased by $459,908 or 1,542.5% to $489,723 during the nine months ended December 31, 2013 from $29,815 for the nine months ended December 31, 2012. The increase is due to our expanded engineering team and development of our existing and new high performance vehicles including the recent introduction of our George Follmer edition and 30th year anniversary cars.
Sales and Marketing Expense
: Sales and marketing expenses relate to costs incurred to promote our existing and new products, such as through car shows and other media outlets, along with sales expenses such as commissions and incentives. Sales and marketing expenses increased by $826,528 or 714.3% to $942,238 for the nine months ended December 31, 2013 from $115,710 for the nine months ended December 31, 2012. The increase was primarily related to our sales and marketing team and marketing
efforts to promote our existing and new products including our attending of various car shows, launch of new products such as our George Follmer and 30th year anniversary cars, and the general promotion of our Company.
General and Administrative Expense
: General and administrative expenses include expenses for sales, marketing, engineering and administrative salaries and benefits, occupancy costs, professional fees, stock compensation, and other general and administrative costs. General and administrative expenses increased by $1,592,831 or 74.7% to $3,576,843 for the nine months ended December 31, 2013 from $1,984,012 for the nine months ended December 31, 2012. The increase is primarily comprised of $223,674 of higher salaries and benefits expense resulting from our expansion of personnel to support the increased sales volume; $180,562 increase in occupancy costs from our expansion of our campus to support our growth and new engineering and design facilities used to expand development; $504,481 in non-cash stock compensation primarily related to stock granted in exchange for board services; $208,000 from settlements of previous claim; and a $476,114 increase in other general and administrative and professional fee expenses incurred to support the growth of our Company.
Depreciation and Amortization Expense
: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $4,389 or 7.2% to $65,333 for the nine months ended December 31, 2013 from $60,944 for the nine months ended December 31, 2012.
Interest Expense
: Interest expense increased by $224,503 or 162.4% to $362,784 for the nine months ended December 31, 2013 from $138,281 for the nine months ended December 31, 2012. The increase is primarily attributable to $215,348 of non-cash interest expense during the nine months ended December 31, 2013 attributable to the amortization of the convertible debt discount on our $3,000,000 of senior secured convertible notes issued on June 27, 2013.
Expenses of Reverse Merger Transaction
: During the nine months ended December 31, 2013, we incurred $365,547 of expenses related to the reverse merger transaction. This includes $39,547 of liabilities assumed, $46,000 in legal fees, and dividends of $280,000 paid to our existing shareholders prior to the Merger. We did not have a comparable expense of this type during the nine months ended December 31, 2012.
Change in Fair Value of Derivative Liability
: In accordance with the FASB authoritative guidance, the conversion feature of our $3,000,000 convertible notes issued on June 27, 2013 was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability that is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the nine months ended December 31, 2013, we recorded a $73,892 loss due to the change in the derivative liability from issuance date to December 31, 2013. We did not have a comparable gain during the three months ended December 31, 2012.
Gain on Extinguishment of Derivative Liability
: Gain on extinguishment of derivative liability of $40,548 resulted from certain note holders request to convert their convertible debt to stock in accordance with the convertible note. We did not have a comparable gain during the three months ended December 31, 2012.
Net Loss
: Net loss increased by $3,396,861, or 197.4%, to a net loss of $5,117,754 for the nine months ended December 31, 2013 from a net loss of $1,720,893 for the nine months ended December 31, 2012. This net loss reflects the increased operating expenses offset somewhat by higher gross margin discussed above.
Liquidity and Capital Resources
On May 23, 2013, we entered into the Merger Agreement with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, SMS and Steve Saleen. The closing of the transactions contemplated by the Merger Agreement occurred on June 26, 2013.
The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the operations of our wholly-owned subsidiaries, Saleen Automotive and Saleen Signature Cars (Formerly SMS), for the periods presented. The accompanying consolidated financial statements are prepared as if we will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.
On June 26, 2013, we issued 3.0% Senior Secured Convertible Notes for a cash purchase price of $2,500,000 and the conversion of $500,000 of Saleen Automotive’s existing secured convertible debt, for an aggregate principal amount of $3,000,000 outstanding under the Notes. The Notes, excluding accrued interest through their maturity, are convertible into 40,000,000 shares of our common stock at a conversion price of $0.075 per share. Under the Notes, we are obligated to repay to the Purchasers on June 25, 2017, the principal amount of $3,000,000. The Notes accrue interest at the rate of 3% per annum (which interest rate shall be increased to 12% from and for the continuation of an event of default) on the unpaid/unconverted principal balance, payable on the maturity date of the Notes. As the Notes provide that interest is payable on the maturity date, no cash interest will be paid on the Notes.
On October 8, 2013, we entered into a Secured Promissory Note with W-Net pursuant to which W-Net loaned an aggregate of $500,000 to us. The note bears interest at the rate of 8% per annum, which is payable along with all principal under the note on October 7, 2014, unless earlier repaid. Our obligations under the note are secured by a second priority security interest in all of our assets, other than an S7 automobile in which W-Net has a first priority security interest. During the nine months ended December 31, 2013, and subsequently in January and February 2014, we entered into Subscription Agreements with accredited investors pursuant to which the investors purchased from us an aggregate of 6,453,333 shares of our common stock at a per share price of $0.15 for aggregate proceeds of $968,000. Management expects that the current funds on hand, together with current operations plus additional proceeds received from additional sales of stock subsequent to December 31, 2013 will be sufficient to continue operations through March 31, 2013 without additional funding. However, management will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the Company’s business beyond March 31, 2014.
As presented in the consolidated financial statements, we incurred a net loss of $5,117,754 during the nine months ended December 31, 2013, and losses are expected to continue in the near term. The accumulated deficit since inception was $13,861,286 at December 31, 2013. We have been funding our operations through private loans and the sale of common stock in private placement transactions. Management anticipates that significant additional expenditures will be necessary to develop and expand our automotive assets before significant positive operating cash flows will be achieved and funds will be needed in order to achieve these objectives.
Our consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred an accumulative loss of $13,861,286 from inception through December 31, 2013. In addition, we had a stockholders deficit of $8,066,266 as of December 31, 2013, and as of that date, we were delinquent in payment of $729,314 of payroll taxes, $1,402,889 of outstanding notes payable is in default, and had a negative working capital of $7,192,703. Our cash resources are insufficient to meet our planned business objectives without additional financing. These and other factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013, we had cash on hand in the amount of $10,840. In January and February 2014, we issued 2,003,333 shares of restricted common stock to certain accredited individuals ("Stock Subscriptions") at an offering price of $0.15 per share for total proceeds of $300,500. We will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the business beyond March 31, 2014. No assurance can be given that any additional financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for its stockholders, in case or equity financing.
Cash, total current assets, total assets, total current liabilities and total liabilities as of December 31, 2013 as compared to March 31, 2013, were as follows:
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December 31,
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March 31,
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2013
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2013
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Cash
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$
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10,840
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$
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4,434
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Total current assets
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559,036
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746,493
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Total assets
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1,161,372
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1,124,070
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Total current liabilities
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7,751,739
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4,722,099
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Total liabilities
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9,227,637
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5,272,357
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At December 31, 2013, we had a working capital deficit of $7,192,703 compared to a working capital deficit of $3,975,606 at March 31, 2013. Current liabilities increased to $7,751,739 at December 31, 2013 from $4,722,099 at March 31, 2013 primarily as a result of accounts payable, accrued payroll taxes, accrued interest, derivative liability, and increase in current portion of notes payable primarily related to additional borrowings.
Net cash used by operating activities for the nine months ended December 31, 2013 totaled $3,375,364 after the cash used in the net loss of $5,117,754 was decreased by $843,505 in non-cash charges offset by $898,885 in net changes to the working capital accounts. This compares to cash used by operating activities for the nine months ended December 31, 2012 of $1,050,159 after the net loss for the period of $1,720,898 was decreased by $383,444 in non-cash charges and by $287,290 in changes to the working capital accounts.
Net cash used in investing activities was $285,090 for nine months ended December 31, 2013. This compares to $237 of cash used in investing activities for the nine months ended December 31, 2012. This increase is primarily related to purchasing of tooling and other research and development activities.
Net cash provided by financing activities for the nine months ended December 31, 2013 was $3,666,860. Of this amount, $3,000,000 came from the issuance of our senior secured convertible notes; $550,000 came from the issuance of note payable to a shareholder; and $544,000 came from the issuance of 3,836,665 shares of common stock. Cash of $223,895 was used to pay principal on long term notes and cash of $203,243 was used to pay principal on notes payable to related parties. This compares to $1,046,512 in cash provided by financing activities during the nine months ended December 31, 2012, of which $864,573 came from the sale of common stock; $250,000 came from notes payable to a related party; $25,000 was used to pay principal on note payable to a related party; and $43,061 was used to pay principal on notes payable.
3% Senior Secured Convertible Notes Payable
On June 26, 2013, pursuant to a Securities Purchase Agreement, we issued senior secured convertible notes, having a total principal amount of $3,000,000, to 12 accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements. The Notes will pay 3.0% interest per annum with a maturity of 4 years. No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each Note is convertible at any time into common stock at a specified conversion price, which is currently $0.075 per share The Note conversion price is subject to specified adjustments for certain changes in the numbers of outstanding shares of our common stock, including conversions or exchanges of such. If our shares are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance.
Defaults on Notes Payable
As of December 31, 2013, we were in default on $984,465 and $385,972 of secured and unsecured notes payable, respectively. While we are in discussions with the note holders to arrange extended payment terms, the initiation of collection actions by these note holders may severely affect our ability to execute on our business plan. In addition, Saleen Signature Cars received a Complaint from our Senior Secured note payable to a bank, which was filed on February 6, 2014 in California Superior Court, Riverside County. The Complaint alleges, among others, breach of promissory note due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. We are currently involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their most “critical accounting policies” in management’s discussion and analysis of financial condition and results of operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following represents a summary of our critical accounting policies.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
Revenue Recognition
Sales of High Performance Cars and Parts
We generate revenues primarily from the sale of high performance automobiles and parts. We recognize revenue from the sale of completed high performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the our products or delivery of the products to the destination specified by the customer.
We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs upon acceptance by the customer when we place the cars or products with the buyer’s carrier. We regularly review our customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, we have no post-sales obligations.
Contract Revenue and Cost Recognition on Design Services
During the year ended March 31, 2013, we completed a contract a with a movie producer to develop and manufacture working replicas of high performance racing “supercars” that are to be featured in a new movie. We recognized revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because we consider costs to be the best available measure of progress on this contract. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. As of December 31, 2013, and March 31, 2013, there were no contracts in progress.
Research and Development Expenses
All research and development costs are expensed as incurred and include costs of employees and consultants who conduct research and development on our behalf.
Derivative Financial instruments
We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is re-valued at each reporting date, with changes in fair value reported in the condensed consolidated statement of operations. For stock-based derivative financial instruments, we use a Monte Carlo pricing model to value the derivatives instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Recently Issued Accounting Standards
Recent accounting pronouncements did not or are not believed by management to have a material impact on our present or future consolidated financial statements.