Notes
to Condensed Consolidated Financial Statements (Unaudited)
Three
Months Ended June 30, 2014 and 2013
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 fiscal year ending March 31, 2015, 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, 2014, which are included in the Company’s Annual Report on Form 10-K for
such year filed on June 30, 2014. The consolidated balance sheet as of March 31, 2014, has been derived from the audited financial
statements included in the Form 10-K filed on June 30, 2014.
NOTE
1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description
of the Company
The
Company designs, develops, manufactures and sells high performance vehicles built from base chassis’ of Ford Mustangs, Chevrolet
Camaros, and Dodge Challengers. The Company is a low volume 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 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. The Company’s
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.
History
of the Company
Saleen
Automotive, Inc. (formerly W270, Inc.) 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. Following its formation, the Company
issued an additional 1,000,000 shares of its common stock to Fry. 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, Fry and W-Net Fund I, L.P. ( “W-Net”), entered into a Stock Purchase Agreement (the “Purchase
Agreement”), pursuant to which Fry sold to W-Net 75.0% of the issued and outstanding shares of the Company’s common
stock
Merger
On
May 23, 2013, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California
Merger Corporation, its wholly-owned subsidiary, Saleen Florida Merger Corporation, its 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 the Company’s wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive
with Saleen Automotive surviving as one of the Company’s wholly-owned subsidiaries; (c) holders of the outstanding capital
stock of Saleen Automotive received an aggregate of 554,057 shares of the Company’s Super Voting Preferred Stock, which
was subsequently converted into 69,257,125 shares of the Company’s common 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 the Company’s
common stock (on a fully-diluted basis) was owned, collectively, by Saleen Parties (including 341,943 shares of the Company’s
Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of the Company’s common stock, issued
to Saleen pursuant to an Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive.
As a result of the Merger the Company is solely engaged in the Saleen Entities’ business, Saleen Automotive’s then
officers became the Company’s officers and Saleen Automotive’s then three directors became members of the Company’s
five-member board of directors. On June 17, 2013, the Company consummated a merger with WSTY Subsidiary Corporation, its wholly-owned
subsidiary, pursuant to which the Company amended its articles of incorporation to change its name to Saleen Automotive, Inc.
In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January
2014, the Company effected an increase in the number of its common shares authorized to 500,000,000 and all the remaining shares
of Super Voting Preferred Stock were converted into common stock of the Company and the Super Voting Preferred Stock ceased to
be a designated series of the Company’s preferred stock.
As
the owners and management of Saleen Automotive had voting and operating control of the Company after the Merger, the transaction
was accounted for as a recapitalization with the Saleen Entities deemed the acquiring companies for accounting purposes, and the
Company deemed the legal acquirer. Due to the change in control, the condensed 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 of the earliest periods presented
as capital stock reflecting the exchange ratio in the Merger. The amount of debt assumed upon the 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 for the three months ended June 30, 2013.
Consolidation
Policy
The
condensed consolidated financial statements 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 Year Information
The
Company has reclassified certain prior year amounts to conform to the current year presentation. This included reclassification
of engineering and sales and marketing salaries of $91,406 and $98,254, respectively, from general and administrative operating
expenses to research and development and sales and marketing expenses, respectively, and reclassification of promotional trade
discount expenses of $19,657 to revenue from sales and marketing expenses. The reclassification of these amounts had no impact
on consolidated net loss or cash flows.
Going
Concern
The
Company’s condensed consolidated 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 three months
ended June 30, 2014, the Company incurred an operating loss of $1,603,749 and utilized $1,423,194 of cash in operations. The Company
also had a stockholders’ deficit and working capital deficit of $4,530,646 and $3,757,048, respectively, as of June 30,
2014, and as of that date, the Company owed $612,716 in past unpaid payroll taxes, $352,795 of outstanding notes payable were
in default and $583,150 of accounts payable was greater than 90 days past due. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. The Company’s independent auditors, in their audit report for the
year ended March 31, 2014, expressed 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 June 30, 2014 the Company had cash on hand in the amount of $27,216
and is not generating sufficient funds from operations to cover current operating expenses. During the three months ended June
30, 2014, the Company raised $250,000 through the issuance of convertible notes and the Company entered into Subscription Agreements
with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company
an aggregate of 1,066,667 of restricted common shares at a per share price of $0.15 for aggregate proceeds of $160,000. However,
additional funding will be needed to continue operations through September 30, 2014. In addition, the Company will need and is
currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate its business
through and beyond September 30, 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 and covenants on its operations, in the case of debt financing or cause substantial dilution for
its stockholders, including diluting Saleen below 50% ownership, 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 estimates include the
estimated collectability of its accounts receivable, the valuation of the S7 Supercar held for sale, the valuation of long lived
assets, warranty reserves, 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 the FASB Accounting Standards Codification (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.
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.
Financial
instruments consist principally of cash, accounts receivable, 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.
The
following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at
fair value on the Company’s consolidated balance sheet on a recurring basis and their level within the fair value hierarchy
as of March 31, 2014. There were no such investments or liabilities as of June 30, 2014 that were measured and recorded on
a recurring basis.
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fair
value of Derivative Liability at March 31, 2014
|
|
|
$
|
—
|
|
|
$
|
5,032,786
|
|
|
$
|
—
|
|
|
$
|
5,032,786
|
|
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 condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company used a
weighted average Black–Scholes-Merton 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.
Inventories
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
|
|
(unaudited)
|
|
|
|
|
Parts and work in process
|
|
$
|
184,716
|
|
|
$
|
183,941
|
|
S7 Supercar held for sale
|
|
|
250,000
|
|
|
|
250,000
|
|
Total inventories
|
|
$
|
434,716
|
|
|
$
|
433,941
|
|
Advertising,
Sales and Marketing Costs
Advertising,
sales and marketing costs are expensed as incurred and are included in sales and marketing expenses. During the three months ended
June 30, 2014 advertising, sales and marketing expenses were $3,131, $56,589 and $410,032, respectively. During the three months
ended June 30, 2013, advertising, sales and marketing expenses were nill, $12,788, and $34,138, respectively.
Income
Taxes
The
Company accounts for income taxes under FASB 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 any
related deferred tax asset. Any change in the valuation allowance would 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 that vest over a period of time.
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.
Income
(Loss) per Share
The
Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. The basic EPS is calculated by
dividing the Company’s net income (loss) available to common stockholders by the weighted average number of common shares
during the period. Diluted EPS reflects the potential dilution, using the treasury stock method that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock
that then shared in the income (loss) of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding
options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period.
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 include, as of the earliest period presented, the equivalent number of common shares
that were converted upon conversion of all the Super Voting Preferred Stock, as these shares have the same characteristics of
common stock.
Warrants,
options and other potentially dilutive securities that are anti-dilutive have been excluded from the dilutive calculation when
their exercise price or conversion price exceeds the average stock market price during the period or the effect would be anti-dilutive
when applying to a net loss during the period presented. The following table presents a reconciliation of basic and diluted shares
for the three month periods ended June 30, 2014 and 2013:
|
|
Three Month Periods Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Basic weighted-average number of common shares outstanding
|
|
|
141,832,616
|
|
|
|
120,000,000
|
|
Diluted effect of potentially dilutive debt and equity
|
|
|
70,908,438
|
|
|
|
—
|
|
Diluted weighted-average number of potential common shares outstanding
|
|
|
212,741,054
|
|
|
|
120,000,000
|
|
Potential common shares excluded from the per share computations as the effect of their inclusion
would not be dilutive
|
|
|
13,146,432
|
|
|
|
35,645,134
|
|
Significant
Concentrations
Sales
to customers in excess of 10% of revenues and customers with receivable balances in excess of 10% of gross accounts receivable
were as follows:
|
|
Three Month Periods Ended
June 30, 2014
|
|
|
Three Month Periods Ended
June 30, 2013
|
|
|
|
Revenues
|
|
|
Receivables
|
|
|
Revenues
|
|
|
Receivables
|
|
Customer A
|
|
|
27
|
%
|
|
|
31
|
%
|
|
|
-
|
%
|
|
-
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
-
|
%
|
Customer C
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
11
|
%
|
|
-
|
%
|
Customer D
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
15
|
%
|
|
-
|
%
|
Customer E
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
18
|
%
|
|
-
|
%
|
Customer F
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
11
|
%
|
|
-
|
%
|
Recently
Issued Accounting Standards
On
May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU
2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it
with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue
based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating the
impact, if any, on adopting ASU 2014-09 on the Company’s results of operations or financial condition.
In
April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic
205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations
and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic
shift in operations or that have a major effect on the Company’s operations and financial results should be presented as
discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. Management
is currently evaluating the impact, if any, of adopting ASU 2014-08 on the Company’s results of operations or financial
condition.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future condensed consolidated financial statements.
NOTE
2 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Tooling
|
|
$
|
470,399
|
|
|
$
|
470,399
|
|
Equipment
|
|
|
321,189
|
|
|
|
264,837
|
|
Leasehold improvements
|
|
|
203,312
|
|
|
|
203,311
|
|
Construction-in-progress
|
|
|
153,807
|
|
|
|
—
|
|
Total, cost
|
|
|
1,148,707
|
|
|
|
938,548
|
|
Accumulated Depreciation and Amortization
|
|
|
(437,633
|
)
|
|
|
(391,724
|
)
|
Total Property, Plant and Equipment
|
|
$
|
711,074
|
|
|
$
|
546,824
|
|
Depreciation
and amortization expense for the three months ended June 30, 2014 and 2013 was $45,909 and $20,162, respectively.
NOTE
3 – NOTES PAYABLE
Notes
payable are comprised as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
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
full in October 2014 (1)
|
|
$
|
418,429
|
|
|
$
|
442,479
|
|
Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates,
currently in default (2) (5)
|
|
|
97,000
|
|
|
|
414,500
|
|
Subordinated secured note payable, interest at 10% per annum, payable March 16, 2010, currently
in default (3)
|
|
|
61,046
|
|
|
|
61,046
|
|
Subordinated secured note payable for legal services rendered, non-interest bearing, payable
on October 25, 2014, currently in default (4)
|
|
|
37,749
|
|
|
|
37,749
|
|
Unsecured notes payable, interest at 10% per annum payable on various
dates from July 31 to March 31, 2010, currently in default (5)(6)
|
|
|
55,000
|
|
|
|
320,000
|
|
Total notes payable
|
|
$
|
669,224
|
|
|
$
|
1,275,774
|
|
(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 March 31, 2014, and the occurrence of a change in control as a
result of the Merger. In April 2014, the Company entered into a settlement arrangement with the bank whereby the bank dismissed
this case in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal
and interest for May, June and July 2014. In accordance with the settlement arrangement, the Company was required to pay $418,429
to this bank in August 2014 as full settlement of remaining principal amount owed. In August 2014, the bank agreed to extend
this date by 90 days to November 2014 in exchange for $30,000 to be applied towards principal and interest on the loan.
|
|
|
(2)
|
Bonds and notes issued on March 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 June 30, 2014 and March 31, 2014, respectively, the Bonds were in default due to non-payment.
|
|
|
|
On May 7, 2014, the Company, along with its subsidiaries and Steve Saleen, entered into a
Settlement Agreement and Mutual Release with Thomas Del Franco a holder of a Bond payable of $317,500. See (5) below for further
discussion.
|
|
|
(3)
|
Note payable issued on March 16, 2010 due in full on March 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 as of June 30, 2014 and March 31, 2014 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 certain of the Company’s intellectual property. The note was in default
as of June 30, 2014 and March 31, 2014 due to non-payment.
|
|
|
(5)
|
On
May 7, 2014, the Company, along with its subsidiaries and Steve Saleen, entered into a Settlement Agreement and Mutual Release
(the “Settlement Agreement”) with Thomas Del Franco and Jason B. Cruz (the “Del Franco Parties”),
pursuant to which the Del Franco Parties agreed to fully and finally settle a claim filed against the Company for outstanding
Bond and note payables to Thomas Del Franco, which consisted of Bond and note payable of $317,230 and $200,000, respectively,
and unpaid interest of $187,535 in exchange for (1) the Company’s payment to Mr. Del Franco of $250,000 (the “Settlement
Payment”) and (2) issuance of 2,250,000 shares of its common stock (the “Settlement Shares” and together
with the Settlement Payment, the “Settlement Amount”). The Settlement Shares had a value of $382,500 based on
the closing price of the Company’s common stock on May 7, 2014 of $0.17. The parties to the Settlement Agreement also
agreed to release each other from all claims arising from their prior business dealings. The Del Franco Parties have agreed
to a contractual restriction on the sale of the Settlement Shares whereby for a period of 12 months from and after the expiration
of any applicable restricted periods imposed by applicable federal and state securities laws and regulations, including Rule
144 under the Securities Act of 1933, as amended (the “Securities Act”), the Del Franco Parties will not offer,
pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, more than 200,000 of the
Settlement Shares in any given calendar month. The Company recognized a gain of $72,265 in the Statement of Operations for
the three months ended June 30, 2014 based on the difference between the value of the common shares and the amount recorded
as of the date of settlement.
|
|
|
(6)
|
In
June 2014, the Company entered into a Settlement Agreement and Mutual Release agreement with Jim Marsh American Corporation
(“Marsh”) for an outstanding principal and interest of $100,000 and $53,374, respectively, in exchange for (1)
issuance of 800,000 shares of its common stock and (2) cash payment of $35,000. The Company issued the common shares in June
2014 and determined the value to be $120,000, which was based on the value of the common stock of $0.15 as of the date of
settlement. The remaining cash payment of $35,000 was unpaid and was included in current portion of notes payable as of June
30, 2014. In accordance with the Settlement Agreement, Marsh agreed to a contractual restriction on the sale of the Shares
whereby Marsh agreed to not transfer or dispose of, directly or indirectly, more than 80,000 of the Shares in any given calendar
month.
|
Total
notes payable interest expense for notes included in Note 3 above and Notes 4 and 5 below was $89,226 and $68,989, respectively,
for the three months ended June 30, 2014 and 2013. As of June 30 and March 31, 2014, $213,048 and $380,257, respectively, of interest
on notes payable remains unpaid.
NOTE
4 – NOTES PAYABLE TO RELATED PARTIES
Notes
payable to related parties are as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Unsecured note payable to a stockholder, non-interest bearing, due on April 1, 2014,
currently in default.
(1)
|
|
$
|
102,000
|
|
|
$
|
102,000
|
|
Unsecured note payable to a stockholder, interest at 10% per annum payable at various maturity
dates, settled in April 2014.
(2)
|
|
|
—
|
|
|
|
32,452
|
|
Unsecured $100,000 revolving promissory note to a stockholder, interest at 12% per annum payable
in full on November 14, 2014. $25,000 available at June 30, 2014.
|
|
|
75,000
|
|
|
|
75,000
|
|
Total notes payable, related parties
|
|
$
|
177,000
|
|
|
$
|
209,452
|
|
(1)
|
Represents
a Bond payable of $64,500 issued to a stockholder on March 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 stockholder payable on various dates ranging from September 2008 to August 2010.
On May 21, 2013, the Company entered into a Settlement Agreement and Mutual General Release by cancelling the note and bond
and agreeing to enter into a new note to pay $135,000 on or before April 1, 2014, which represented principal plus
interest to be accrued through April 1, 2014. The note was in default as of June 30, 2014 due to non-payment.
|
|
|
(2)
|
Unsecured
note payable to a related party issued on November 3, 2008 for original principal of $60,000 bearing interest at 10% per annum
and due in full on February 10, 2009. In April 2014, the Company entered into a Settlement Agreement and Mutual General Release
with this note holder whereby it agreed to issue 527,520 shares of its common stock along with a five-year warrant to purchase
527,520 shares of its common stock at an exercise price of $0.15 per share in exchange for cancellation of all amounts owed
and mutual general release. The value of the common stock issued was $110,779 based on a stock price of $0.21 on date of settlement.
The Company valued the warrants at $122,103 using the Black-Scholes-Merton option pricing model using the following assumptions:
(i) fair market value of stock of $0.21; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate
of 1.75% and (v) expected term of 5 years. The Company recognized a loss of $153,754 in the Statement of Operations for the
year ended March 31, 2014 based on the difference between the value of the common shares and stock warrants issued and the
amount owed.
|
NOTE
5 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable are as follows:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Senior secured convertible notes payable to private accredited investor group,
convertible into 34,550,865 shares of common stock (including accrued interest) as of June 30, 2014, interest accrued at 3%
per annum, notes mature on June 25, 2017
|
|
$
|
2,509,245
|
|
|
$
|
2,586,732
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible notes payable to private accredited investor group, convertible into
36,357,573 shares of common stock (including accrued interest), interest accrued at 7% per annum, notes mature in March, 2017
|
|
|
2,500,000
|
|
|
|
2,250,000
|
|
|
|
|
5,009,245
|
|
|
|
4,836,732
|
|
Less: discount on notes payable
|
|
|
(3,507,215
|
)
|
|
|
(3,498,981
|
)
|
Notes payable, net of discount
|
|
$
|
1,502,030
|
|
|
$
|
1,337,751
|
|
Senior
secured convertible notes
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 balance of convertible notes outstanding as of March 31, 2014
was $2,586,732. During the three months ended June 30, 2014, a note holder converted $77,487 of principal and $2,664 of interest
into 1,016,667 shares of the Company’s common stock. The balance of the convertible notes outstanding as of June 30, 2014
was $2,509,245. The Notes pay 3.0% interest per annum with a maturity of 4 years (June 25, 2017) and are secured by all assets
and intellectual property of the Company. No cash interest payments are 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 the Company’s common stock at a specified conversion price, which currently is $0.075
per share. Prior to June 2014, the note conversion price was subject to specified adjustments for certain changes in the numbers
of outstanding shares of the Company’s common stock, including conversions or exchanges thereof, and the agreements included
an anti-dilution provisions that allowed for the automatic reset of the conversion or exercise price upon any future sale of the
Company’s common stock instruments at or below the then current exercise price. In June 2014, in exchange for the issuance
in aggregate of 389,923 shares of its common stock valued at $58,488, the Company entered into a First Amendment to Saleen Automotive,
Inc. 3.0% Secured Convertible Note (“3% First Amendment”) to remove all specified adjustments to the conversion price
except for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or
enters into a stock split of its common shares the conversion price would adjust proportionally. In addition, if a Fundamental
Transaction, as defined, were to occur the potential liquidated damages was set to a fixed amount. The Company recorded $58,488
as additional debt discount related to the value of the 389,923 shares issued, which is being amortized over the remaining term
of the Notes.
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 prior to June 2014 the conversion prices of the notes were not a fixed amount
because they were subject to adjustment based on the occurrence of future offerings or events. As a result, the Company determined
that the conversion features were 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 of the notes on June
26, 2013, the initial fair value of the embedded beneficial conversion feature of the notes was $1,660,656. This amount was 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). As a result of the 3% First Amendment entered into in June 2014, the conversion price is no longer
subject to fluctuation based on the occurrence of future offerings or events except for standard anti-dilution provisions whereby
if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the
conversion price would adjust proportionally. As a result, the Company determined that the derivative liability was extinguished
in June 2014 (See Note 6).
During
the three months ended June 30, 2014 and June 30, 2013, the Company amortized $96,421 and $4,550, respectively, of the valuation
discount as additional interest expense. As of June 30, 2014 and March 31, 2014, the remaining unamortized valuation discount
of $1,158,936 and $1,248,981, respectively, has been offset against the face amount of the notes for financial statement purposes.
Unsecured
convertible notes
In
March and April 2014, as amended in June 2014, the Company issued 7% Unsecured Convertible Notes, having a total principal amount
of $2,250,000 and $250,000, respectively, to 5 accredited investors of which $2,000,000 was received from 3 investors who participated
in the June 26, 2013 offering. The notes were issued in a private placement, exempt from the Securities Act registration requirements.
The notes pay 7.0% interest per annum with a maturity of 3 years (March and April, 2017). No cash interest payments are 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 initially convertible at any time into the Company’s common stock at a specified conversion price, which currently
is $0.07 per share. The conversion price is adjustable to the lower of $0.07 or the three lowest daily volume weighted average
prices of the Company’s common stock during the twenty consecutive trading days immediately preceding any conversion date.
However, in no event shall the conversion price be lower than $0.03 per share. In addition, the conversion price adjusts for standard
anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock
split of its common shares the conversion price would adjust proportionally.
In
June 2014, in exchange for the issuance in aggregate of 357,143 shares of its common stock valued at $53,571, the Company entered
into a First Amendment to Saleen Automotive, Inc. 7% Convertible Note whereby effective as of March 31, 2014 or the applicable
issuance date for notes issued thereafter, the conversion price would in no event adjust below $0.03 per share. In addition, if
a Fundamental Transaction, as defined, were to occur the potential liquidated damages was set to a fixed amount. The Company recorded
$53,571 as additional debt discount related to the value of the shares issued, which is being amortized over the remaining term
of the notes.
As
the conversion price of $0.07 reflected a price discount below the fair market value of the Company’s common stock as of
the issuance date of the notes, the Company determined that there was deemed a beneficial conversion feature associated with these
notes. As such, the Company recorded $2,250,000 and $250,000 in March 2014 and April 2014, respectively, representing the intrinsic
value of the beneficial conversion feature at the issuance date of the notes in additional paid-in capital. The value of the beneficial
conversion feature is being amortized as additional interest expense over the term of the notes, which totaled $205,292 for the
three months ended June 30, 2014. As of June 30 and March 31, 2014, the remaining unamortized valuation discount of $2,348,279
and $2,250,000, respectively, has been offset against the face amount of the notes for financial statement purposes.
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 above), did not have fixed settlement provisions because their conversion prices could be lowered if the
Company issues securities at lower prices in the future. 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 had been characterized as a derivative liability that was re-measured at the end of every reporting period
with the change in value reported in the statement of operations. As discussed further in Note 5 above, in June 2014 the
Company entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note to remove all specified adjustments
to the conversion price except for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction,
pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally. As a result
of this amendment, after June 17, 2014 the Company no longer recognizes a derivative liability related to these notes.
As
of June 17, 2014 and March 31, 2014, the derivative liability was valued using a Black-Scholes-Merton model with the following
assumptions:
|
|
June 17, 2014
|
|
|
March 31, 2014
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.02
|
%
|
|
|
0.05
|
%
|
Expected volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
Expected life (in years)
|
|
|
0
years
|
|
|
|
.25
years
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
2,586,732
|
|
|
$
|
5,032,786
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own volatility as
the estimated volatility. The expected life of the conversion feature of the notes was nill, as the Company no longer recognizes
a derivative liability related to these notes after June 17, 2014. 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.
During
the three months ended June 30, 2104, the Company recognized $2,446,054 as other income, which represented the difference in the
value of the derivative between March 31, 2014 and June 17, 2014. In addition, the Company recognized $2,586,732 as other income,
which represented the remaining derivative liability as of June 17, 2014, as the Company no longer recognizes a derivative liability
related to these convertible notes.
NOTE
7 – RELATED PARTY TRANSACTIONS
The
amounts of accounts payable to related parties as of June 30 and March 31, 2014 are as follows:
Related Party:
|
|
June 30, 2014
|
|
|
March 31, 2014
|
|
Steve Saleen
(a)
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
Michaels Law Group
(b)
|
|
|
42,572
|
|
|
|
23,954
|
|
Top Hat Capital
(c)
|
|
|
37,500
|
|
|
|
25,000
|
|
|
|
$
|
180,072
|
|
|
$
|
148,954
|
|
(a)
|
During
the three months ended June 30, 2013, the Company incurred $60,000 in officers’ salary expense due its Director, Chairman
and CEO, Mr. Steve Saleen. As of June 30 and March 31, 2014, the Company owed $100,000 to Mr. Saleen for his unpaid officers’
salary.
|
|
|
(b)
|
During
the three months ended June 30, 2014 and 2013, the Company incurred $33,618 and $94,299, respectively, in General Counsel
Services and legal fees expense with Michaels Law Group, a firm owned by its Director and General Counsel, Mr. Jonathan Michaels.
As of June 30, 2014 and March 31, 2014, $42,572 and $23,954, respectively, was payable to Michaels Law Group for these services.
|
|
|
(c)
|
During
the three months ended June 30, 2014, the Company incurred $25,000 in investment advisor and research services from Top Hat
Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of June 30, 2014 and March
31, 2014, $37,500 and $25,000, respectively, was payable to TopHat Capital for these services.
|
Other
Transactions
During
the three months ended June 30 2014, the Company paid $25,000 for research report services to Crystal Research Associates, whose
co-founder and Chief Executive Officer, Jeffrey Kraws, is a Director of the Company.
During
the three months ended June 30 2013, the Company incurred $101,208 in accounting advisory and CFO services with Miranda &
Associates, a firm owned by its former Chief Financial Officer, Mr. Robert Miranda.
During
the three months ended June 30, 2013, the Company issued 5,277 shares of its Super Voting Preferred stock or the equivalent of
659,625 shares of its Common Stock, to Robert J. Miranda and Jonathan Michaels (329,811 common shares each). These shares were
valued at $250,000, which was recorded as director’s fee expense. These shares were issued in consideration of Messrs. Miranda’s
and Michaels’ service on the Company’s board of directors for the period April 1, 2013 through March 31, 2014.
NOTE
8 – STOCKHOLDERS’ EQUITY
Issuance
of common stock
During
the three months ended June 30, 2014, the Company entered into Subscription Agreements with individual accredited investors (the
“Subscribers”) pursuant to which the Subscribers purchased an aggregate of 1,016,667 restricted shares of the
Company’s common stock at a per share price of $0.15 for aggregate proceeds of $152,500, and also received Common Stock
Purchase Warrants to purchase 1,016,667 shares of the Company’s common stock at an exercise price of $0.15 per share.
During
the three months ended June 30, 2014, the Company issued 1,000,000 shares of its common stock valued at $170,000 in exchange for
services.
During
the three months ended June 30, 2014, the Company issued 1,285,460 shares of common stock to settle $470,534 of previously recorded
accounts to be settled through issuance of equity securities. As a result, the Company reclassified the $470,534 from a liability
as of March 31, 2014 to equity during the three months ended June 30, 2014.
During
the three months ended June 30, 2013, the Company issued the equivalent of 12,178 shares of its Super Voting Preferred Stock,
or 1,522,250 shares of its common 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 $576,981 based on management’s estimate
of value of the shares issued and was recorded as general and administration expense.
Warrants
The
following summarizes warrant activity for the Company during the three months ended June 30, 2014:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining
Contractual Term
|
|
Outstanding
March 31, 2014
|
|
|
|
11,252,245
|
|
|
$
|
0.15
|
|
|
|
4.8
|
|
Issued
|
|
|
|
1,944,187
|
|
|
|
0.15
|
|
|
|
4.9
|
|
Exercised
|
|
|
|
(50,000
|
)
|
|
|
0.15
|
|
|
|
—
|
|
Outstanding
June 30, 2014
|
|
|
|
13,146,432
|
|
|
$
|
0.15
|
|
|
|
4.6
|
|
During
the three months ended June 30, 2014, warrants to purchase 50,000 shares of the Company’s common stock were exercised for
total proceeds of $7,500. As of June 30, 2014, 13,146,432 warrants were exercisable and the intrinsic value of the warrants was
nil.
NOTE
9 – COMMITMENTS AND CONTINGINCIES
Purchase
Commitments
In
April 2014, the Company entered into an agreement with BASF to exclusively use BASF’s products for paint work. The agreement
continues from May 2014 until the Company purchases in aggregate $4,131,000 of BASF products. If the aggregate purchases of BASF
products are less than $1,697,000 over a period of 36 consecutive months, the Company is required to repay BASF 6.1% of the shortfall
between $1,697,000 and the amount it actually purchased over this period. In consideration for the Company’s exclusive use
of BASF’s products and fulfilling this purchase commitment, BASF paid the Company $250,000, which was recorded as deferred
vendor consideration. This amount will be recorded as a reduction of cost of services based on a systematic and rational allocation
of the cash consideration offered to the underlying transaction.
In
May 2014, the Company entered into an agreement with FinishMaster, Inc. (“FinishMaster”) to exclusively use FinishMaster’s
paint material supplies. The agreement continues from May 2014 until the Company purchases in aggregate $1,555,000 of FinishMaster
products. In consideration for the Company’s exclusive use of FinishMaster’s products and fulfilling this purchase
commitment, FinishMaster paid the Company $25,000, which was recorded as deferred vendor consideration, and FinishMaster will
pay an additional $25,000 upon the achievement of purchase level milestones, as outlined in the agreement. Should the Company
not complete a set purchase level milestone, the Company would be required to re-pay the $25,000 along with $11,475 compensation
to FinishMaster. This initial amount paid will be recorded as a reduction of cost of services based on a systematic and rational
allocation of the cash consideration offered to the underlying transaction.
Litigation
The
Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. The Company
is currently a party to several legal proceedings related to claims for payment that are currently accrued for in its financial
statements as accounts or notes payable. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals
for contingencies to the extent that 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. Material legal proceedings
that are currently pending are as follows:
SSC
is the plaintiff in a case filed against Connects Marketing and Eric Hruza on July 2, 2012 in the United States District Court,
Central District of California, Southern Division, for misappropriation of trade secrets, trademark infringement and other related
causes of action. The suit seeks damages in excess of $1,000,000 and is currently pending.
SSC
is the plaintiff in a case filed against Douglas Lopez & Rumm, LLP, Diana Lopez and Dana Douglas on October 16, 2012 in the
California Superior Court, Orange County, for legal malpractice for their failure to adequately represent SSC in its litigation
against Connects Marketing for the installation of defective engines in SSC vehicles. The suit seeks damages in excess of $1,000,000.
The defendants have filed a cross-complaint against SSC and Saleen for payment for legal services rendered in the amount of $10,000.
The Company has recorded this liability in its books.
In
February 2014, SSC received a Complaint from a bank 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 the occurrence of a change
in control as a result of the Merger. In April 2014, the bank agreed to dismiss the suit in exchange for the payment of $124,000
that was applied towards principal and unpaid fees along with advance loan principal and interest for May, June and July 2014,
and the Company’s agreement to pay the remaining recorded balance to the bank in August 2014. In August 2014, the bank agreed
to extend this date by 90 days to November 2014 in exchange for $30,000 to be applied towards principal and interest on the loan.
Although
the Company’s management currently believes that resolving claims against the Company, individually or in aggregate, will
not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties and management’s
views of these matters may change in the future.
NOTE
10 – SUBSEQUENT EVENTS
Note
Conversion
In
July 2014, six note holders converted $428,704 of principal and $12,879 of interest to 5,887,775 shares of the Company’s
common stock.
Legal
The
Company was a plaintiff in a case filed against Inland Empire Auto Body & Paint, Inc. on August 8, 2012 in the California
Superior Court, Riverside County, for breach of contract related to several paint jobs performed by Inland Empire on SSC vehicles.
The suit sought damages in excess of $30,000. This case was settled in July 2014 for damages awarded to the Company of $15,000
payable over 20 months.
Stock
Options
On
August 12, 2014, the Company’s board of directors approved the grant of options to purchase up to 8,778,000 shares of the
Company’s common stock at an exercise price of $0.10 per share. For employees who have been with the Company for at least
one year, the options will vest over a period of three years with one-third vesting immediately and the remaining to vest ratably
over the remaining period. For employees who have been with the Company for less than one year, the options will vest over a period
of three years with one-third to be fully vested after one year and the remaining to vest ratably over the remaining period. The
Company valued the options at $789,531 using the Black-Scholes-Merton option pricing model using the following assumptions: (i)
fair market value of stock of $0.10; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 2.44%
and (v) expected term of 10 years.
On
August 12, 2014, the Company’s board of directors approved the grant of options to purchase up to 500,000 shares of the
Company’s common stock to three of the Company’s board members who joined the board in October 2013, December 2013
and May 2014 for a total of 1,500,000 shares at an exercise price of $0.10 per share. One-third of the options will vest immediately
with the remaining options vesting one-third on each of the following two anniversary dates from date the board member first joined
the board. The Company valued the options at $134,915 using the Black-Scholes-Merton option pricing model using the following
assumptions: (i) fair market value of stock of $0.10; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk
free rate of 2.44% and (v) expected term of 10 years.
Common
Stock Issuance
In
July 2014, the Company issued 166,667 shares of common stock to settle $25,000 of previously recorded accounts to be settled through
the issuance of equity securities.