Notes
to Condensed Consolidated Financial Statements (Unaudited)
Three
and Nine month Periods Ended December 31, 2015 and 2014
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, 2016, 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, 2015, which are included in the Company’s Annual Report on Form 10-K for
such year filed on July 14, 2015. The consolidated balance sheet as of March 31, 2015, has been derived from the audited financial
statements included in the Form 10-K filed on July 14, 2015.
NOTE
1 - NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description
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 designs, develops, manufactures and sells high performance vehicles built from base chassis of Ford Mustangs,
Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. 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, Dodge and Tesla) of OEM American sports and electric vehicles. A high performance car is an automobile that
is designed and constructed specifically for speed and performance. The design and construction of a high performance car involves
not only providing a capable power train but also providing the handling, aerodynamics and braking systems to support it. The
Company’s Saleen-branded products include a complete line of upgraded high performance vehicles, automotive aftermarket
specialty parts and lifestyle accessories.
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 (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 the 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.
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.
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 nine months
ended December 31, 2015, the Company incurred a net loss of $2,077,085 and utilized $894,423 of cash in operations. The Company
also had a stockholders’ deficit and working capital deficit of $10,664,234 and $7,446,888, respectively, as of December
31, 2015, and as of that date, the Company owed $762,639 in past unpaid payroll and other taxes; $846,004 of outstanding notes
payable were in default; $1,317,928 of accounts payable was greater than 90 days past due; and $401,689 is owed on past due rent
as of the date of filing of this Form 10-Q. In addition, in May 2015, the Company received a complaint from a bank alleging breach
of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and
fees of $369,302. A default under the loan agreement triggers a cross default under the Company’s 3% Senior Secured Convertible
Notes and 7% Convertible Notes (see Note 5) enabling the holders thereof to, at their election until the later of 30 days after
such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of
the Company’s indebtedness.
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, 2015, 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 profit from operations. At December 31, 2015, the Company had cash on hand in the amount of $60,850
and is not generating sufficient funds to cover operations. The Company has utilized funding to operate the business during the
nine months ended December 31, 2015 with advance royalty payments of $500,000 obtained from an Intellectual Property License Agreement
entered into in June 2015 and has received proceeds of $750,000 and $120,000 in secured convertible notes and notes payable from
a related party, respectively. However, the Company will need and is currently working on obtaining additional funds, primarily
through the issuance of debt or equity securities to operate its business through and beyond the date of this Form 10-Q filing.
As further discussed in the Company’s Form 8-K filed on December 8, 2015 and further in Note 5, on December 2, 2015, the
Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), with SM Funding Group, Inc. (“SM
Funding”). Under the Purchase Agreement, the Company issued to SM Funding a 12% Senior Secured Convertible Note (“Senior
Note”) under which SM Funding may advance to the Company up to $2,000,000. Amounts outstanding under the Senior Note are
convertible into Preferred Stock the Company may issue to accredited investors in a private placement of up to $10,000,000, but
not less than $8,000,000. Under the Senior Note, the Company agreed that it will not enter into, create, assume or suffer to exist
any additional indebtedness for borrowed money. The Company has received aggregate advances from SM Funding of $750,000 as of
December 31, 2015 and $960,000 as of the date of this filing of Form 10-Q. However, SM Funding is currently in default of its
obligations to make advances to the Company under a Binding Letter of Intent (the “LOI”) the Company entered into
with SM Funding on October 21, 2015. Accordingly, no assurance can be given that the Company will complete the financing transactions
with SM Funding, including obtaining additional advances under the Senior Note, and 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 in the case of convertible debt and 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 inventories and long lived assets, warranty reserves, the
assumptions used to calculate derivative liabilities, and equity instruments issued for financing and compensation. Actual results
could differ from those estimates.
Fair
Value of Financial Instruments
The
Company accounts for the fair value of financial instruments in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS
No. 157 “Fair Value Measurements”. 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.
Authoritative
guidance provided by the 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
Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued liabilities,
customer deposits, 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.
As
of December 31, 2015 and March 31, 2015, the Company’s condensed consolidated balance sheets included the fair value of
derivative liabilities of $181,565 and $1,268,588, respectively, which was based on Level 2 measurements.
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. 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.
To
determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses
a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company
reviews its convertible securities to determine their classification is appropriate.
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
basic EPS is calculated by dividing the Company’s net income or loss available to common stockholders by the weighted average
number of common shares during the period. Outstanding shares of Super Voting Preferred Stock are included in the calculation
as they are considered as a common stock equivalent. The diluted EPS is calculated by dividing the Company’s net income
or loss available to common stockholders 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 securities unless the effects thereof are anti-dilutive, that is inclusion of such shares would reduce the net
loss or increase the net income.
For
the three and nine months ended December 31, 2015 and 2014, the basic and diluted shares outstanding were the same, as potentially
dilutive shares were considered anti-dilutive. As of December 31, 2015, stock options, warrants, and convertible notes convertible
or exercisable into 6,870,333, 13,313,099, and 485,568,933 shares of common stock, respectively, have been excluded from diluted
loss per share because they are anti-dilutive.
As
of December 31, 2014, stock options, warrants, and convertible notes convertible or exercisable into 7,271,333, 13,313,099, and
139,159,937 shares of common stock, respectively, have been excluded from diluted loss per share because they are anti-dilutive.
Significant
Concentrations
Two
customers comprised 18% and 10% of sales, respectively, for the three months ended December 31, 2015 and one separate customer
comprised 14% of sales for the nine months ended December 31, 2015. One customer comprised 93% of accounts receivable at December
31, 2015.
Sales
to three separate customers comprised 28%, 11% and 10%, respectively, and one separate customer comprised 13% of revenues for
the three and nine months ended December 31, 2014, respectively. Two different customers comprised 63% and 37% of accounts receivable
as of December 31, 2014.
Recently
Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from
Contracts with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing
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 interim and annual periods beginning after December
15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of
the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements
and disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s
ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide
certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.
The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted.
In
November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in
a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not
change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial
instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded
derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities
that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for
public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record
a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.
ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and
disclosures.
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:
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
Tooling
|
|
$
|
711,053
|
|
|
$
|
698,243
|
|
Equipment
|
|
|
210,980
|
|
|
|
210,980
|
|
Leasehold improvements
|
|
|
203,310
|
|
|
|
203,310
|
|
Total, cost
|
|
|
1,125,343
|
|
|
|
1,112,533
|
|
Accumulated depreciation and amortization
|
|
|
(600,081
|
)
|
|
|
(520,417
|
)
|
Total Property, Plant and Equipment
|
|
$
|
525,262
|
|
|
$
|
592,116
|
|
Depreciation
and amortization expense was $79,664 and $109,715 for the nine months ended December 31, 2015, and 2014, respectively.
NOTE
3 - NOTES PAYABLE
Notes
payable, exclusive of accrued interest, are comprised as follows:
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
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 March 2015, currently in default
(1)
|
|
$
|
358,704
|
|
|
$
|
358,704
|
|
Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default
(2)
|
|
|
97,000
|
|
|
|
97,000
|
|
Subordinated secured note payable, interest at 6% per annum, payable March 16, 2010, currently in default
(3)
|
|
|
61,046
|
|
|
|
61,046
|
|
Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default
(4)
|
|
|
55,000
|
|
|
|
55,000
|
|
Promissory note, interest at 6%, secured by a vehicle
(5)
|
|
|
-
|
|
|
|
100,000
|
|
Total notes payable
|
|
$
|
571,750
|
|
|
$
|
671,750
|
|
(1)
|
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 March 31, 2014, and the occurrence of a change in control as a result of the Merger. The bank
sought full payment of principal and interest owed. 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 through July 2014. From August 2014 to March 31, 2015, in exchange for
payments totaling $90,000, the bank agreed to extend this arrangement through various dates with the last date being March
2015. On April 29, 2015, the bank filed a claim against the Company alleging breach of the loan agreement, breach of a commercial
guaranty by Steve Saleen, Chairman and CEO, and the bank demanded full payment of principal and interest outstanding (see
Note 10).
|
|
|
(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 December 31, 2015 and March 31, 2015,
respectively, the Bonds were in default due to non-payment.
|
|
|
(3)
|
Note
payable issued on March 16, 2010 due in full on March 16, 2011. The note accrued 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 December 31, 2015 and March 31, 2015 due to non-payment.
|
|
|
(4)
|
In
June 2014, the Company entered into a Settlement Agreement and Mutual Release agreement with a note holder for one of the
notes that had 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 $112,000, which was based on the value of the Common Stock of $0.14 as of the date of settlement.
The remaining cash payment of $35,000 was unpaid and was included in notes payable as of December 31, 2015 and March 31, 2015.
In addition, another separate note for $20,000 remains outstanding as of December 31, 2015 and is in default due to non-payment.
|
|
|
(5)
|
The
Company entered into a note agreement on March 25, 2015 for $100,000 principal and interest bearing at a rate of 6% per annum.
The note was secured by a vehicle provided to the note holder by the Company and was due on demand after 60 days following
the date the secured vehicle was returned to the Company. In June 2015, the note holder agreed to cancel this note and attribute
the then principal outstanding of $100,000 as partial payment against advance royalties received in conjunction with an Intellectual
Property License Agreement entered into with the note holder (see Note 7).
|
NOTE
4 - NOTES PAYABLE TO RELATED PARTIES
Notes
payable to related parties, exclusive of accrued interest, are as follows:
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
Unsecured note payable to a stockholder at 10% per annum, due on April 1, 2014, currently in default.
|
|
$
|
102,000
|
|
|
$
|
102,000
|
|
Unsecured 10% note payable to a stockholder and convertible note holder at 10% per annum, payable on demand
|
|
|
120,000
|
|
|
|
-
|
|
Unsecured payable to a stockholder at 10% per annum, payable on demand
|
|
|
123,584
|
|
|
|
165,000
|
|
Total notes payable, related parties
|
|
$
|
345,584
|
|
|
$
|
267,000
|
|
NOTE
5 - CONVERTIBLE NOTES PAYABLE
Convertible
notes payable, exclusive of accrued interest, are as follows:
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
3% Senior secured convertible notes payable to a private accredited investor group, convertible into 133,666,799 shares of Common Stock (including accrued interest), $2,001,720 due in June 2017 and $499,892 due in January 2019.
|
|
$
|
2,501,612
|
|
|
$
|
2,501,612
|
|
|
|
|
|
|
|
|
|
|
12% Senior secured convertible note payable to a private accredited inventory group, due on October 12, 2016, convertible into shares of preferred stock that may be issued by the Company in a subsequent offering
|
|
|
750,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
7% Unsecured convertible notes payable to private accredited investor group, convertible into 82,484,267 shares of Common Stock (including accrued interest) as of December 31, 2015, interest accrued at 7% per annum, notes mature in March 2017
|
|
|
2,200,000
|
|
|
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible notes payable to five separate private accredited investors, convertible into 269,824,686 shares of Common Stock (including accrued interest) as of December 31, 2015, interest accrued at 8% to 12% per annum, notes mature on various dates ending before December 31, 2015, in default
|
|
|
172,254
|
|
|
|
618,225
|
|
|
|
|
5,623,866
|
|
|
|
5,319,837
|
|
Less: discount on notes payable
|
|
|
(954,004
|
)
|
|
|
(1,836,828
|
)
|
Notes payable, net of discount
|
|
|
4,669,862
|
|
|
|
3,483,009
|
|
Less: notes payable, current
|
|
|
(922,254
|
)
|
|
|
(267,332
|
)
|
Notes payable, long-term
|
|
$
|
3,747,608
|
|
|
$
|
3,215,677
|
|
3%
Senior secured convertible notes
On
June 26, 2013, pursuant to a Securities Purchase Agreement, as amended, the Company issued senior secured convertible notes, having
a total principal amount of $3,000,000, to 12 accredited investors (“2013 Notes”). The 3% Notes pay 3.0% interest
per annum with a maturity of 4 years from the date of issuance (June 2017 and January 2019) and are secured by all assets and
intellectual property of the Company. 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
3% Note is convertible at any time into Common Stock at a specified conversion price, which initially was $0.075 per share. In
June 2014, the Company entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note (“3% First
Amendment”) and removed 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 in the 2013 Note agreement,
were to occur the potential liquidated damage was set to a fixed amount. As an inducement for the amendment, the Company issued
an aggregate of 389,923 shares of Common Stock with a fair value of $58,488 determined based on the market value of the Company’s
Common Stock of $0.15 as of the date of issuance. Further, the Company accounted for this amendment as a modification for accounting
purposes, and as such, the derivative liability recorded of when the note was originally issued was deemed extinguished.
On
January 23, 2015, the Company entered into a Second Amendment to 3% Senior Secured Convertible Notes whereby the conversion price
of the 2013 Notes were amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during
the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elect to convert
all or part of the note. However, in no event shall the conversion price be less than $0.02. In conjunction with this amendment,
the Company entered into two additional 3% Senior Secured Convertible Notes in the principal amount of $499,892 with two accredited
investors who participated in the June 26, 2013 offering (“2015 Notes” and collectively “3% Notes”) of
which $98,708 was converted from a revolver note payable previously entered into with one investor in November 2013.
In
May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty
by Steve Saleen and demanding full payment of principal, interest and fees of $369,302 (see Note 3). A default under the loan
agreement triggers a cross default under the 3% Notes enabling the holders thereof to, at their election until the later of 30
days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the
maturity of the indebtedness under the 3% Notes requiring the Company to pay, upon such acceleration, the sum of (1) 120% of the
outstanding principal plus (2) 100% of all accrued and unpaid interest plus (3) all other amounts due under the 3% Notes. Upon
the occurrence of an event of default under the 3% Notes interest accrues at the rate of 12% per annum. The Company continues
to classify the 3% Notes as long term, as a judgment against the Company has not been granted and the Company disagrees with the
compliant and plans to defend its position. As of the date of this filing of Form 10-Q, the Company has not received a notice
of default from the holders of the 3% Notes.
In
June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon
conversion of the 3% Notes. As a result, the Company determined that the conversion feature of the 3% Notes were not considered
indexed to the Company’s own stock pursuant to FASB guidance on “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. Therefore, the Company characterized the fair value of the 3% Note conversion feature of $106,781 in
June 2015 as derivative liability. See Note 6 for further discussion.
During
the nine months ended December 31, 2015 and 2014, the Company amortized $24,761 and $270,701, respectively, of the valuation discount.
The remaining unamortized valuation discount of $49,260 and $74,021 as of December 31, 2015 and March 31, 2015, respectively,
has been offset against the face amount of the notes for financial statement purposes. As of December 31, 2015, the principal
balance of the convertible Notes outstanding was $2,501,612 and potentially convertible into 133,666,799 shares of Common Stock
including accrued and unpaid interest.
12%
Senior secured convertible note
As
noted above under “Going Concern” on December 2, 2015, the Company entered into the Purchase Agreement with SM Funding.
Under the Purchase Agreement, the Company issued to SM Funding a 12% Senior Secured Convertible Note under which SM Funding may
advance to the Company up to $2,000,000. Pursuant to the LOI (defined below) SM Funding was required to advance the Company at
least $1,000,000 within seven business days after its execution in October 2015. However, as of December 31, 2015, the Company
had only received aggregate advances from SM Funding of $750,000 evidenced by the Senior Note. Advances under the Senior Note
will mature on October 12, 2016, bear interest at a rate of 12% per annum, and will be, at the holder’s option, convertible
into shares of preferred stock (“Preferred Stock”) that may be issued by the Company in an offering described below.
The Company’s subsidiaries have guaranteed the obligations under the Senior Note pursuant to a Subsidiary Guaranty, and
the Company’s obligations under the Senior Note and the obligations of its subsidiaries under the Subsidiary Guaranty are
secured pursuant to a Security Agreement and an Intellectual Property Security Agreement the Company entered into in favor of
SM Funding. In addition, pursuant to a Binding Letter of Intent (the “LOI”) the Company entered into with SM Funding
on October 21, 2015, the Company entered into a Subordination Agreement with SM Funding and certain existing holders of the Company’s
existing 3% Senior secured convertible notes discussed above and 7% Unsecured convertible notes discussed below (the “Existing
Lenders”) to memorialize the senior position of the Senior Note relative to the notes held by the holders of the 3% Notes.
Amounts
outstanding under the Senior Note are convertible into Preferred Stock the Company may issue to accredited investors in a private
placement of up to $10,000,000 (the “Target Amount”) but not less than $8,000,000, including the conversion of the
principal and interest under the Senior Note (the “Qualified Offering”). Pursuant to the LOI and the Senior Note,
upon completion of the Qualified Offering at the Target Amount, the investors in the Qualified Offering will collectively and
beneficially own 60.9% of the Company, the Existing Lenders will beneficially own 26.1% of the Company (pursuant to the conversion
of their notes into shares of preferred stock), Steve Saleen will beneficially own 10% of the Company (excluding a warrant to
purchase 5% of the Company’s outstanding shares of Common Stock), and all other stockholders will beneficially own approximately
3% of the Company. There can be no assurance that SM Funding will make additional advances to the Company under the Senior Note
or that the Company will be able to consummate a Qualified Offering with SM Funding or otherwise.
Without
the prior written consent of the holder of the Senior Note, the Company is prohibited from (i) entering into, creating, assuming
or suffering to exist any additional indebtedness for borrowed money, (ii) entering into, creating, assuming or suffering to exist
any additional liens on or with respect to any of the Company’s properties or assets, (iii) repurchasing shares of the Company’s
Common Stock or common stock equivalents other than repurchases of common stock or common stock equivalents from departing employees
up to an aggregate maximum of $150,000, (iv) paying cash dividends, and (v) entering into transactions with its affiliates that
would be required to be disclosed in public filings with the Securities and Exchange Commission, unless such transaction is expressly
approved by a majority of the disinterested directors on the Company’s board of directors.
7%
Unsecured convertible notes
In
March and April 2014, as amended in June 2014, the Company issued 7% Unsecured Convertible Notes (the “7% 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 above. The 7% Notes pay interest at 7% per annum with a maturity
of 3 years (March and April, 2017). No cash payments are required, except that unconverted outstanding principal and accrued interest
shall be due and payable on the maturity date. Each 7% Note is initially convertible at any time into the Company’s Common
Stock at a conversion price, which 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, 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 in the Agreement, were to occur the potential liquidated damages
was set to a fixed amount. As an inducement, the Company issued an aggregate of 357,143 shares of its Common Stock with a fair
value of $53,571 based on the market value of the Company’s Common Stock of $0.15 as of the date of issuance.
As
the initial 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 7% Notes, the Company determined that there was deemed a beneficial conversion feature associated
with these 7% 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 7% 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 7% Notes, which
totaled $544,556 and $422,206 for the nine months ended December 31, 2015 and 2014, respectively. As of December 31, 2015 and
March 31, 2015, the remaining unamortized valuation discount of $904,744 and $1,449,300, respectively, has been offset against
the face amount of the notes for financial statement purposes. As of December 31, 2015, the outstanding principal balance of these
notes was $2,200,000 and potentially convertible into 82,077,448 shares of Common Stock including accrued and unpaid interest.
In
May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty
by Steve Saleen and demanded full payment of principal, interest and fees of $369,302 (see Note 3). If the bank is successful
in their claim of default, such default would trigger a cross default under the 7.0% Notes enabling the holders thereof to, at
their election, accelerate the maturity of the outstanding indebtedness under the 7% Notes requiring the Company to pay, upon
such acceleration, the greater of (1) 120% of the outstanding principal (plus all accrued and unpaid interest) and (2) the product
of (a) the highest closing price for the five trading immediately preceding the holder’s acceleration and (b) a fraction,
of which the numerator is the entire outstanding principal, and of which the denominator is the then applicable conversion price.
Upon the occurrence of an event of default under the 7% Notes interest accrues at the rate of 24% per annum. The Company continues
to classify the 7% Notes as long term, as a judgment against the Company has not been granted and the Company disagrees with the
compliant and plans to defend its position. As of the date of this filing of Form 10-Q, the Company has not received a notice
of default from the holders of the 7% Notes.
In
June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon
conversion of the 7% Notes. As a result, the Company determined that the conversion feature of the 7% Notes was not considered
indexed to the Company’s own stock pursuant to FASB guidance on “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. Therefore, the Company characterized the fair value of the 7% Note conversion feature of $13,148 in
June 2015 as derivative liability. See Note 6 for further discussion.
Unsecured
convertible notes
From
September 2014 to December 2014, the Company issued Unsecured Convertible Promissory Notes (“Notes”) to eight separate
accredited investors with a remaining principal balance of $172,254 and $618,225 as of December 31, 2015 and March 31, 2015, respectively.
The original Notes contained interest ranging from 8% to 12% per annum and matured on various dates from April 2015 to December
2016. The notes outstanding as of December 31, 2015 contain interest rates ranging from 8% to 10% and matured on dates prior to
December 31, 2015 and as such, were in default as of December 31, 2015. The Company may not prepay the Notes without the Note
holder’s consent. Notes under default contain provisions that, as defined in the agreements, the amount owed could increase
by amounts ranging from 135% to 150% depending on the event of default. In addition, in the event of non-payment when due, the
interest rates would increase to between 20% and 25% per annum from the date due until paid.
The
Notes are convertible into shares of Common Stock of the Company at the option of the holder commencing on various dates following
the issuance date of the Notes and ending on the later of the maturity date or date of full payment of principal and interest.
The principal amount of the Notes along with, at the holder’s option, any unpaid interest and penalties, are convertible
at price per share discounts ranging from 42% to 38% of the Company’s Common Stock trading market price during a certain
time period, as defined in the agreement. Further, the conversion prices are subject to a floor such that the conversion prices
will not be less than a certain price, as defined in the agreement, with such floor prices ranging from $0.001 to $0.00005 per
share. In addition, the conversion prices are subject to adjustment in certain events, such as in conjunction with any sale, conveyance
or disposition of all or substantially all of the Company’s assets or consummation of a transaction or series of related
transactions in which the Company is not the surviving entity. The note agreements also require the Company to maintain a reserve
of Common Stock, as determined based on a formula stated in the note agreements, which, upon request by the note holder, can be
adjusted based on the formula and the then share price of the Company’s Common Stock as of the date of request. The note
holder can convert up to the number of the then shares reserved for conversion of their related note.
During
the nine months ended December 31, 2015, Note holders converted $473,731 of principal and $33,040 of accrued interest into 750,387,791
shares of the Company’s Common Stock. In addition, in June 2015, the Company agreed to allow one note holder to assign their
then note principal balance of $49,240, which was in default due to non-payment after maturity date and insufficient availability
of Common Stock available upon conversion, to a separate note holder, who is also a note holder under the 3% Notes and 7% Notes,
for the new note holder’s payment of $77,000 to the original note holder. As a result of this assignment, the Company recorded
$27,760 as loss on extinguishment during the nine months ended December 31, 2015 as a result of the increase in principal balance
from $49,240 to $77,000. As of December 31, 2015, the principal balance of the convertible Notes outstanding was $172,254 and
potentially convertible into 269,824,686 shares of Common Stock including accrued and unpaid interest.
The
Company considered the current FASB guidance of “Contracts in 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 of whether or
not within the issuers’ control means the instrument is not indexed to the issuer’s own stock. Accordingly, the Company
determined that the conversion prices of the Notes were not a fixed amount because they were subject to an adjustment based on
the occurrence of future offerings or events. In addition, the Company determined that instruments with floor prices ranging from
$0.001 to $0.00005 were de minimis and in substance not indexed to the Company’s own stock. As a result, the Company determined
that the conversion features of the Notes were not considered indexed to the Company’s own stock and characterized the fair
value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the Notes,
the initial fair value of the embedded conversion feature was $1,306,455. As such, the Company recorded a $1,306,455 derivative
liability, of which $638,225 was recorded as debt discount offsetting the fair value of the Notes and the remainder of $668,230
recorded as private placement costs in the Consolidated Statement of Operations for the year ended March 31, 2015. The balance
of the unamortized discount was $313,507 at March 31, 2015. During the nine months ended December 31, 2015, the Company amortized
$313,507 of the valuation discount to interest expense.
In
addition, as a result of the assignment of note discussed above, the Company recognized a derivative liability of $54,508 in June
2015. The derivative liability is re-measured at the end of every reporting period with the change in value reported in the statement
of operations (see Note 6).
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 and unsecured 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 or the ultimate determination of shares
to be issued could exceed current available authorized shares. In June 2015, the Company determined that there was not sufficient
authorized and available Common Stock available for issuance upon conversion of the 3% senior secured and 7% unsecured convertible
notes. 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 and was re-measured at the end of every reporting period with the change in value reported in the statement of operations.
The
derivative liability was valued at the following dates using a Weighted-Average Black-Scholes-Merton model with the following
assumptions:
|
|
December 31, 2015
|
|
|
June 30, 2015
|
|
|
March 31, 2015
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.01 - 1.31
|
%
|
|
|
0.02 - 0.03
|
|
|
|
0.004 - 1.55
|
%
|
Expected volatility
|
|
|
217
|
%
|
|
|
203
|
%
|
|
|
179
|
%
|
Expected life (in years)
|
|
|
.01 - 1.5 years
|
|
|
|
1.62 - 1.8 years
|
|
|
|
.2 - 1.6 years
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
181,565
|
|
|
$
|
174,437
|
|
|
$
|
1,268,588
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own stock’s volatility
as the estimated volatility. The expected life of the conversion feature of the notes was based on the estimated remaining terms
of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its holders
of Common Stock in the past and does not expect to pay dividends to holders of its Common Stock in the future.
During
the nine months ended December 31, 2015 and 2014, the Company recognized $540,802 and $2,602,392, respectively, as other income,
which represented the difference in the value of the derivative from the respective prior period. In addition, the Company recognized
a gain of $720,658 and $2,586,732, which represented the extinguishment of derivative liabilities related to the conversion of
the unsecured convertible notes during the nine months ended December 31, 2015 and 2014, respectively.
In
June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon
conversion of certain of its Notes. As a result, the Company was required to record a derivative liability of $174,437 in June
2015.
NOTE
7 - ADVANCE ROYALTY
In
June 2015, the Company entered into an Intellectual Property License Agreement (the “License Agreement”) with Saleen
Motors International, LLC, a Delaware limited liability company (“SMI”) and a wholly owned subsidiary of GreenTech
Automotive, Inc. (“GTA”) and non-affiliated subsidiary of the Company. Pursuant to the License Agreement, the Company
granted to SMI an irrevocable, fully paid-up (subject to certain royalty fees), sublicensable license during the term of the License
Agreement to use all of the Company’s intellectual property on an exclusive basis worldwide other than in North America,
Europe, Middle East and Australia (as applicable, the “Territory”), and to make, promote, sell and otherwise exploit
the Company’s intellectual property in the Territory. The License Agreement has an initial term of 10 years, with automatic
renewal for periods of five years at SMI’s election provided that the number of Saleen branded vehicles sold by SMI in the
prior 12-month period is not less than the average number of Saleen-branded vehicles sold by the Company and subsidiaries in the
most recently available three-year period. The License Agreement may be terminated by mutual written agreement, upon a material
breach, which remains uncured (with SMI having the right to cure no more than 3 breaches of its obligation to pay royalties) for
15 days after written notice of such breach, or in the event of SMI’s bankruptcy.
In
consideration of the license, SMI shall pay royalties, within 15 days after the product shipment date and in all events at least
quarterly, based on a fee per Saleen-branded vehicle sold by SMI depending on its sales volume as set forth in the License Agreement,
and shall pay royalties based on a percentage of SMI’s gross revenues for parts and merchandise (in each case net of discounts,
returns, taxes and similar amounts) received on Saleen-branded non-vehicle products.
As
part of the License agreement, SMI agreed to advance to the Company $500,000 in royalties of which $250,000 was applied from loan
advances previously made to the Company under the 10% Notes made by GTA pursuant to a Securities Purchase Agreement and 10.0%
First Lien Convertible Note entered into in May 2015; $100,000 was applied from the cancelation of a note entered into between
GTA and the Company in March 2015; and $150,000 was paid by GTA in cash to the Company. As of December 31, 2015, the Company recognized
a deferred advance royalty of $500,000 and will recognize this amount as revenue based on actual future royalties resulting from
sales by SMI under the License Agreement.
Except
for the transactions under the agreements described above and the Company’s Joint Branding, Marketing, and Distribution
Agreement with WM Industries Corp. (an affiliate of SMI and GTA) dated March 2014, none of the Company or its subsidiaries had
any material relationship with SMI, GTA and its affiliates.
NOTE
8 - RELATED PARTY TRANSACTIONS
The
amounts of accounts payable to related parties as of December 31 and March 31, 2015 are as follows:
Related Party:
|
|
December 31, 2015
|
|
|
March 31, 2015
|
|
Steve Saleen
(a)
|
|
$
|
122,759
|
|
|
$
|
223,455
|
|
Top Hat Capital
(b)
|
|
|
62,500
|
|
|
|
62,500
|
|
Crystal Research
|
|
|
6,343
|
|
|
|
6,343
|
|
Molly Saleen, Inc.
(c)
|
|
|
-
|
|
|
|
34,214
|
|
|
|
$
|
191,602
|
|
|
$
|
326,512
|
|
(a)
|
As
of March 31, 2015 the Company owed $223,455 to Mr. Saleen for his unpaid officers’ salary. On June 16, 2015, the Company
issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen.
The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting
Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of
June 11, 2015, the date the issuance was approved by the Company’s Board of Directors. Further, during the nine months
ended December 31, 2015, the Company incurred $122,759 in officers’ salary expense to its Director, Chairman and CEO,
Mr. Steve Saleen, which was due and owing as of December 31, 2015. As discussed in Note 9, in October 2015, shares of Super
Voting Preferred stock were converted into shares of Common Stock.
|
|
|
(b)
|
The
Company previously incurred $75,000 of expense, of which the Company paid $12,500, for investment advisor and research services
provided by Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of December
31 and March 31, 2015, $62,500 was payable to Top Hat Capital for these services.
|
|
|
(c)
|
As
of March 31, 2015 the Company owed $34,214 for apparel merchandise purchased on behalf of the Company by Molly Saleen, Inc.,
dba Mollypop (“Mollypop”), who’s owner, Molly Saleen, is the Chief Executive Officer of Mollypop and is
the daughter of Steve Saleen. On June 22, 2015, the Company issued to Mollypop, 19,007.777 shares of Super Voting Preferred
Stock to reimburse Mollypop for the amount owed of $34,214. The per share price of Super Voting Preferred Stock issued to
Mollypop was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by
the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board
of Directors. During the nine months ended December 31, 2015, the Company incurred $802 of such costs, which was paid. As
discussed in Note 9, in October 2015, shares of Super Voting Preferred stock were converted into shares of Common Stock.
|
Other
Transactions
On
June 22, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”)
as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company
is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the
Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred Stock issued to MLG
was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share
closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. As
discussed in Note 9, in October 2015, all shares of Super Voting Preferred stock were converted into shares of Common Stock.
NOTE
9 - STOCKHOLDERS’ EQUITY
Authorized
Shares
In
June 2015, the board of directors approved an increase in the Company’s authorized shares from 500,000,000 to 2,500,000,000.
The increase became effective in October 2015.
Issuance
of Common Stock
During
the nine months ended December 31, 2015, the Company issued an aggregate of 750,387,791 shares of common stock upon conversion
of the Company’s convertible notes payable and accrued interest amounting to $506,771 (see Note 5).
During
the nine months ended December 31, 2015, the Company entered into Settlement Agreement and Mutual Release agreement with a vendor
whereby the Company issued an aggregate of 2,380,377 shares of Common Stock with a fair value of $47,607 in exchange for extinguishment
of amount owed of $47,607. The value of the Common Stock was based on the market price of the Company’s Common Stock as
of the date of the Settlement Agreement.
Designation
of Super Voting Preferred
On
June 12, 2015, the Company filed a Certificate of Designation designating the rights and restrictions of 1,000,000 shares of Super
Voting Preferred Stock, par value $0.001 per share, pursuant to resolutions approved by the Company’s Board of Directors
on June 11, 2015. In October 2015, upon the increase in our authorized shares of common stock to 2,500,000,000, all 384,142 outstanding
shares of Super Voting Preferred Stock were automatically cancelled and converted into 384,142,000 shares of Common Stock , and
the Super Voting Preferred Stock ceased to be a designated class of Preferred Stock.
Issuance
of Super Voting Preferred
During
the nine months ended December 31, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group,
APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims
and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously
served as a member of the Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred
Stock issued was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by
the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of
Directors. The Company recorded these fees as general and administrative expense during the nine months ended December 31, 2015.
During
the nine months ended December 31, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction
of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on
the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price
($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors.
During
the nine months ended December 31, 2015, the Company issued to Mollypop, 19,007.777 shares of Super Voting Preferred Stock to
reimburse Mollypop for $34,214 of merchandise previously purchased by Mollypop on the Company’s behalf and owed to Mollypop
as of March 31, 2015. The per share price of Super Voting Preferred Stock issued was based on the conversion ratio of Super Voting
Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June
19, 2015, the date the issuance was approved by the Board of Directors.
In
order to make available additional shares of Common Stock to facilitate the conversion of outstanding debt, during the nine months
ended December 31, 2015 the Company issued to Steve Saleen, the Company’s Chief Executive Officer and President, 82,133.875
shares of Super Voting Preferred Stock in exchange for 82,133,875 shares of Common Stock held by Mr. Saleen.
As
discussed above, all shares of Super Voting Preferred Stock were automatically cancelled and converted into shares of Common Stock
in October 2015.
Omnibus
Incentive Plan
The
Company utilizes the Black-Scholes option valuation model to estimate the fair value of stock options granted. The Company’s
assessment of the estimated fair value of stock options is affected by the Company’s stock price as well as assumptions
regarding a number of complex and subjective variables and the related tax impact.
Stock
option activity is set forth below:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-Average
Remaining
Contractual Term
(in years)
|
|
Balance at March 31, 2015
|
|
|
13,459,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options granted during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options cancelled during the period
|
|
|
(792,334
|
)
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December 31, 2015
|
|
|
12,666,666
|
|
|
$
|
0.10
|
|
|
$
|
0
|
|
|
|
8.69
|
|
Exercisable at December 31, 2015
|
|
|
6,870,333
|
|
|
$
|
0.10
|
|
|
$
|
0
|
|
|
|
8.71
|
|
Expected to vest after December 31, 2015
|
|
|
5,796,333
|
|
|
$
|
0.10
|
|
|
$
|
0
|
|
|
|
8.69
|
|
The
aggregate intrinsic value shown in the table above represents the difference between the fair market value of the Company’s
common stock of $0.0007 on December 31, 2015 and the exercise price of each option.
During
the nine months ended December 31, 2015, the Company recorded stock compensation expense of $160,084 of which $5,782, $120,069,
and $34,233 was included in research and development, sales and marketing, and general and administrative expenses, respectively.
Unearned compensation of $143,997 at December 31, 2015, related to non-vested stock options, will be recognized into expense over
a weighted average period of .4 years.
During
the nine months ended December 31, 2014, the Company recorded stock compensation expense of $580,933 of which $56,805, $229,305,
and $294,822 was included in research and development, sales and marketing, and general and administrative expenses, respectively.
Warrants
The
following summarizes warrant activity for the Company during the nine months ended December 31, 2015:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
Outstanding March 31, 2015
|
|
|
13,313,099
|
|
|
$
|
0.15
|
|
|
|
3.4
|
|
Issued during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
13,313,099
|
|
|
$
|
0.15
|
|
|
|
3.4
|
|
As
of December 31, 2015, 13,313,099 warrants were exercisable and the intrinsic value of the warrants was nil.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
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 the 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 reduction to costs of goods sold in future periods based upon a prorated
percentage of the purchased amount over the purchase commitment if the Company determines there is a reasonable certainty in achieving
the purchase commitment.
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 the 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 amount will be recorded as reduction to costs of goods sold in future periods based upon a prorated percentage
of the purchased amount over the purchase commitment if the Company determines there is a reasonable certainty in achieving the
purchase commitment.
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 accrued liabilities, 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:
The
Company is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County,
that claimed breach of contract related to an engine installed by a third party vendor. The suit claimed $200,000 in damages plus
interest, legal fees and costs of litigation. SSC filed a cross complaint against MSY Trading, Inc. for breach of warranty, negligence,
and indemnification. On January 10, 2014, the Company settled this claim by agreeing to pay $112,500 over a period of 18 months,
of which we paid $45,500 through August 2014. Subsequent to this date the Company defaulted on these payment obligations. On October
30, 2014, a judgment was entered against SSC in the amount of $68,950, which the Company accrued for in accounts payable.
In
December 2014, Saleen Automotive, Inc. (formerly Saleen Electric Automotive, Inc.), the Company’s wholly-owned subsidiary,
received a Complaint from Green Global Automotive B.V. (“GAA”) alleging causes of action for breach of contract and
breach of the covenant of good faith and fair dealing, related to a European Distribution Agreement entered into in December 2011
between GAA and Saleen Automotive. The suit seeks contract and economic damages of $50,000 along with compensatory damages, restoration,
lost profits and attorneys’ fees. The Company believes this case is without merit and that the Company is not liable under
the alleged contract.
In
December 2014, the Company received a Complaint from Ford of Escondido seeking damages based on 1) claim and delivery of personal
property, 2) money due on a contract, and 3) common count. This matter was settled with the Company agreeing to a judgment in
the amount of $300,000 and the transfer to the Company of title to four vehicles held by Ford of Escondido. The judgment has been
entered, but no collection efforts have started.
In
February 2014, SSC received a Complaint from Citizens Business Bank (the “Bank”) alleging, among other matters, breach
of contract due to non-timely payment of November and December 2013 principal amounts owed 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 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 agreement
to pay the remaining recorded balance due of $443,000 to the Bank in August 2014. From August 2014 to March 31, 2015, in exchange
for payments totaling $90,000, the Bank agreed to extend this arrangement through various dates with the last date being March
2015. The Company did not pay the then outstanding principal and interest in March 2015 and the Bank did not agree to an additional
extension. In May 2015, the Company was notified of a lawsuit filed by the Bank in the Superior Court of the State of California,
County of Riverside, alleging breach of the Loan Agreement with the Bank, breach of a commercial guaranty by Steve Saleen and
indebtedness for principal and interest of at least $369,302, and seeking appointment, which has not been granted by the court
as of the date of this filing, of a limited purpose receiver and a temporary restraining order enjoining the Company from transferring
the collateral securing the loan, which related to SSC. The main complaint by the Bank stems from the Company’s reverse
merger that occurred in June 2013 whereby the Bank deemed this event to constitute a change in control, as defined in the loan
agreement. The Company disagrees with the Bank’s interpretation and believes the claims by the bank are without merit. Although
the Company currently believes that resolving claims against the Company, individually or in aggregate, will not have a material
adverse impact on the Company’s financial statements, these matters are subject to inherent uncertainties and management’s
views of these matters may change in the future.
NOTE
11 - SUBSEQUENT EVENTS
Subsequent
to December 31, 2015 through the date of this Filing of this Form 10-Q, SM Funding advanced the Company $210,000 under the terms
of the 12% Senior Secured Note, as discussed in Note 5.
In
January, February 2016 and as of the date of the Filing of this Form 10-Q, note holders related to the unsecured convertible notes,
as discussed in Note 5, converted approximately $200,000 of principal and interest into 842,506,341 shares of common stock.