UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended September 30,December 31, 2019

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-55236

SALEEN AUTOMOTIVE, INC.

(Exact name of registrant issuer as specified in its charter)

(714) 400-2121

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [  ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

The number of shares of registrant’s common stock outstanding as of JuneAugust 1, 2020 was 24,536,963.

SALEEN AUTOMOTIVE, INC.

FORM 10-Q

INDEX

Saleen Automotive, Inc.

Saleen Automotive, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Saleen Automotive, Inc.

Saleen Automotive, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Saleen Automotive, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

For the Nine Months Ended December 31, 2019

Saleen Automotive, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

For the SixNine Months Ended September 30, 2019December 31, 2018

Saleen Automotive, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

For the Six Months Ended September 30, 2018

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Saleen Automotive Inc.

Saleen Automotive Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Saleen Automotive Inc.

Saleen Automotive Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 31, 2019, which has been derived from audited consolidated financial statements, and the accompanying interim condensed consolidated financial statements as of September 30,December 31, 2019 and for the three-months and six-monthsnine-months ended September 30,December 31, 2019 and 2018, have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the financial condition, results of operations and cash flows of Saleen Automotive, Inc. (the “Company”) as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three-months and sixnine months ended September 30,December 31, 2019 are not necessarily indicative of the results that may be expected for the year ending March 31, 2020, or for any other interim period during such year. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the SEC on October 4, 2019.

Description of the Company

Saleen Automotive, Inc. (the “Company”) is an original equipment manufacturer (“OEM”) of high-performance vehicles (“Saleen Original”) that are built from the ground up. The Company also designs, develops, manufactures, and sells high-performance vehicles built from base chassis of major American automobile manufacturers (“Saleen Signature Cars”). The Company also provides engineering, development, and design consulting services on a project basis for automotive manufacturers worldwide. The Company currently has customers worldwide, including muscle and high-performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture productions, and consumers in the luxury supercar and motorsports markets.

Saleen Automotive, Inc. was incorporated under the laws of the State of Nevada on June 24, 2011. On May 23, 2013, the Company entered into a merger agreement with Saleen California Merger Corporation, Saleen Florida Merger Corporation, Saleen Automotive, Inc., and SMS Signature Cars (“SMS”) (collectively, the “Saleen Entities”), and Steve Saleen (“Saleen”). The merger closed on June 26, 2013, and the Saleen Entities merged with the Company and approximately 93% of the Company’s common stock was owned, collectively, by Saleen and the former holders of the outstanding capital stock of Saleen Automotive. 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. In June 2013, the Company amended its articles of incorporation to change its name to Saleen Automotive, Inc.

On December 19, 2017, the Company effected a 1-for-2,000 reverse stock split of its common stock (“reverse stock split”) following approval by the Company’s Board of Directors and stockholders. All common stock share and per-share amounts for all periods presented in these condensed consolidated financial statements have been adjusted retroactively to reflect the reverse stock split.

The Company’s common stock is not currently quoted or traded on any market. Prior to deregistration on October 13, 2017, the Company’s common stock traded on the OTC Pink Sheets under the symbol “SLNN.” We intend to apply for quotation of our common stock on the OTCQB, although there is no assurance that our application will be accepted.

Saleen OEM

The Company manufacturers the Saleen S7 supercar (“S7”), a limited production supercar with a 1,500-horsepower engine, in the Company’s production facility in Corona, California. The S7 was previously produced under a joint venture agreement with S7 Supercars, LLC (“S7 Supercars”), a related party owned by a significant shareholder, which owned the “S7” name and related intellectual property and assets. Under the agreement, S7 Supercars provided the chassis and all other costs to build the vehicle, and the Company was entitled to a fee for engineering and manufacturing services, plus an additional markup for these services. Separately, upon the sale of the vehicle to the end-users, the Company became entitled to a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars. On May 31, 2019, the Company entered into an asset purchase agreement with S7 Supercars, LLC pursuant to which S7 Supercars sold all of its assets, chassis and other automotive parts relating to the manufacture of the S7 supercar, and related intellectual property, to the Company for an initial purchase price of $1,165,000 comprised of a cash payment of $800,000, and the elimination of an accounts receivable balance of $365,000$682,304 owed to us by S7 Supercars. Furthermore, the amount of accounts receivable balance eliminated increased by $317,304 to $682,304 increasing theSupercars, for a final purchase price to $1,482,304. Given that the purchase assets did not qualify as a business under the definition of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 805 Business Combinations, the Company recognized this transaction as the purchase of an intangible asset consisting of the “S7” tradename. In the previousfirst fiscal quarter, the Company had classified the purchased assets as fixed assets and subsequently reclassified these assets as an intangible asset on the accompanying condensed consolidated balance sheet. In addition, the Company is required to pay S7 Supercars, LLC up to four additional payments of $50,000 each, upon sales by the Company of S7 supercars within the two-year period following the closing, subject to the conditions provided for in the purchase agreement. Currently, none of the additional payments have been accrued as of December 31, 2019. Pursuant to the purchase agreement, the joint venture agreement between the Company and S7 Supercars was terminated, except for indemnification obligations of the Company thereunder. However, the Company does not intend to sell S7s to customers but instead will manufacture S7s for promotional purposes to build its brand. See Note 7X for more details.

The Company is also inhas been working on the process of completing the engineering, design, and certificationdevelopment of a new high-performance sports car, the Saleen 1 (or “S1”), under an engineering development and design contract with Jiangsu Saleen Automotive Technology Co. (“JSAT”), an unaffiliated corporation located in China which holds the intellectual property rights related to the S1 developed under the agreement and licenses the Saleen name from Saleen Motors International, an un-related third-party.

Saleen Signature Cars

The Company’s Saleen Signature Cars are built from base chassis of major American automobile manufacturers, including Ford Mustangs, Tesla Model S vehicles, and Ford trucks. The Company is a specialist in vehicle design, engineering and manufacturing focusing on the mass customization (the process of customizing automobiles that are mass produced by manufacturers) of American sports and electric vehicles and the production of high-performance USA-engineered sports cars. Saleen-branded products include a line of high performance and upgraded muscle and electric cars, automotive aftermarket specialty parts and lifestyle accessories.

Liquidity

The Company cannot give assurance that it can maintain its cash balances or limit its cash consumption and maintain sufficient cash balances for its planned operations. Also, future business demands may lead to cash utilization at levels greater than recently experienced or anticipated. While we believe that our existing cash balances will be sufficient to fund our currently planned level of operations and investment activity, we may require additional financing to fund our planned future operations if we encounter unanticipated difficulties, or if our estimates of the amount of cash necessary to operate our business prove to be wrong, and we use our available financial resources faster than we currently expect. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Subject to the foregoing, management and the Board of Directors have adopted a budget that we believe will allow the Company sufficient capital and liquidity to fund its operations for at least one year from the date these condensed consolidated financial statements are issued.

In response to the COVID-19 pandemic which impacted operations in early 2020, we have reduced manufacturing schedules to balance production with our demand and our supply chain constraints. We have also taken actions to reduce overhead to mitigate the negative impacts of a reduced manufacturing schedule. While we currently expect any negative impact on sales to be temporary during the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time.

Consolidation Policy

The condensed consolidated financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries, Saleen Signature Cars, a California corporation, and Saleen Sales Corporation, a California corporation. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated 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, inventory obsolescence, valuation of intangible assets, warranty reserves, and the valuation of deferred tax assets. Actual results could differ from those estimates.

Revenue recognition

The Company recognizes revenue using ASC 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes

(1) identifying the contracts or agreements with a customer,

(2) identifying performance obligations in the contract or agreement,

(3) determining the transaction price,

(4) allocating the transaction price to the separate performance obligations, and

(5) recognizing revenue as each performance obligation is satisfied.

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.

The Company’s revenue consists of primarily from the sale of its Signature Cars and services provided under its engineering and design, and development consulting services contracts.contracts to one customer and sales of signature Cars. See Note 2 for further discussion of Revenues.

Cash

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. As of September 30,December 31, 2019, and March 31, 2019, the Company did not have cash equivalents. From time to time, including as of September 30,2019,December 31, 2019 and March 31, 2019, the Company’s cash account balances exceed the balances as covered by federally insured limits. The Company uses high quality financial institutions and believes the risk of loss due to exceeding federally insured limits to be low.

Accounts Receivable, net

The Company evaluates the collectability of its accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.

The Company recognizes an allowance for doubtful accounts to ensure tradewhen evidence suggests that accounts receivables are not overstated due to lack of collectability. For the most part, the Company generally requires advance payments for its Signature Cars and credit card payments for parts and merchandise. As of September 30,December 31, 2019, and March 31, 2019, the Company deemed an allowance for doubtful accounts was not required against its receivables.

Inventory

Inventory are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis for automobile parts. Inventory consists of parts for the Company’s Signature Car models. Management has determined that no inventory reserve is required because automobile parts are utilized consistently through the manufacturing process and has a high turnover.

Property and Equipment, net

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. The cost of property and equipment is depreciated or amortized on a straight-line basis over the following estimated useful lives:

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The Company did not record anany impairment losslosses for either the three and sixor nine months ended September 30,December 31, 2019 and September 30,December 31, 2018.

The Company’s museum collection of automobiles held for exhibition purposes is not depreciated, as the estimated useful life of the museum collection is so long so that depreciation would not be necessary, and the residual value of such vehicles may exceed their acquisition cost. The Company’s museum collection is currently being exhibited in automobile museums around the country to further market the Company’s brand.

Customer Deposits

Sales orders received from customers of Signature Cars generally require customers to make deposits at the time of signing the related sales order. The Company receives either partial or full deposits related to Signature Car sales orders in advance of shipment and is generally paid in full prior to the shipment of the finished Signature Cars. Customer deposits as of September 30,December 31, 2019 and March 31, 2019 comprised of funds received in advance of shipment and amounted to $99,692$304,974 and $511,081, respectively, which will be recorded as revenue upon shipment of finished Signature Cars and satisfaction of the revenue recognition requirements discussed above.

Warranty Policy

The Company provides a three-year or 36,000 miles New Vehicle Limited Warranty for its Signature Cars. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen high performance cars. All of the unalteredUnaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles.

Advertising, Sales and Marketing Costs

Advertising, sales, and marketing costs are expensed as incurred and are included in sales and marketing expenses on the accompanying condensed consolidated statement of operations. During the six-monthsthree-months ended September 30,December 31, 2019 and 2018, advertising, sales and marketing expenses were $682,488$414,181 and $294,951,$219,558, respectively. During the three-monthsnine-months ended September 30,December 31, 2019 and 2018, advertising, sales and marketing expenses were $251,058$1,096,669 and $167,805,$514,509, respectively.

Income Taxes

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits or that future deductibility is uncertain.

Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.

Fair Value of Financial Instruments

The Company accounts for the fair value of financial instruments in accordance with the FASB ASC topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). 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, and customer deposits. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. The carrying values of notes payable approximate their fair values due to the fact thatsince the interest rates on these obligations are based on prevailing market interest rates. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.

Net Income per Share

Basic income per common share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common stock for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants and the conversion of convertible notes payable.

The following table sets forth the computation of basic and diluted net income per common share for the three-months and sixnine months ended:

The following table sets forth the number of potential common shares excluded from the calculations of net loss per diluted share because their inclusion would be anti-dilutive:

Significant Concentrations

Sales to China-based customer, JSAT (seeJiangsu Saleen Automotive Technology Co., Ltd (“JSAT”, see Note 2) comprised 68%76% and 76%80% of revenues for the three-months ended September 30,December 31, 2019 and 2018, respectively. Sales to China-based customer, JSAT comprised 78%85% and 71%75% of revenues for the six-monthsnine-months ended September 30,December 31, 2019 and 2018, respectively.

Two customerscustomer comprised 88%100% (72% and 28%) of accounts receivable as of September 30,December 31, 2019. One customer, a related party, comprised 98% of accounts receivable as of March 31, 2019.

The Company utilizes automobile platform vehicles for its Signature Cars from major manufacturers including Ford and Tesla and generally receives the base vehicle platforms directly from dealers. The Company enters into sourcing agreements with individual car dealerships but does not have supply agreements with the major manufacturers. Accordingly, the Company’s supply of base vehicle platforms may be limited to the allocation allotted from its source dealerships.

Recently Adopted Accounting Standards

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11, and ASU 2018-20 (collectively, Topic 842). Topic 842 will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. Topic 842 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods. The Company adopted Topic 842 using the modified retrospective approach, using a date of initial application of April 1, 2019. The adoption of this standard on April 1, 2019 resulted in the Company recording right-of-use assets and operating lease liabilities on its condensed consolidated balance sheets as of that date in the amounts of $4,059,492 each. The adoption of this standard did not have a significant effect on the amount of lease expense recognized by the Company.

Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are on our condensed consolidated balance sheet as of September 30,December 31, 2019.

We have elected not to present short-term leases on the condensed consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because our leases do not provide an implicit rate of return, we used our incremental borrowing rate of 10% based on the information available at adoption date in determining the present value of lease payments.

The cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:

See Note 118 for details regarding the Company’s operating leases.

Recent accounting pronouncements are not believed by management to have a material impact on the Company’s present or future condensed consolidated financial statements. During the three-months ended September 30,December 31, 2019, there have been no other changes to the Company’s significant accounting policies as described in the Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company recognizes revenue from the following sources:

Revenue from services

The Company recognizes revenue from its engineering and design contracts and consulting services contracts as the services are provided and accepted by the customer over time. Contract liabilities are recorded for any payments received for services yet to be completed.completed or for amounts billed to customers for which collectability is not reasonably assured. Under the terms of its engineering design and development contract, costs are invoiced as incurred plus a markup.

Revenue from Saleen S1

The Company provides engineering, design, and development services to Jiangsu Saleen Automotive Technology Co., Ltd (“JSAT”) an unaffiliated corporation located in China, under a consulting agreement entered into in September 2016, and an engineering services contract entered into in April 2018. Under the engineering services contract, the Company agreed to provide engineering, design, and development services for the S1 and an SUV to be distributed in the United States and China. The Company entered into two addendums on the engineering services contract, one dated September 29, 20192018 (the “September Addendum”) and the other dated December 20, 20192018 (the “December Addendum”). Management evaluates contract modifications based on the terms of the modification and determined the appropriate accounting under ASC 606 which results in one of three outcomes: 1) a modification of the original contract with cumulative catch-up adjustment; 2) a modification of the original contract with the change being accounted for prospectively; or 3) a separate and new contract. The September Addendum increased the scope of the contract, price and added distinct deliverables and performance obligations. Based on the terms of September Addendum, management has determined to account for this contract as a completely separate and distinct contract. The December Addendum increased the price but did not add any distinct deliverables, and thus based on management’s evaluation has been accounted for as a modification of the original contract with the change being accounted for prospectively. The Company expectsis currently in discussions and negotiations with the customer to determine if the Company is to complete the engineering, designing and developing of the S1 in the calendar year 2020. Under the terms of the engineering services contract, as amended, the total contract amount is approximately $31,605,000. An early termination fee based on a percentage of the remaining unbilled contract amount will apply in the event the contract is cancelled or in default by JSAT.

The Company also entered into a Saleen S1 Cup Vehicle Development and Production Agreement (“Cup Agreement”) with JSAT in November 2018, as amended in May 2019. Based on management’s evaluation of the amendment, the amendment clarified the terms of the original Cup Agreement and was accounted for as a modification of the original contract. Under the Cup Agreement, the Company agreed to provide engineering, design, and development services for the Saleen S1 racing vehicle, including prototype development and assembly of racing vehicles to be used in the S1 Cup Racing Series in the United States and China. The Cup Agreement provides for aggregate revenues to the Company of approximately $15,631,000.

In addition to these two agreements, the Company provides ad hoc consulting related to JSAT. Furthermore, for logistical expediency, JSAT sometimes requests that the Company pay for some of JSAT’s expenses, and subsequently JSAT reimburses the Company. These reimbursement of expenses to the Company have no mark-up and totaled $2,309,503$781,909 and $0 for the three-months ended September 30,December 31, 2019 and 2018, respectively, and $4,309,503$5,091,412 and $0 for the six-monthsnine-months ended September 30,December 31, 2019 and 2018, respectively.

During the three-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $2,403,666$2,845,205 and $3,848,927,$2,819,148, respectively, related to its completed performance under the engineering services contract. During the three-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $7,456,024$0 and $0, respectively, related to its completed performance under the Cup Agreement. During the three-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $0 and $162,048, respectively, of consulting fees related to JSAT.

During the six-monthsnine-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $2,977,666$7,487,590 and $3,130,611,$6,668,075, respectively, related to its completed performance under the engineering services contract. During the six-monthnine-month periods ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $17,295,719$15,631,000 and $0, respectively, related to its completed performance under the Cup Agreement. During the three-monthsnine-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $0 and $162,048, respectively, of consulting fees related to JSAT.

Revenue from Saleen S7

Prior to the May 31, 2019 purchase of the S7 Supercars assets, the Company recognized revenue for engineering and manufacturing services as these services were performed. Separately, upon the sale by S7 Supercars of an S7 to the end user, the Company recognized a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars when such sale was completed, the title transferred to the buyer, and the buyer has accepted the vehicle. Prior to May 31, 2019 and the purchase of the S7 Supercars assets, the Company recognized revenue from S7 Supercars of $410,535 during the first fiscal quarter ending June 30, 2019. See Note 76 for more details.

Revenue from Products

Revenue from sale of Signature Cars

The Company recognizes revenue from the sale of its Signature Cars when control is transferred which generally occurs upon shipment or delivery of the Signature Cars from its manufacturing facility to the destination specified by the customer. Signature Cars revenue represents the amount of consideration which the Company expects to be entitled in exchange for the delivery of the modified vehicle. The Company determines whether delivery has occurred based on when title transfers and the risks of ownership have transferred to the buyer, which usually occurs when the Company places the cars on the carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured and generally collects deposits before work is started and final payments are received prior to shipment. Except for warranties, the Company has no post-sales obligations nor does the Company accept returns. During the three-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $1,388,018$450,774 and $645,986,$593,803, respectively, from the sale of Signature cars. During the six-monthsnine-months ended September 30,December 31, 2019 and 2018, the Company recognized revenue of $1,872,123$2,329,191 and $1,164,673,$1,771,718, respectively, from sale of Signaturesignature cars.

Revenue from Saleen S7 Product Sales

Subsequent to the S7 supercars asset purchase agreement, the Company records the sale of S7 cars upon shipment and delivery of the completed S7 car to the buyer. During the three-months ended September 30,December 31, 2019, the Company recognized revenue of $556,300,$105,844, from the sale of S7 vehicle. During the six-monthsnine-months ended September 30,December 31, 2019, the Company recognized revenue of $764,433,$870,278, from the sale of S7 vehicle.

Contract Liabilities

As of September 30,December 31, 2019, and March 31, 2019, the Company’s contract liabilities balances included advances received prior to revenue being recognized of $1,323,696$0 and $1,068,150, respectively related to the engineering services agreement for JSAT. For service contracts where the performance obligation is not completed, contract liabilities is recorded for any payments received in advance of the performance obligation being completed.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net consisted of the following as of September 30,December 31, 2019 and March 31, 2019:

Depreciation and amortization expense were $37,168$60,407 and $10,843$23,646 for the three-months ended September 30,December 31, 2019 and 2018, respectively. Depreciation and amortization expense were $97,724$158,131 and $38,530$62,176 for the six-monthnine-month periods ended September 30,December 31, 2019 and 2018, respectively.

NOTE 4 – NOTES PAYABLE

Notes payable consisted of the following as of September 30,December 31, 2019 and March 31, 2019:

NOTE 5 – CONVERTIBLE NOTES PAYABLE, PAST DUE

As of September 30,December 31, 2019, and March 31, 2019, the Company had one unsecured convertible note outstanding for $100,000. The note bears interest at 7% per annum, was due in March 2017 and is currently in default. The note is convertible into 166,667 shares of common stock.

NOTE 6 – ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of September 30, 2019 and March 31, 2019:

NOTE 76 – RELATED PARTY TRANSACTIONS

Jeffrey Kraws, Top Hat Capital, and Crystal Research

As of September 30,December 31, 2019, and March 31, 2019, the Company owed Top Hat Capital and Crystal Research, whose co-founder and Managing Partner, Jeffrey Kraws, is a director of the Company, $61,672 for investment advisor and research services provided to the Company.

S7 Supercars, LLC

The Company served as the OEM for the Saleen S7, a limited production supercar. Prior to May 31, 2019, the S7 was produced under a joint venture with S7 Supercars, LLC, an entity that is controlled by affiliates of two of the Company’s principal shareholders. Under the agreement, S7 Supercars provided the chassis and all other costs to build the vehicle, and the Company was entitled to a fee for engineering and manufacturing services, plus an additional markup for these services. The agreement did not meet the scope for joint venture or equity method accounting under ASC 323-30-15, as neither party could make decisions for the other party and a formal entity was not created. The Company recognized revenue as these engineering and manufacturing services were performed. The cars produced under this agreement were owned by S7 Supercars until title passed to the ultimate buyer. Separately, upon the sale of the vehicle to the end users, the Company became entitled to a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars when such sale was completed, the title transferred to the buyer, and the buyer accepted the vehicle.

During the three and six monthnine-month periods ended SeptemberDecember 31, 2018, the Company recognized revenue from S7 Supercars of $379,969$105,844 and $288,597,$870,278, respectively, for engineering and manufacturing services provided toproduct sales of S7 Supercars, LLC.Supercars. Prior to May 31, 2019 and the purchase of the S7 Supercars assets, the Company recognized revenue from S7 Supercars of $410,535 during the first fiscal quarter ending June 30, 2019. As of September 30,December 31, 2019, and March 31, 2019, the Company had accounts receivable due from S7 Supercars of $0 and $133,742, respectively. As of September 30,December 31, 2019, and March 31, 2019, deposits of $0 and $100,000 from S7 Supercars were included in customer deposits, respectively.

On May 31, 2019, the Company entered into an asset purchase agreement with S7 Supercars, LLC pursuant to which S7 Supercars sold all of its assets, consisting of chassis and other automotive parts relating to the manufacture of the S7 supercar, and related intellectual property, to the Company for an initial purchase price of $1,482,304 comprised of a cash payment of $800,000, and the elimination of an accounts receivable balance of $682,304 owed to us by S7 Supercars. Based on management’s analysis, the S7 purchase did not meet the definition of a “business” under ASC 805-10-55, the entire purchase price of $1,482,304 was allocated to the intellectual property purchased, which is a reclassification of the prior fixed assets balance. In addition, the Company is required to pay S7 Supercars, LLC up to four additional payments of $50,000 each, upon sales by the Company of S7 supercars within the two-year period following the closing, subject to the conditions provided for in the purchase agreement. However, the Company does not intend to sell S7s to customers but instead will manufacture S7s for promotional purposes to build its brand. Pursuant to the purchase agreement, the joint venture agreement between the Company and S7 Supercars was terminated, except for indemnification obligations of the Company thereunder.

NOTE 87 – INCOME TAXES

For the three and six months-monthsnine-months ended September 30,December 31, 2019 and 2018, a reconciliation of the effective income tax rate to the U.S. statutory rate was as follows:

In assessing the realizability of the net deferred tax assets, the Company considered all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets was dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. As of September 30, 2019 and March 31, 2019 the Company believed that it is more likely than not that the Company’s deferred income tax assets will not be realized. As such, there isrecorded a full valuation allowance againston the net deferred tax assets, which was primarily the result of net operating losses incurred. For the period ended December 31, 2019, the Company has maintained the valuation allowance on the net operating losses as of September 30,discussed below. No further valuation allowance has been provided in the period ended December 31, 2019 and March 31, 2019.as the company is projecting taxable income for the year.

As of September 30,December 31, 2019, the Company generated regular tax federal net operating losses (“NOLs”) of approximately $19.2 million. The Company’s ability to realize tax benefit from the NOLs is subject to Internal Revenue Code Section 382 (“Section 382”), which generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. It was previously estimated that the Company could not use the NOLs. For the three and sixnine month period ended September 30,December 31, 2019, the Company did not benefit from or use any NOLs. However, management will be undergoing a study in order to determine if the NOLs are usable for future use which could result in a change to the valuation allowance in future periods.

The Company’s operations are based in California and it is subject to Federal and California state income tax. Tax years after 2014 are open to examination by Federal and state tax authorities.

NOTE 98 – STOCKHOLDERS’ EQUITY (DEFICIT)

Series B Preferred Stock

In August 2018, the Company filed a Certificate of Designation designating the rights and restrictions of its Series B Preferred Stock. Of the 1,000,000 preferred shares authorized at a par value of $0.001, 1,000 were designated as Series B Preferred Stock. The Series B Preferred Stock is convertible at the option of the holder into 1,000 common shares per one share of Series B Preferred Stock. The Series B Preferred Stock provides for liquidation and dividend rights on an as-if-converted basis into equivalent common shares. The Series B Preferred Stockholders have voting rights with the common shareholders on an as-if-converted basis. The holders of Series B Preferred Stock have the right, voting as a separate class, following a “Change of Control” (as defined), to elect a majority of the members of the Company’s Board of Directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors.

In September 2018, the Company issued 666.66 units of Series B Preferred Stock and warrants for $600 per unit, for total cash proceeds of $400,000 to a related party. Each unit consisted of one share of Series B Preferred Stock that is convertible into 1,000 shares of the Company’s common stock, and a three-year warrant to purchase 500 shares of the Company’s common stock at an exercise price of $.70 per share. A total of 666.66 shares of Series B Preferred Stock convertible into 666,666 shares of common stock and warrants exercisable into 333,330 shares of common stock were issued. The warrants have a term of three years and vested immediately. The aggregate value of the warrants issued was $92,000 and were valued using the Black-Scholes-Merton option valuation model with the following assumptions: risk-free interest rate of 2.83%; dividend yield of 0%; and volatility of 100. The Company also determined that the Series B Preferred Stock contained a beneficial conversion feature of $92,000 which was recorded as a deemed dividend.

A portion of the proceeds from the sale of the Series B Preferred Stock was allocated to the warrants based on their relative fair value, which amounted to $92,000, using the Black Scholes option pricing model. The assumptions used in the Black Scholes model were as follows: risk-free interest rate of 2.83%; dividend yield of 0%; and volatility rate of 100%. The $92,000 has been recorded as a deemed dividend to the preferred shareholders and as a charge to additional paid-in capital (as there is a deficit in the Company’s retained earnings).

Issuance of Common Stock

During the three and six monthsNine Months ended September 30,December 31, 2019 and 2018, there were no shares of common stock issued.

Options

Omnibus Incentive Plan

In December 2013, the Company’s board of directors approved the 2013 Omnibus Incentive Plan (the “Plan”), which is administered by the Company’s board of directors or a committee thereof (the “Administrator”) as set forth in the Plan. The Plan provides for the granting of stock options, stock appreciation rights, restricted share awards, and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an option, other than with respect to substitute awards, shall not be less than 100% of the fair market value of the Company’s Common Stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). A total of 14,153 shares of common stock have been authorized for issuance and reserved under the Plan. The Plan was approved by the Company’s stockholders on December 11, 2013.

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: