SALEEN AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Charter)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2013
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_____from _________ to _____
SALEEN AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Charter)
| Nevada | 333-176388 | 45-2808694 | ||
| (State or Other Jurisdiction | (Commission | (I.R.S. Employer | ||
| of Incorporation) | File No.) | Identification No.) | ||
2735 Wardlow Road Corona, California | 92882 | |||
| (Address of Principal Executive Offices) | (Zip Code) | |||
(800) 888-8945
Registrant’s telephone number, including area code:
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes
As of February 13,August 12, 2014, there were 129,339,794152,154,872 shares of the issuer’s common stock, $0.001 par value per share, outstanding.
SALEEN AUTOMOTIVE, INC.
FORM 10-Q
For the Quarter Ended June 30, 2014
INDEX
| 2 |
Condensed Consolidated Balance Sheets
| December 31, 2013 | March 31, 2013 | ||||||
| (Unaudited) | |||||||
| ASSETS | |||||||
| Current Assets | |||||||
| Cash | $ | 10,840 | $ | 4,434 | |||
| Cash held in trust by related party | — | 175,000 | |||||
| Accounts receivable, net | 16,153 | 5,352 | |||||
| Inventory | 447,752 | 538,224 | |||||
| Prepaid expenses and other current assets | 84,291 | 23,483 | |||||
| Total Current Assets | 559,036 | 746,493 | |||||
| Long Term Assets | |||||||
| Property and equipment, net | 559,977 | 340,219 | |||||
| Other assets | 42,358 | 37,358 | |||||
| TOTAL ASSETS | $ | 1,161,371 | $ | 1,124,070 | |||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||||||
| Current Liabilities | |||||||
| Accounts Payable | $ | 1,392,296 | $ | 666,782 | |||
| Accounts Payable - related parties | 877,885 | 709,267 | |||||
| Current portion of notes payable, in default | 1,370,437 | 1,044,074 | |||||
| Current portion of notes payable to Related Parties | 684,452 | 360,500 | |||||
| Payroll Taxes Payable | 729,314 | 246,075 | |||||
| Accrued Interest on Notes Payable | 350,630 | 318,836 | |||||
| Customer Deposits | 178,732 | 942,859 | |||||
| Other current liabilities | 473,993 | 433,706 | |||||
| Derivative liability | 1,694,000 | — | |||||
| Total Current Liabilities | 7,751,739 | 4,722,099 | |||||
| Notes payable, net of current portion | — | 550,258 | |||||
| Senior Secured Convertible Notes payable, net of discount | 1,475,898 | — | |||||
| Total Liabilities | 9,227,637 | 5,272,357 | |||||
| Stockholders' Deficit | |||||||
| Common stock; $0.001 par value; 100,000,000 shares authorized 99,837,259 shares issued and outstanding as of December 31, 2013 | 99,837 | — | |||||
| Super Voting Preferred stock; $0.001 par value; 1,000,000 shares authorized; 200,000 and 883,822 shares issued and outstanding as of December 31, 2013 and March 31, 2013, respectively | 200 | 10,269 | |||||
| Additional paid in capital | 5,694,983 | 4,584,976 | |||||
| Accumulated deficit | (13,861,286 | ) | (8,743,532 | ) | |||
| Total Stockholders' Deficit | (8,066,266 | ) | (4,148,287 | ) | |||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,161,371 | $ | 1,124,070 | |||
| June 30, 2014 | March 31, 2014 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 27,216 | $ | 1,499,889 | ||||
| Accounts receivable, net | 124,138 | 198,538 | ||||||
| Inventory | 434,716 | 433,941 | ||||||
| Prepaid expenses and other current assets | 37,927 | 97,926 | ||||||
| Total Current Assets | 623,997 | 2,230,294 | ||||||
| Long Term Assets | ||||||||
| Property and equipment, net | 711,074 | 546,824 | ||||||
| Other assets | 42,358 | 47,904 | ||||||
| TOTAL ASSETS | $ | 1,377,429 | $ | 2,825,022 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 1,656,864 | $ | 2,048,310 | ||||
| Due to related parties | 180,072 | 148,954 | ||||||
| Current portion of notes payable | 669,224 | 1,275,774 | ||||||
| Current portion of notes payable to related parties | 177,000 | 209,452 | ||||||
| Payroll taxes payable | 612,716 | 669,575 | ||||||
| Accrued interest on notes payable | 213,048 | 380,257 | ||||||
| Customer deposits | 230,893 | 193,912 | ||||||
| Deferred vendor consideration | 275,000 | — | ||||||
| Other current liabilities | 366,228 | 354,346 | ||||||
| Total Current Liabilities | 4,381,045 | 5,280,580 | ||||||
| Accounts to be settled by issuance of equity securities | 25,000 | 470,534 | ||||||
| Derivative liability | — | 5,032,786 | ||||||
| Convertible Notes payable, net of discount of $3,507,215 and $3,498,981 at June 30, 2014 and March 31, 2014, respectively | 1,502,030 | 1,337,751 | ||||||
| Total Liabilities | 5,908,075 | 12,121,651 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock; $0.001 par value; 500,000,000 shares authorized; 146,100,432 and 137,710,501 issued and outstanding as of June 30, 2014 and March 31, 2014, respectively | 146,100 | 137,710 | ||||||
| Preferred stock; $0.001 par value; 1,000,000 shares authorized; none issued and outstanding as of June 30, 2014 and March 31, 2014, respectively | — | — | ||||||
| Additional paid in capital | 12,202,784 | 10,431,175 | ||||||
| Accumulated deficit | (16,879,530 | ) | (19,865,514 | ) | ||||
| Total Stockholders’ Deficit | (4,530,646 | ) | (9,296,629 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 1,377,429 | $ | 2,825,022 | ||||
See accompanying notes which are an integral part of these condensed consolidated financial statements.
| F-1 |
Condensed Consolidated Statements of Operations
| For the Three months ended December 31, | For the Nine months ended December 31, | ||||||||||||||
| INCOME STATEMENT | 2013 | 2012 | 2013 | 2012 | |||||||||||
| Revenue | |||||||||||||||
| Vehicles and parts | $ | 1,076,153 | $ | 607,490 | $ | 3,570,722 | $ | 1,277,476 | |||||||
| Design services | — | 1,245,985 | — | 1,245,985 | |||||||||||
| Total revenue | 1,076,153 | 1,853,475 | 3,570,722 | 2,523,461 | |||||||||||
| Costs of goods sold | |||||||||||||||
| Vehicles and parts | 773,467 | 532,932 | 2,852,665 | 1,056,141 | |||||||||||
| Design services | — | 859,541 | — | 859,451 | |||||||||||
| Total Costs of Goods Sold | 773,467 | 1,392,473 | 2,852,665 | 1,915,592 | |||||||||||
| Gross Margin | 302,686 | 461,002 | 718,057 | 607,869 | |||||||||||
| Operating expenses | |||||||||||||||
| Research and development | 204,026 | 3,269 | 489,723 | 29,815 | |||||||||||
| Sales and marketing | 320,077 | 74,224 | 942,238 | 115,710 | |||||||||||
| General and administrative | 1,029,054 | 646,694 | 3,576,843 | 1,984,012 | |||||||||||
| Depreciation and Amortization | 18,588 | 20,391 | 65,332 | 60,944 | |||||||||||
| Total operating expenses | 1,571,745 | 744,578 | 5,074,136 | 2,190,481 | |||||||||||
| Loss from operations | (1,269,059 | ) | (283,576 | ) | (4,356,079 | ) | (1,582,612 | ) | |||||||
| Other income (expenses) | |||||||||||||||
| Interest expense | (186,004 | ) | (37,595 | ) | (362,784 | ) | (138,281 | ) | |||||||
| Costs of reverse merger transaction | — | — | (365,547 | ) | — | ||||||||||
| Gain on extinguishment of derivative liability | 40,548 | 40,548 | |||||||||||||
| Change in fair value of derivative liability | (125,026 | ) | — | (73,892 | ) | — | |||||||||
| Net Loss | $ | (1,539,541 | ) | $ | (321,171 | ) | $ | (5,117,754 | ) | $ | (1,720,893 | ) | |||
| Loss per common share – basic and diluted | $ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | (0.01 | ) | ||||
| Weighted average shares outstanding basic and diluted | 120,649,951 | 120,000,000 | 120,635,914 | 120,000,000 | |||||||||||
| Three month periods ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Revenue, net | $ | 1,697,377 | $ | 889,904 | ||||
| Costs of goods sold | 1,431,485 | 826,442 | ||||||
| Gross margin | 265,892 | 63,462 | ||||||
| Operating expenses | ||||||||
| Research and development | 197,955 | 122,757 | ||||||
| Sales and marketing | 576,919 | 121,783 | ||||||
| General and administrative | 1,048,858 | 1,713,145 | ||||||
| Depreciation and Amortization | 45,909 | 20,170 | ||||||
| Total operating expenses | 1,869,641 | 1,977,855 | ||||||
| Loss from operations | (1,603,749 | ) | (1,914,393 | ) | ||||
| Other income (expenses) | ||||||||
| Interest expense | (443,053 | ) | (73,539 | ) | ||||
| Costs of reverse merger transaction | — | (365,547 | ) | |||||
| Gain in extinguishment of derivative liability | 2,586,732 | — | ||||||
| Change in fair value of derivative liability | 2,446,054 | (89,765 | ) | |||||
| Net income (loss) | $ | 2,985,984 | $ | (2,443,244 | ) | |||
| Net income (loss) per share: | ||||||||
| Basic | $ | 0.02 | $ | (0.02 | ) | |||
| Diluted | $ | 0.01 | $ | (0.02 | ) | |||
| Shares used in computing net income (loss) per share: | ||||||||
| Basic | 141,832,616 | 120,000,000 | ||||||
| Diluted | 212,741,054 | 120,000,000 | ||||||
See accompanying notes which are an integral part of these condensed consolidated financial statements.
| F-2 |
Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited)
For the ninethree month period ended December 31, 2013June 30, 2014
| Common Stock $0.001 Par | Super Voting Preferred Stock $0.001Par | ||||||||||||||||||||||||
| Number | Amount | Number | Amount | Additional Paid In Capital | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||
| Balance, March 31, 2013 | — | $ | — | 883,822 | $ | 10,269 | $ | 4,584,976 | $ | (8,743,532 | ) | $ | (4,148,287 | ) | |||||||||||
| Shares issued upon reverse merger | 8,000,000 | 8,000 | (8,000 | ) | — | ||||||||||||||||||||
| Shares issued for directors fees | 5,277 | 5 | 249,995 | 250,000 | |||||||||||||||||||||
| Shares issued for services to related parties | 923 | 1 | 43,749 | 43,750 | |||||||||||||||||||||
| Shares issued for services | 4,976 | 5 | 235,726 | 235,731 | |||||||||||||||||||||
| Shares issued as principal payments on notes payable | 481 | 22,803 | 22,803 | ||||||||||||||||||||||
| Shares issued as interest on notes payable | 521 | 1 | 24,696 | 24,697 | |||||||||||||||||||||
| Shares issued for cash | 3,786,666 | 3,787 | 540,213 | 544,000 | |||||||||||||||||||||
| Adjustment of Super Voting Preferred | (1,385 | ) | 1,385 | — | |||||||||||||||||||||
| Conversion of Super Voting Preferred to Common Stock | 87,000,000 | 87,000 | (696,000 | ) | (696 | ) | (86,304 | ) | — | ||||||||||||||||
| Conversion of debt to Common Stock | 1,050,593 | 1,050 | 77,744 | 78,794 | |||||||||||||||||||||
| Net loss for the period | (5,117,754 | ) | (5,117,754 | ) | |||||||||||||||||||||
| Balance, December 31, 2013 | 99,837,259 | $ | 99,837 | 200,000 | $ | 200 | $ | 5,694,983 | $ | (13,861,286 | ) | $ | (8,066,266 | ) | |||||||||||
| Additional | ||||||||||||||||||||||||||||
| Common Stock $0.001 Par | Preferred Stock $0.001 Par | Paid In | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Number | Amount | Number | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, March 31, 2014 | 137,710,501 | $ | 137,710 | — | $ | — | $ | 10,431,175 | $ | (19,865,514 | ) | $ | (9,296,629 | ) | ||||||||||||||
| Shares issued for services | 1,000,000 | 1,000 | 169,000 | 170,000 | ||||||||||||||||||||||||
| Reclass of amounts to be settled through the issuance of equity securities | 1,285,460 | 1,285 | 469,249 | 470,534 | ||||||||||||||||||||||||
| Shares issued for cash | 1,016,667 | 1,017 | 151,483 | 152,500 | ||||||||||||||||||||||||
| Shares issued upon exercise of warrants | 50,000 | 50 | 7,450 | 7,500 | ||||||||||||||||||||||||
| Shares issued as consideration for the amendments of convertible debts | 747,066 | 747 | 111,313 | 112,060 | ||||||||||||||||||||||||
| Shares issued upon conversion of convertible debt and accrued interest | 4,290,738 | 4,291 | 613,114 | 617,405 | ||||||||||||||||||||||||
| Beneficial conversion feature associated with convertible debt financing | 250,000 | 250,000 | ||||||||||||||||||||||||||
| Net income | 2,985,984 | 2,985,984 | ||||||||||||||||||||||||||
| Balance, June 30, 2014 | 146,100,432 | $ | 146,100 | — | $ | — | $ | 12,202,784 | $ | (16,879,530 | ) | $ | (4,530,646 | ) | ||||||||||||||
See accompanying notes which are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three month periods ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | 2,985,984 | $ | (2,443,244 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | 45,909 | 20,170 | ||||||
| (Gain) Loss on change in fair value of derivative liability | (2,446,054 | ) | 89,765 | |||||
| Gain on extinguishment of derivative liability | (2,586,732 | ) | — | |||||
| Gain on settlement of notes payable | (72,297 | ) | — | |||||
| Amortization of discount on convertible notes | 353,826 | 4,550 | ||||||
| Shares issued for directors fees to related parties | — | 250,000 | ||||||
| Shares issued as principal payment on notes payable | — | 22,803 | ||||||
| Shares issued for interest on loan | — | 24,697 | ||||||
| Shares issued for services to related parties | — | 43,750 | ||||||
| Shares issued for services | 170,000 | 235,731 | ||||||
| Changes in working capital: | ||||||||
| (Increase) Decrease in: | ||||||||
| Cash held in trust account | — | 175,000 | ||||||
| Accounts receivable | 74,400 | (20,477 | ) | |||||
| Inventory | (775 | ) | (283,629 | ) | ||||
| Prepaid expenses and other assets | 65,545 | (19,967 | ) | |||||
| Increase (Decrease) in: | ||||||||
| Accounts payable | (391,446 | ) | 127,480 | |||||
| Due to related parties | 31,118 | (19,195 | ) | |||||
| Payroll taxes payable | (56,859 | ) | 105,635 | |||||
| Accrued interest | 80,324 | (37,281 | ) | |||||
| Customer deposits | 36,981 | 106,757 | ||||||
| Deferred vendor consideration | 275,000 | — | ||||||
| Other liabilities | 11,882 | 32,644 | ||||||
| Net cash used in operating activities | (1,423,194 | ) | (1,584,811 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (210,159 | ) | (9,100 | ) | ||||
| Net cash used in investing activities | (210,159 | ) | (9,100 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from senior secured notes payable | — | 3,000,000 | ||||||
| Proceeds from unsecured convertible notes - related parties | 250,000 | — | ||||||
| Principal payments on notes payable – related parties | — | (221,303 | ) | |||||
| Principal payments on notes payable | (274,320 | ) | (176,565 | ) | ||||
| Proceeds from issuance of common stock | 152,500 | — | ||||||
| Accounts to be settled by issuance of equity securities | 25,000 | — | ||||||
| Proceeds from exercise of warrants | 7,500 | — | ||||||
| Net cash provided by financing activities | 160,680 | 2,602,132 | ||||||
| Net (decrease) increase in cash | (1,472,673 | ) | 1,008,221 | |||||
| Cash at beginning of period | 1,499,889 | 4,434 | ||||||
| Cash at end of period | $ | 27,216 | $ | 1,012,655 | ||||
(continued)
| F-4 |
| Nine months ended December 31, | |||||||
| 2013 | 2012 | ||||||
| Cash flows from operating activities | |||||||
| Net loss | $ | (5,117,754 | ) | $ | (1,720,893 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities | |||||||
| Depreciation and amortization | 65,332 | 60,944 | |||||
| Change in fair value of derivative liability | 73,892 | — | |||||
| Gain in extinguishment of derivative liability | (40,548 | ) | — | ||||
| Amortization of discount on senior secured convertible notes | 215,348 | — | |||||
| Shares issued for value of Saleen S7 Supercar | — | 250,000 | |||||
| Shares issued for directors fees | 250,000 | — | |||||
| Shares issued for services | 279,481 | 6,250 | |||||
| Changes in working capital: | |||||||
| (Increase) Decrease in cash held in trust account | 175,000 | — | |||||
| (Increase) Decrease in accounts receivable | (10,801 | ) | (6,424 | ) | |||
| (Increase) Decrease in inventory | 90,472 | (131,616 | ) | ||||
| (Increase) Decrease in prepaid expenses and other assets | (65,808 | ) | (5,605 | ) | |||
| Increase (Decrease) in accounts payable | 725,514 | (206,911 | ) | ||||
| Increase (Decrease) in accounts payable to related parties | 168,618 | 524,114 | |||||
| Increase (Decrease) in payroll taxes payable | 483,239 | 56,151 | |||||
| Increase (Decrease) in accrued interest | 56,491 | 134,795 | |||||
| Increase (Decrease) in customer deposits | (764,127 | ) | (110,994 | ) | |||
| Increase (Decrease) in other liabilities | 40,287 | 100,030 | |||||
| Net cash used in operating activities | (3,375,364 | ) | (1,050,159 | ) | |||
| Cash flows from investing activities | |||||||
| Purchases of property and equipment | (285,090 | ) | (237 | ) | |||
| Net cash used in investing activities | (285,090 | ) | (237 | ) | |||
| Cash flows from financing activities | |||||||
| Proceeds from senior secured notes payable | 3,000,000 | — | |||||
| Proceeds from notes payable - related parties | 550,000 | 250,000 | |||||
| Principal payments on notes payable – related parties | (203,245 | ) | (25,000 | ) | |||
| Principal payments on notes payable | (223,895 | ) | (43,061 | ) | |||
| Proceeds from issuance of common stock | 544,000 | 864,573 | |||||
| Net cash provided from financing activities | 3,666,860 | 1,046,512 | |||||
| Net increase (decrease) in cash | 6,406 | (3,884 | ) | ||||
| Cash at beginning of period | 4,434 | 6,779 | |||||
| Cash at end of period | $ | 10,840 | $ | 2,895 | |||
Condensed Consolidated Statements of Cash Flows (Unaudited)
(continued)
| Nine months Ended December 31: | |||||||
| 2013 | 2012 | ||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||
| Derivative liability related to conversion feature | $ | 1,660,656 | $ | — | |||
| Issuance of Common Stock on conversion of Secured Convertible Notes Payable | 78,794 | — | |||||
| Issuance of Common Stock on payment of interest on Notes Payable | 24,697 | 66,250 | |||||
| Issuance of common stock as principal on Notes Payable to related parties | 22,803 | — | |||||
| Issuance of common stock for automotive asset | — | 250,000 | |||||
| Supplemental disclosures of cash flow information: | |||||||
| Cash paid during the period for | |||||||
| Interest | $ | 32,726 | $ | 32,809 | |||
| Income taxes | $ | — | $ | — | |||
| Three months periods ended June 30: | |||||||
| 2014 | 2013 | ||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||
| Derivative liability related to conversion feature | $ | — | $ | 1,660,056 | |||
| Issuance of Common Stock on conversion of Secured Convertible Notes Payable and accrued interest | 80,151 | — | |||||
| Issuance of Common Stock on payment of interest on Notes Payable | 244,869 | 24,697 | |||||
| Issuance of common stock as payment on Notes Payable | 364,682 | 22,803 | |||||
| Beneficial conversion feature | 250,000 | — | |||||
| Shares issued in exchange for amendment of convertible debts recorded as debt discount | 112,060 | — | |||||
| Reclass of amounts to be settled through the issuance of equity securities | 470,534 | — | |||||
| Supplemental disclosures of cash flow information: | |||||||
| Cash paid during the year for | |||||||
| Interest | $ | 12,184 | $ | 44,292 | |||
| Income taxes | $ | — | $ | — | |||
See accompanying notes which are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended December 31,June 30, 2014 and 2013 and 2012
The accompanying condensed consolidated financial statements of Saleen Automotive, Inc. and subsidiaries (“Saleen,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2014,2015, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2013,2014, which are included in the Company’s CurrentAnnual Report on Form 8-K10-K for such year filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013.2014. The combinedconsolidated balance sheet as of March 31, 2013,2014, has been derived from the audited financial statements included in the Form 8-K10-K filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013.
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
The Company designs, develops, manufactures and sells high performance vehicles built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers. The Company is a low volume vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by the manufacturers (Ford, Chevrolet and Dodge)) of OEM American Sports Cars and the production of high performance USA-engineered racing cars. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it. The Company’s Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. Muscle cars are any of a group of American-made 2-door sports coupes with powerful engines designed for high performance driving.
History of the Company
Saleen Automotive, Inc. (formerly W270, Inc., the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011. The Company issued 5,000,000 shares of its common stock to Mr. Wesley Fry (“Fry”) at inception in exchange for organizational costs/services incurred uponinception. Following its incorporation. Following our formation, wethe Company issued an additional 1,000,000 shares of ourits common stock to Mr. Fry, in exchange for a business plan along with a client/customer list related to his information technology consulting services.
On November 30, 2012, Wesley Fry (“Fry”) and W-Net Fund I, L.P. ( “W-Net”), entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Fry would sellsold to W-Net and W-Net would purchase from Fry, an aggregate of 6,000,000 shares of the W270, Inc.’s common stock (the “Shares”), which Shares represented 75.0% of the issued and outstanding shares of the Company’s common stock (2) Fry would release the Company from any and all existing claims, (3) Fry would settle various liabilities of the Company and (4) Fry would indemnify W-Net and the Company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Fry. The closing occurred on November 30, 2012. W-Net paid for the Shares with personal funds. Simultaneous with the closing, W-Net sold to Verdad Telecom, Inc. one half of the Shares. There are no arrangements or understandings by and among members of both the former and new control groups and their associates with respect to election of directors or other matters of the Company.
Merger
On May 23, 2013, wethe Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, ourits wholly-owned subsidiary, Saleen Florida Merger Corporation, ourits 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 ourthe Company’s wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of ourthe Company’s wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of ourthe 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 ourthe Company’s common stock (on a fully-diluted basis) was owned, collectively, by Saleen Parties (including 341,943 shares of ourthe 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 thean Assignment and License Agreement discussed below)Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we arethe Company is solely engaged in the Saleen Entities’ business, Saleen Automotive’s then officers became ourthe Company’s officers and Saleen Automotive’s then three directors became members of ourthe Company’s five-member board of directors (which currently has two vacancies).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.
As the owners and management of Saleen Automotive havehad voting and operating control of the Company after the Merger, the transaction has beenwas accounted for as a recapitalization with the Saleen Entities deemed the acquiring companies for accounting purposes, and our companythe Company deemed the legal acquirer. Due to the change in control, the condensed consolidated financial statements reflect the historical results of the Saleen Entities prior to the Merger and that of the combined company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as of the earliest periods presented as capital stock shares reflecting the exchange ratio in the Merger. The amount of debt assumed upon the reverse mergerMerger of $39,547, legal and closing costs of $46,000, and a dividend of an aggregate amount of $280,000 paid to our stockholders as of May 23, 2013 have been reflected as a cost of the Merger in the statement of operations.
Consolidation Policy
The Company develops, manufactures and sells high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
Reclassification of Certain Prior PeriodYear Information
The Company has reclassified certain prior periodyear amounts to conform to the current period presentation, including theyear presentation. This included reclassification of engineering salaries of $6,438 to research and development expenses and sales and marketing salaries of $40,769$91,406 and $98,254, respectively, from general and administrative operating expenses to research and development and sales and marketing expenses, respectively, and reclassification of promotional trade discount expenses of $19,657 to revenue from generalsales and administrative operatingmarketing expenses. The reclassification of these amounts had no impact on consolidated net incomeloss or cash flows.
Going Concern
The Company’s combinedcondensed 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 ninethree months ended December 31, 2013,June 30, 2014, the Company incurred a netan operating loss of $5,117,754$1,603,749 and utilized $3,375,364$1,423,194 of cash in operations. The Company also hashad a stockholders'stockholders’ deficit and working capital deficit of $8,066,266$4,530,646 and $7,192,703,$3,757,048, respectively, as of December 31, 2013,June 30, 2014, and as of that date, the Company is delinquentowed $612,716 in payments of $729,314 ofpast unpaid payroll taxes, and $1,402,889$352,795 of outstanding notes payable arewere in default. The current cash resourcesdefault and $583,150 of the Company are insufficient to meet its planned business objectives and operational needs without additional financing.accounts payable was greater than 90 days past due. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result,The Company’s independent auditors, in their audit report for the Company's independent registered public accounting firm issued a report on ouryear ended March 31, 2013 financial statements that raised2014, expressed substantial doubt about the Company'sCompany’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013,June 30, 2014 the Company had cash on hand in the amount of $10,840. On October 8, 2013,$27,216 and is not generating sufficient funds from operations to cover current operating expenses. During the three months ended June 30, 2014, the Company entered into a Secured Promissory Note with W-Net pursuant to which W-Net loaned an aggregateraised $250,000 through the issuance of $500,000 to the Company. The note bears interest at the rate of 8% per annum, which is payable along with all principal under the note on October 7, 2014, unless earlier repaid. The Company’s obligations under the note are secured by a second priority security interest in all of its assets, other than an S7 automobile in which W-Net has a first priority security interest. In addition, during the nine months ended December 31, 2013,convertible notes and the Company entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 3,786,666 shares1,066,667 of its restricted common stockshares at a per share price of $0.15 for aggregate proceeds of $544,000, net of issuance costs of $24,000. Additional Subscribers purchased restricted common shares of 1,316,667 and 686,666 in January and February 2014, respectively, at a per share price of $0.15 for aggregate proceeds of $197,500 and $103,000, respectively.$160,000. However, additional funding will be needed to continue operations through March 31, 2014, whichSeptember 30, 2014. In addition, the Company currently anticipates raising through the consummation of additional Stock Subscriptions. In addition, management will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the Company’sits business through and beyond March 31,September 30, 2014. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders, including diluting Saleen below 50% ownership, in case or equity financing.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management hasestimates include the estimated the collectability of its accounts receivable, the valuation of the S7 Supercar held for sale, the valuation of long lived assets, warranty reserves, the assumptions used to calculate its derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.
Fair valueValue of Financial Instruments
The Company adopted ASCthe FASB Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1, 2009. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s financial statements.
Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.
Level 3 Unobservable inputs based on the Company’s assumptions.
Financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheetssheet on a recurring basis and their level within the fair value hierarchy as of DecemberMarch 31, 2013.
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Fair value of Derivative Liability at December 31, 2013 | $ | — | $ | 1,694,000 | $ | — | $ | 1,694,000 | |||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
| Fair value of Derivative Liability at March 31, 2014 | $ | — | $ | 5,032,786 | $ | — | $ | 5,032,786 | |||||||||
Derivative financial instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company used a Monte Carlo option pricing model to value the derivative instruments at inception, and on subsequent valuation dates is using a weighted average Black–Scholes Model.Scholes-Merton model. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Inventories
| June 30, 2014 | March 31, 2014 | |||||||
| (unaudited) | ||||||||
| Parts and work in process | $ | 184,716 | $ | 183,941 | ||||
| S7 Supercar held for sale | 250,000 | 250,000 | ||||||
| Total inventories | $ | 434,716 | $ | 433,941 | ||||
| F-8 |
Advertising, Sales and Marketing Costs
Advertising, sales and marketing costs are expensed as incurred and are included in trust by related party
| December 31, 2013 | March 31, 2013 | ||||||
| Parts and work in process | $ | 197,752 | $ | 288,224 | |||
| S7 Supercar held for sale | 250,000 | 250,000 | |||||
| Total inventories | $ | 447,752 | $ | 538,224 | |||
Income Taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”).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 theany related deferred tax asset. Any change in the valuation allowance willwould be included in income in the year of the change in estimate.
Stock Compensation
The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes-Merton option pricing model to calculate the fair value of any equity instruments on the grant date.
The Company also uses the provisions of ASC 505-50, “Equity Based Payments to Non-Employees,” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
Income (Loss) per Share
The basicCompany’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. The basic EPS is calculated by dividing the Company’s net income (loss) available to common shareholdersstockholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividingDiluted EPS reflects the Company’s netpotential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) availableof the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common shareholders bystock at the diluted weighted average number of shares outstandingmarket price during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items.
Weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented. Weighted average shares outstanding also includesinclude, as of the earliest period presented, the equivalent number of common shares that will bewere converted upon conversion of all the Super Voting Preferred Stock, as of the earliest period presented as these shares have the same characteristics of common stock.
Warrants, options and other potentially dilutive securities that are anti-dilutive have been excluded from the dilutive calculation when their exercise price or conversion price exceeds the average stock and for which management expects to convert (see Note 9).
| Three Month Periods Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Basic weighted-average number of common shares outstanding | 141,832,616 | 120,000,000 | ||||||
| Diluted effect of potentially dilutive debt and equity | 70,908,438 | — | ||||||
| Diluted weighted-average number of potential common shares outstanding | 212,741,054 | 120,000,000 | ||||||
| Potential common shares excluded from the per share computations as the effect of their inclusion would not be dilutive | 13,146,432 | 35,645,134 | ||||||
Significant Concentrations
Sales to customers in excess of 10% of revenues and customers with receivable balances in excess of 10% of gross accounts receivable were as follows:
| Three Month Periods Ended June 30, 2014 | Three Month Periods Ended June 30, 2013 | ||||||||||||||
| Revenues | Receivables | Revenues | Receivables | ||||||||||||
| Customer A | 27 | % | 31 | % | - | % | - | % | |||||||
| Customer B | 14 | % | - | % | - | % | - | % | |||||||
| Customer C | - | % | - | % | 11 | % | - | % | |||||||
| Customer D | - | % | - | % | 15 | % | - | % | |||||||
| Customer E | - | % | - | % | 18 | % | - | % | |||||||
| Customer F | - | % | - | % | 11 | % | - | % | |||||||
Recently Issued Accounting Standards
On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating the impact, if any, on adopting ASU 2014-09 on the Company’s results of operations or financial condition.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. Management is currently evaluating the impact, if any, of adopting ASU 2014-08 on the Company’s results of operations or financial condition.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company'sCompany’s present or future condensed consolidated financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2013 and March 31, 2013:
| December 31, 2013 | March 31, 2013 | ||||||
| Tooling | $ | 453,969 | $ | 384,293 | |||
| Equipment | 262,692 | 121,186 | |||||
| Leasehold improvements | 203,311 | 129,402 | |||||
| Total, cost | 919,972 | 634,881 | |||||
| Accumulated Depreciation and Amortization | (359,995) | (294,662) | |||||
| Total Property, Plant and Equipment | $ | 559,977 | $ | 340,219 | |||
| June 30, 2014 | March 31, 2014 | |||||||
| Tooling | $ | 470,399 | $ | 470,399 | ||||
| Equipment | 321,189 | 264,837 | ||||||
| Leasehold improvements | 203,312 | 203,311 | ||||||
| Construction-in-progress | 153,807 | — | ||||||
| Total, cost | 1,148,707 | 938,548 | ||||||
| Accumulated Depreciation and Amortization | (437,633 | ) | (391,724 | ) | ||||
| Total Property, Plant and Equipment | $ | 711,074 | $ | 546,824 | ||||
Depreciation and amortization expense for the ninethree months ended December 31,June 30, 2014 and 2013 was $45,909 and 2012 was $65,332 and $60,944,$20,162, respectively.
NOTE 3 – NOTES PAYABLE - IN DEFAULT
Notes payable are comprised as follows:
| December 31, 2013 | March 31, 2013 | ||||||
| Senior secured note payable to a bank, secured by all assets of Saleen Signature Cars, guaranteed by the U.S. Small Business Administration and personally guaranteed by the Company’s CEO, payable in monthly installments of $5,833, including interest at a rate of 6% per annum payable monthly, through October 26, 2019, currently in default (1) | $ | 527,216 | $ | 582,258 | |||
| Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (2) | 414,500 | 414,500 | |||||
| Subordinated secured note payable, interest at 10% per annum, payable December 16, 2010, currently in default (3) | 65,972 | 105,312 | |||||
| Subordinated secured note payable, interest at 10% per annum payable March 31, 2009, in default as of March 31, 2013, paid in full | — | 124,513 | |||||
| Subordinated secured note payable for legal services rendered, non interest bearing, payable on October 25, 2013, currently in default (4) | 42,749 | 47,749 | |||||
| Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default | 320,000 | 320,000 | |||||
| Total notes payable | 1,370,437 | 1,594,332 | |||||
| Less: current portion of notes payable | (1,370,437 | ) | (1,044,074 | ) | |||
| Notes payable, net of current portion | $ | — | $ | 550,258 | |||
| June 30, 2014 | March 31, 2014 | |||||||
| Senior secured note payable to a bank, secured by all assets of Saleen Signature Cars, guaranteed by the U.S. Small Business Administration and personally guaranteed by the Company’s CEO, payable in full in October 2014 (1) | $ | 418,429 | $ | 442,479 | ||||
| Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (2) (5) | 97,000 | 414,500 | ||||||
| Subordinated secured note payable, interest at 10% per annum, payable March 16, 2010, currently in default (3) | 61,046 | 61,046 | ||||||
| Subordinated secured note payable for legal services rendered, non-interest bearing, payable on October 25, 2014, currently in default (4) | 37,749 | 37,749 | ||||||
| Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default (5)(6) | 55,000 | 320,000 | ||||||
| Total notes payable | $ | 669,224 | $ | 1,275,774 | ||||
| On February 6, 2014, Saleen Signature Cars received a Complaint from the bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to |
| loan. | |
| (2) | Bonds and notes issued on |
| On May 7, 2014, the Company, along with its subsidiaries and Steve Saleen, entered into a Settlement Agreement and Mutual Release with Thomas Del Franco a holder of a Bond payable of $317,500. See (5) below for further discussion. | |
| (3) | Note payable issued on |
| Non-interest bearing note payable dated January 25, 2013 due in full on October 25, 2013 or earlier upon the occurrence of certain events that have not occurred. The note is secured by | |
| (5) | On May 7, 2014, the Company, along with its subsidiaries and Steve Saleen, entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Thomas Del Franco and Jason B. Cruz (the “Del Franco Parties”), pursuant to which the Del Franco Parties agreed to fully and finally settle a claim filed against the Company for outstanding Bond and note payables to Thomas Del Franco, which consisted of Bond and note payable of $317,230 and $200,000, respectively, and unpaid interest of $187,535 in exchange for (1) the Company’s payment to Mr. Del Franco of $250,000 (the “Settlement Payment”) and (2) issuance of 2,250,000 shares of its common stock (the “Settlement Shares” and together with the Settlement Payment, the “Settlement Amount”). The Settlement Shares had a value of $382,500 based on the closing price of the Company’s common stock on May 7, 2014 of $0.17. The parties to the Settlement Agreement also agreed to release each other from all claims arising from their prior business dealings. The Del Franco Parties have agreed to a contractual restriction on the sale of the Settlement Shares whereby for a period of 12 months from and after the expiration of any applicable restricted periods imposed by applicable federal and state securities laws and regulations, including Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), the Del Franco Parties will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, more than 200,000 of the Settlement Shares in any given calendar month. The Company |
| (6) | In June 2014, the Company entered into a Settlement Agreement and Mutual Release agreement with Jim Marsh American Corporation (“Marsh”) for an outstanding principal and interest of $100,000 and $53,374, respectively, in exchange for (1) issuance of 800,000 shares of its common stock and (2) cash payment of |
Total notes payable interest expense for notes included in Note 3 above and Notes 4 and 5 below was $362,784$89,226 and $138,281$68,989, respectively, for the ninethree months ended December 31, 2013June 30, 2014 and 2012, respectively.2013. As of December 31, 2013June 30 and March 31, 2013, $350,6302014, $213,048 and $318,836,$380,257, respectively, of interest on notes payable remains unpaid.
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
| December 31, 2013 | March 31, 2013 | ||||||
| Unsecured note payable to a shareholder, non interest bearing, due on April 1, 2014. (1) | $ | 102,000 | $ | 100,500 | |||
| Note payable to a shareholder, secured by S7 Supercar automobile, interest at 10% per annum payable quarterly, due and paid off on May 23, 2013. | — | 200,000 | |||||
| Unsecured note payable to a shareholder, interest at 10% per annum payable at various maturity dates, currently in default. (2) | 32,452 | 60,000 | |||||
Note payable to a shareholder, secured by S7 Supercar automobile, interest at 8% per annum payable in full on October 7, 2014. | 500,000 | — | |||||
| Unsecured $100,000 revolving primissory note to a shareholder, interest at 12% per annum payable in full on November 14, 2014. $50,000 available at December 31, 2013. | 50,000 | — | |||||
| Total notes payable, related parties | $ | 684,452 | $ | 360,500 | |||
| June 30, 2014 | March 31, 2014 | |||||||
| Unsecured note payable to a stockholder, non-interest bearing, due on April 1, 2014, currently in default.(1) | $ | 102,000 | $ | 102,000 | ||||
| Unsecured note payable to a stockholder, interest at 10% per annum payable at various maturity dates, settled in April 2014.(2) | — | 32,452 | ||||||
| Unsecured $100,000 revolving promissory note to a stockholder, interest at 12% per annum payable in full on November 14, 2014. $25,000 available at June 30, 2014. | 75,000 | 75,000 | ||||||
| Total notes payable, related parties | $ | 177,000 | $ | 209,452 | ||||
| (1) |
| (2) | Unsecured note payable to a related party issued on November 3, 2008 for original principal of $60,000 |
NOTE 5- SENIOR SECURED5 – CONVERTIBLE NOTES PAYABLE
| December 31, 2013 | March 31, 2013 | ||||||
| Senior secured convertible notes payable to private accredited investor group, convertible into 40,000,000 shares of common stock, interest accrued at 3% per annum, notes mature on June 25, 2017 | $ | 2,924,422 | $ | — | |||
| Less: discount on notes payable | (1,448,524 | ) | — | ||||
| Notes payable, net of discount | $ | 1,475,898 | $ | — | |||
Convertible notes payable are as follows:
| June 30, 2014 | March 31, 2014 | |||||||
| Senior secured convertible notes payable to private accredited investor group, convertible into 34,550,865 shares of common stock (including accrued interest) as of June 30, 2014, interest accrued at 3% per annum, notes mature on June 25, 2017 | $ | 2,509,245 | $ | 2,586,732 | ||||
| Unsecured convertible notes payable to private accredited investor group, convertible into 36,357,573 shares of common stock (including accrued interest), interest accrued at 7% per annum, notes mature in March, 2017 | 2,500,000 | 2,250,000 | ||||||
| 5,009,245 | 4,836,732 | |||||||
| Less: discount on notes payable | (3,507,215 | ) | (3,498,981 | ) | ||||
| Notes payable, net of discount | $ | 1,502,030 | $ | 1,337,751 | ||||
Senior secured convertible notes
On June 26, 2013, pursuant to a Securities Purchase Agreement, the Company issued senior secured convertible notes, having a total principal amount of $3,000,000, to 12 accredited investors. The Notes were issued inbalance of convertible notes outstanding as of March 31, 2014 was $2,586,732. During the three months ended June 30, 2014, a private placement, exempt fromnote holder converted $77,487 of principal and $2,664 of interest into 1,016,667 shares of the Securities Act registration requirements.Company’s common stock. The balance of the convertible notes outstanding as of June 30, 2014 was $2,509,245. The Notes will pay 3.0% interest per annum with a maturity of 4 years (June 25, 2017). and are secured by all assets and intellectual property of the Company. No cash interest payments will beare required, except that accrued and unconverted interest shall be due on the maturity date and on each
Each Notenote is convertible at any time into the Company’s common stock at a specified conversion price, which currently is $0.075 per share The Noteshare. Prior to June 2014, the note conversion price iswas subject to specified adjustments for certain changes in the numbers of outstanding shares of the Company'sCompany’s common stock, including conversions or exchanges of such. If the Company's shares are issued, except in specified exempt issuances, including the conversion of the Super Voting Preferred Stock, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance. During the nine months ended December 31, 2013, certain note holders converted $75,578 of principalthereof, and $3,216 of interest for 1,050,593 shares the common stock.
The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that prior to June 2014 the conversion prices of the notes arewere not a fixed amount because they arewere subject to fluctuationadjustment based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features arewere not considered indexed to the Company’s own stock and characterized the fair value of these conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the notes on June 26, 2013, the initial fair value of the embedded beneficial conversion feature of the notes to bewas $1,660,656. These amounts wereThis amount was determined by management with the use of an independent valuation specialist using a Monte Carlo simulation option pricing model. As such, the Company recorded a $1,660,656 derivative liability with an offsetting change to valuation discount upon issuance for financial reporting purposes (see note 6). As a result of the 3% First Amendment entered into in June 2014, the conversion price is no longer subject to fluctuation based on the occurrence of future offerings or events except for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally. As a result, the Company determined that the derivative liability was extinguished in June 2014 (See Note 6).
During the ninethree months ended December 31,June 30, 2014 and June 30, 2013, the Company amortized $215,348$96,421 and $4,550, respectively, of the valuation discount as additional interest expense. As of June 30, 2014 and March 31, 2014, the remaining unamortized valuation discount of $1,448,524 as of December 31, 2013,$1,158,936 and $1,248,981, respectively, has been offset against the face amount of the notes for financial statement purposes.
Unsecured convertible notes
In March and April 2014, as amended in June 2014, the Company issued 7% Unsecured Convertible Notes, having a total principal amount of $2,250,000 and $250,000, respectively, to 5 accredited investors of which $2,000,000 was received from 3 investors who participated in the June 26, 2013 offering. The remaindernotes were issued in a private placement, exempt from the Securities Act registration requirements. The notes pay 7.0% interest per annum with a maturity of 3 years (March and April, 2017). No cash interest payments are required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. Each note is initially convertible at any time into the Company’s common stock at a specified conversion price, which currently is $0.07 per share. The conversion price is adjustable to the lower of $0.07 or the three lowest daily volume weighted average prices of the valuationCompany’s common stock during the twenty consecutive trading days immediately preceding any conversion date. However, in no event shall the conversion price be lower than $0.03 per share. In addition, the conversion price adjusts for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally.
In June 2014, in exchange for the issuance in aggregate of 357,143 shares of its common stock valued at $53,571, the Company entered into a First Amendment to Saleen Automotive, Inc. 7% Convertible Note whereby effective as of March 31, 2014 or the applicable issuance date for notes issued thereafter, the conversion price would in no event adjust below $0.03 per share. In addition, if a Fundamental Transaction, as defined, were to occur the potential liquidated damages was set to a fixed amount. The Company recorded $53,571 as additional debt discount will berelated to the value of the shares issued, which is being amortized over the remaining term of the notes.
As the conversion price of $0.07 reflected a price discount below the fair market value of the Company’s common stock as of the issuance date of the notes, the Company determined that there was deemed a beneficial conversion feature associated with these notes. As such, the Company recorded $2,250,000 and $250,000 in March 2014 and April 2014, respectively, representing the intrinsic value of the beneficial conversion feature at the issuance date of the notes in additional paid-in capital. The value of the beneficial conversion feature is being amortized as additional interest expense over the remaining four year term of the senior secured convertible notes, payable.
NOTE 6 -– DERIVATIVE LIABILITY
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s senior secured convertible notes (described in Note 5)5 above), dodid not have fixed settlement provisions because their conversion prices maycould be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the notes from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes hashad been characterized as a derivative liability to bethat was re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of June 26, 2013, the date of issuance17, 2014 and DecemberMarch 31, 2013,2014, the derivative liability was valued using a Monte Carlo option pricingBlack-Scholes-Merton model with the following assumptions:
| December 31, 2013 | June 26, 2013 Date of Issuance | ||||||
| Conversion feature: | |||||||
| Risk-free interest rate | 1.75 | % | 1.04 | % | |||
| Expected volatility | 75.0 | % | 73.3 | % | |||
| Expected life (in years) | 3.48 years | 4 years | |||||
| Expected dividend yield | — | — | |||||
| Fair Value: | |||||||
| Conversion feature | $ | 1,694,000 | $ | 1,660,656 | |||
| June 17, 2014 | March 31, 2014 | |||||||
| Conversion feature: | ||||||||
| Risk-free interest rate | 0.02 | % | 0.05 | % | ||||
| Expected volatility | 100 | % | 100 | % | ||||
| Expected life (in years) | 0 years | .25 years | ||||||
| Expected dividend yield | — | — | ||||||
| Fair Value: | ||||||||
| Conversion feature | $ | 2,586,732 | $ | 5,032,786 | ||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company usesused its own volatility as the volatility of five comparable guideline companies to estimate volatility for its common stock.estimated volatility. The expected life of the conversion feature of the notes was based onnill, as the term of the notes.Company no longer recognizes a derivative liability related to these notes after June 17, 2014. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
During the three months ended June 30, 2104, the Company recognized $2,446,054 as other income, which represented the difference in the value of the derivative between March 31, 2014 and June 17, 2014. In addition, the Company recognized $2,586,732 as other income, which represented the remaining derivative liability as of June 17, 2014, as the Company no longer recognizes a derivative liability related to these convertible notes.
NOTE 7 – RELATED PARTY TRANSACTIONS
The amounts of December 31, 2013accounts payable to related parties as of June 30 and March 31, 2014 are as follows:
| Related Party: | June 30, 2014 | March 31, 2014 | ||||||
| Steve Saleen(a) | $ | 100,000 | $ | 100,000 | ||||
| Michaels Law Group(b) | 42,572 | 23,954 | ||||||
| Top Hat Capital(c) | 37,500 | 25,000 | ||||||
| $ | 180,072 | $ | 148,954 | |||||
| (a) | During the three months ended June 30, 2013, the Company incurred $60,000 in officers’ salary expense due its Director, Chairman and CEO, Mr. Steve Saleen. As of June 30 and March 31, 2014, the Company owed $100,000 to Mr. Saleen for his unpaid officers’ salary. |
| (b) | During the three months ended June 30, 2014 and 2013, the Company incurred $33,618 and $94,299, respectively, in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by its Director and General Counsel, Mr. Jonathan Michaels. As of June 30, 2014 and March 31, 2014, $42,572 and $23,954, respectively, was payable to Michaels Law Group for these services. |
| (c) | During the three months ended June 30, 2014, the Company incurred $25,000 in investment advisor and research services from Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of June 30, 2014 and March 31, 2014, $37,500 and $25,000, respectively, was payable to TopHat Capital for these services. |
| F-15 |
Other Transactions
During the three months ended June 30 2014, the Company paid $25,000 for research report services to Crystal Research Associates, whose co-founder and Chief Executive Officer, Jeffrey Kraws, is a Director of the Company.
During the three months ended June 30 2013, the balances of $452,287 and $300,000, respectively, were payable to Mr. Saleen for his unpaid officers’ salary. Effective March 31, 2013, Mr. Saleen agreed to defer the $300,000 of unpaid salary for payment until April 1, 2014. During the nine months ended December 31, 2013, Mr. Saleen loaned the Company $20,500 payable on demand.
During the nine monththree months ended December 31,June 30, 2013, the Company and Miranda & Associates amended their payment deferral agreement and the Company commenced partial paymentissued 5,277 shares of the unpaid fees.
NOTE 8 – STOCKHOLDERS’ EQUITY
Issuance of these director’s fees as director’s fee expense.
During the three months ended December 31, 2013June 30, 2014, the Company entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased an aggregate of 1,016,667 restricted shares of the Company’s common stock at a per share price of $0.15 for aggregate proceeds of $152,500, and 2012, and $529,259 and $545,115 foralso received Common Stock Purchase Warrants to purchase 1,016,667 shares of the nineCompany’s common stock at an exercise price of $0.15 per share.
During the three months ended December 31, 2013 and 2012, respectively.
| Related Party | December 31, 2013 | March 31, 2013 | ||||||
| Steve Saleen | $ | 452,287 | $ | 300,000 | ||||
| Miranda & Associates | 174,093 | 167,222 | ||||||
| Michaels Law Group | 251,505 | 242,045 | ||||||
| Totals | $ | 877,885 | $ | 709,267 | ||||
During the ninethree months ended December 31, 2012, we incurred $120,000 in consulting fees with a shareholder for marketing, business development, engineering, business management, and financial advisory services.
| December 31, 2013 | March 31, 2013 | ||||||
| Deferred income tax asset: | |||||||
| Net operating loss carry forward | $ | 4,773,000 | $ | 3,316,000 | |||
| Valuation allowance | (4,773,000 | ) | (3,316,000 | ) | |||
| Net deferred income tax asset | $ | — | $ | — | |||
| December 31, 2013 | March 31, 2013 | ||||
| Tax expense at the U.S. statutory income tax | (34.00 | )% | (34.00 | )% | |
| State tax net of federal tax benefit | (5.80 | )% | (5.80 | )% | |
| Increase in the valuation allowance | 39.8 | % | 39.8 | % | |
| Effective tax rate | — | % | — | % | |
During the nine month periodthree months ended December 31,June 30, 2013, the Company issued the equivalent of 12,178 shares of its Super Voting Preferred Stock, or 1,522,250 shares of its common stock, in exchange for the settlement of claims, conditions of employment, director’s fees, and payment of information technology services. These shares were valued at $47.38 per share for a total valuation of $576,981 based on management’s estimate of value of the shares issued.
Warrants
The following summarizes warrant activity for the Company filed an Amendment to Certificate of Designation After Issuance of Class or Series (the “Amendment”) amendingduring the conversion rights of its Super Voting Preferred Stock. As a result of the Amendment, the Company’s board of directors will determine whether (if at all) the Company will effectuate any reverse stock split (or any increase in its authorized shares of common stock), and the appropriate time (if ever) for any such reverse stock split (or increase in its authorized shares of common stock). The remaining shares of Super Voting Preferred Stock were automatically converted into common stock on January 13, 2014.
| Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | |||||||||||
| Outstanding March 31, 2014 | 11,252,245 | $ | 0.15 | 4.8 | |||||||||
| Issued | 1,944,187 | 0.15 | 4.9 | ||||||||||
| Exercised | (50,000 | ) | 0.15 | — | |||||||||
| Outstanding June 30, 2014 | 13,146,432 | $ | 0.15 | 4.6 | |||||||||
During the ninethree months ended December 31, 2013, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 3,786,666 shares of its common stock at a per share price of $0.15 for aggregate proceeds of $544,000, net of issuance costs of $24,000.
NOTE 109 – COMMITMENTS AND CONTINGINCIES
Facilities LeasesPurchase Commitments
In April 2014, the nine months ended December 31, 2013 and 2012 was $508,802 and $348,199, respectively. The current lease amendment provides for an annual escalation of 3% in the rent each February. Past rent will be made up with the payment of an additional $5,300 for 20 months starting in June, 2013.
| Years ending March 31: | Lease Commitment | |
| 2014 | $597,548 | |
| 2015 | 615,154 | |
| 2016 | 583,671 | |
| 2017 | 599,689 | |
| 2018 | 512,172 | |
In May 2014, the Company entered into an agreement with FinishMaster, Inc. (“FinishMaster”) to exclusively use FinishMaster’s paint material supplies. The agreement continues from May 2014 until the Company purchases in aggregate $1,555,000 of a term.FinishMaster products. In consideration for the event Saleen Automotive terminatesCompany’s exclusive use of FinishMaster’s products and fulfilling this purchase commitment, FinishMaster paid the Employment Agreement without cause (as definedCompany $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 Employment Agreement), or otherwise materially breachesagreement. Should the Employment Agreement and such material breach remains uncured after 15 days’ written notice, SaleenCompany not complete a set purchase level milestone, the Company would be required to re-pay the $25,000 along with $11,475 compensation to FinishMaster. This initial amount paid will be entitled torecorded as a severance paymentreduction of 1.50 times his then-current annual salary plus $2 million, payable in cash or cash-equivalents within 30 dayscost of services based on a systematic and rational allocation of the date of termination.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. The Company is currently a party to several legal proceedings related to claims for payment that are currently accrued for in its financial statements as accounts or notes payable. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
SSC is a defendantthe plaintiff in a case filed against Connects Marketing and Eric Hruza on November 28, 2011July 2, 2012 in U.S.the United States District Court, Central District of California, Southern Division, for misappropriation of trade secrets, trademark infringement and other related causes of action. The suit seeks damages in Massachusetts that alleges breachexcess of contract related to a vehicle dispute. The case seeks $75,000 of damages, plus legal fees$1,000,000 and costs of litigation. Saleen Signature Cars has entered into a settlement withis currently pending.
SSC is the Plaintiffs in this matter, the terms of which are to be fulfilled on or before May 15, 2014. In the interim, the matter has been stayed.
In February 2014, SSC received a Complaint from a bank alleging, among other matters, breach of contract related to an engine installed by a third party vendor. The suit claims $200,000 in damages plus interest, legal fees and costs of litigation. The Company believes that the amount sought by the Plaintiff is excessive and without merit. The outcome is uncertain at the present time.
Although the Company’s management currently believes that resolving claims against the claim sought byCompany, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties and management’s views of these matters may change in the bank is not accurate and is without merit; The outcome is uncertain at the present time.
NOTE 1110 – SUBSEQUENT EVENTS
Note Conversion
In JanuaryJuly 2014, six note holders converted $428,704 of principal and February$12,879 of interest to 5,887,775 shares of the Company’s common stock.
Legal
The Company was a plaintiff in a case filed against Inland Empire Auto Body & Paint, Inc. on August 8, 2012 in the California Superior Court, Riverside County, for breach of contract related to several paint jobs performed by Inland Empire on SSC vehicles. The suit sought damages in excess of $30,000. This case was settled in July 2014 for damages awarded to the Company of $15,000 payable over 20 months.
Stock Options
On August 12, 2014, the Company’s board of directors approved the grant of options to purchase up to 8,778,000 shares of the Company’s common stock at an exercise price of $0.10 per share. For employees who have been with the Company for at least one year, the options will vest over a period of three years with one-third vesting immediately and the remaining to vest ratably over the remaining period. For employees who have been with the Company for less than one year, the options will vest over a period of three years with one-third to be fully vested after one year and the remaining to vest ratably over the remaining period. The Company valued the options at $789,531 using the Black-Scholes-Merton option pricing model using the following assumptions: (i) fair market value of stock of $0.10; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 2.44% and (v) expected term of 10 years.
On August 12, 2014, the Company’s board of directors approved the grant of options to purchase up to 500,000 shares of the Company’s common stock to three of the Company’s board members who joined the board in October 2013, December 2013 and May 2014 for a total of 1,500,000 shares at an exercise price of $0.10 per share. One-third of the options will vest immediately with the remaining options vesting one-third on each of the following two anniversary dates from date the board member first joined the board. The Company valued the options at $134,915 using the Black-Scholes-Merton option pricing model using the following assumptions: (i) fair market value of stock of $0.10; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 2.44% and (v) expected term of 10 years.
Common Stock Issuance
In July 2014, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 2,003,333 shares of its common stock at a price of $0.15 per share, for aggregate proceeds of $300,500.
The following discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of Saleen Automotive, Inc. and subsidiaries for the ninethree months ended December 31, 2013June 30, 2014 and 2012.2013. The discussion and analysis that follows should be read together with the financial statements of Saleen Automotive, Inc. and subsidiaries and the notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.
General Overview
We design, develop, manufacture and sell high performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers.Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by the manufacturers (Ford, Chevrolet and Dodge)) of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it.
Our customers worldwide include muscle and high performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture production, and consumers in the luxury supercar and motorsports market. We plan to develop a network of company-owned branded stores to complement our existing retail dealer locations.
We utilize automobile manufacturers Ford, Chevrolet and Dodge platform vehicles for our muscle and performance vehicle production. All aftermarket parts and accessory products are engineered and manufactured exclusively by us. Our current retail outlets for our products are authorized Ford, Chevrolet and Dodge dealers and we also retail our products with exotic car dealers.
We plan to operate as a global high performance automotive brand and expand our production, sales and marketing operations extensively within the markets of the USA and into multiple international markets. In March 2014, we entered into an agreement to distribute the full collection of Saleen automobiles in China. We also plan to open our own retail outlets, market our expertise in specialist engineering and design services to third party clients, develop our own motorsport program and introduce our next generation American supercar.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the then outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of our 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 our common stock (on a fully-diluted basis) was owned, collectively, by Saleen Parties (including 341,943 shares of our Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of our common stock, issued to Saleen pursuant to thean Assignment and License Agreement discussed below)Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors (which currently has two vacancies). In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.
The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the historical operations of the Saleen Entities prior to the Merger and that of the combined company following the Merger. The accompanying condensed consolidated financial statements are prepared as if we will continue as a going concern. TheAccordingly, the condensed consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.
Critical Accounting Policies
Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained starting on page 31 2013 Compared toin “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 as filed on June 30, 2104.
Three Months Ended December 31, 2012
Our revenue, operating expenses, and net loss from operations for the three months ended December 31, 2013June 30, 2014 as compared to the three months ended December 31, 2012June 30, 2013 were as follows – some balances on the prior period’s condensed consolidated financial statements have been reclassified to conform to the current period presentation:
| Three Months Ended, | Percentage Change Inc (Dec) | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | Change | |||||||||||||||
| Revenue | |||||||||||||||||
| Vehicles and parts | $ | 1,076,153 | $ | 607,490 | $ | 468,663 | 77.1% | ||||||||||
| Design Services | — | 1,245,985 | (1,245,985 | ) | (100.0)% | ||||||||||||
| Total revenue | 1,076,153 | 1,853,475 | (777,322 | ) | (41.9)% | ||||||||||||
| Costs of goods sold | |||||||||||||||||
| Vehicles and parts | 773,467 | 532,932 | 240,535 | 45.1% | |||||||||||||
| Design Services | — | 859,541 | (859,541) | (100.0)% | |||||||||||||
| Total Costs of Goods Sold | 773,467 | 1,392,473 | 619,006 | 44.5% | |||||||||||||
| Gross Margin | 302,686 | 461,002 | (158,316 | ) | (34.3)% | ||||||||||||
| Operating Expenses | |||||||||||||||||
| Research and development | 204,026 | 3,269 | 200,757 | 6,141.2% | |||||||||||||
| Sales and marketing | 320,077 | 74,224 | 245,853 | 331.2% | |||||||||||||
| General and administrative | 1,029,054 | 646,694 | 382,360 | 59.1% | |||||||||||||
| Depreciation and amortization | 18,588 | 20,391 | (1,803 | ) | (8.8)% | ||||||||||||
| Total operating expenses | 1,571,745 | 744,578 | 827,167 | 111.1% | |||||||||||||
| Loss from operations | (1,269,059) | (283,576) | (985,483) | 347.5% | |||||||||||||
| Other income (expenses) | |||||||||||||||||
| Interest expense | (186,004) | (37,595) | (148,409) | 394.8% | |||||||||||||
| Gain on extinguishment of derivative liability | 40,548 | — | 40,548 | — | |||||||||||||
| Change in fair value of derivative liability | (125,026 | ) | — | (125,026 | ) | — | |||||||||||
| Net Loss | $ | (1,539,541 | ) | $ | (321,171 | ) | $ | (1,218,370 | ) | 379.4% | |||||||
| For the Three months ended | Percentage | |||||||||||||||
| June 30, | Change | |||||||||||||||
| 2014 | 2013 | Change | Inc (Dec) | |||||||||||||
| Revenue, net | $ | 1,697,377 | $ | 889,904 | $ | 807,473 | 91 | % | ||||||||
| Costs of goods sold | 1,431,485 | 826,442 | 605,043 | 73 | % | |||||||||||
| Gross margin | 265,892 | 63,462 | 202,430 | 319 | % | |||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | 197,955 | 122,757 | 75,198 | 61 | % | |||||||||||
| Sales and marketing | 576,919 | 121,783 | 455,136 | 374 | % | |||||||||||
| General and administrative | 1,048,858 | 1,713,144 | (664,287 | ) | (39 | %) | ||||||||||
| Depreciation and Amortization | 45,909 | 20,171 | 25,738 | 128 | % | |||||||||||
| Total operating expenses | 1,869,641 | 1,977,855 | (108,214 | ) | (5 | %) | ||||||||||
| Loss from operations | (1,603,749 | ) | (1,914,393 | ) | 310,644 | (16 | %) | |||||||||
| Other income (expenses) | ||||||||||||||||
| Interest expense | (443,053 | ) | (73,539 | ) | (369,514 | ) | 502 | % | ||||||||
| Costs of reverse merger transaction | — | (365,547 | ) | 365,547 | (100 | %) | ||||||||||
| Gain in extinguishment of derivative liability | 2,586,732 | — | 2,586,732 | — | ||||||||||||
| Change in fair value of derivative liability | 2,446,054 | (89,765 | ) | 2,535,819 | (2,825 | %) | ||||||||||
| Net Income (Loss) | $ | 2,985,984 | $ | (2,443,244 | ) | $ | 5,429,228 | (222 | %) | |||||||
Revenues: Revenue consists of sales of high performance vehicles, aftermarket retail parts and design services. Our revenue from high performance vehicles generally includes the base chassis (Mustang, Camaro or Challenger), on which we normally obtain a small margin, and production conversion of the base chassis into a Saleen OEM high performance sports car. Parts represent aftermarket retail sales of Saleen lifestyle accessories and Saleen-branded products and automotive aftermarket specialty parts sold to our base of over 25,000 loyal Saleen automotive vehicle enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to the owners of Ford Mustangs, Chevrolet Camaros and Dodge Challengers.
Total revenues for the three months ended December 31, 2013June 30, 2014 were $1,076,153, a decrease$1,697,377, an increase of $777,322$807,473 or 41.9%91% from $1,853,475$889,904 for the three months ended December 31, 2012. Revenue from the sale of automotive vehicles and parts increased $468,663 or 77.1% to $1,076,153 for the three months ended December 31, 2013 from $607,490 for the three months ended December 31, 2012.June 30, 2013. The increase reflects sales efforts achieved by our expanded sales force whereby we sold a higher number of vehicles during the three months ended December 31, 2013June 30, 2014 as compared to the three months ended December 31, 2012.June 30, 2013. Growth was achieved primarily through expansion with existing dealers as well as the addition of new dealer networks. Traditionally, from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shut down of plants and shipping for several weeks causing delivery of cars to be interrupted which has an effect on our sales. During the three months ended December 31, 2012, revenues of $1,245,985 were realized from a contract completed on December 31, 2012 with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie. We did not have any design contracts during the three months ended December 31, 2013.
Cost of Goods Sold: Cost of goods sold consist of five major categories: base chassis, material, overhead, labor and purchased process services. Chassis costs relate to the purchased Ford Mustang, Chevrolet Camaro or Dodge Challenger vehicles. Material cost relates to the purchase of conversion parts used in the production of our high performance vehicles, and procurement of aftermarket parts, which are manufactured by third party suppliers using our proprietary tools and molds developed by us. Overhead costs include costs associated with manufacturing support, shop and warehouse supplies and expenses, small tools and equipment and other related warehouse and production costs. Our labor costs include the cost of personnel related to the production of our high performance vehicles and logistics of warehousing and shipping our aftermarket parts. Purchased process services related to the subcontracting of specific manufacturing processes to outside contractors.
Total costs of goods sold for the three months ended December 31, 2013June 30, 2014 were $773,467, a decrease$1,431,485, an increase of $619,006$605,043 or 44.5%,73% from $1,392,473$826,442 of costs of goods sold for the three months ended December 31, 2012.June 30, 2013. The decrease isincrease was primarily attributable to cost of $859,541 incurred related to a design contract completed during the three months ended December 31, 2012. We did not have any design contracts during the three months ended December 31, 2013. This decrease was somewhat offset by $240,535 of additional costs attributable to increased vehicle and parts sales during the three months ended December 31, 2013June 30, 2014 as compared to the three months ended December 31, 2012.
Gross Margin: Gross Margin from the sale of vehicles and parts increased $228,128$202,430 to $302,686$265,892, or 306.0%319%, for a gross margin of 28%16% for the three months ended December 31, 2013June 30, 2014 from a gross margin of $74,558$63,462, or 12%7%, for the three months ended December 31, 2012.June 30, 2013. The improvement in gross margin reflects both the increase in sales net of an increase in costs of goods sold as a percentage of sales during the three months ended December 31, 2013. Gross Margin from design services contributed $386,444 forJune 30, 2014 as compared to the three months ended December 31, 2012.same period in the prior year.
Research and Development Expenses: Research and development expenses are expensed as incurred and represent engineering salaries and benefits and costs incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes.
Research and development expenses increased by $200,757$75,198, or 6,141.2%61%, to $197,955 during the three months ended December 31, 2013June 30, 2014 from $3,269$122,757 for the three months ended December 31, 2012.June 30, 2013. The increase is primarily due to our expanded engineering team and development of our existing and new Saleen Tesla high performance vehicles including the recent introduction of our 30th year anniversary cars.
Sales and Marketing Expense: Sales and marketing expenses relate to sales and marketing salaries and benefits, including our regional sales representatives, and costs incurred to promote our existing and new products, such as throughattending car shows and promotion through other media outlets, along with new car sales expenses such as commissions and incentives. incentives, and costs related to investor relations.
Sales and marketing expenseexpenses increased by $245,853$455,136, or 331.2%374%, to $320,077$576,919 for the three months ended December 31, 2013June 30, 2014 from $74,224$121,783 for the three months ended December 31, 2012.June 30, 2013. The increase was primarily attributable to our expanded sales andcomprised of increased marketing team and efforts to promote our existing and new products, including our attendingincreased participation at various car shows; higher new car sales commissions related to increased revenues from sales of varies car showshigh performance vehicles; and launch ofinvestor and public relation costs incurred to promote our 30th year anniversary cars.
General and Administrative Expense: General and administrative expenses include expenses for sales, marketing, engineeringadministrative salaries, including executive, finance/accounting, information personnel and administrative salariessupport staff and benefits, occupancy costs, professional fees, and otherbenefits. Other general and administrative costs. costs also include occupancy costs of our facilities, travel and entertainment, auto, insurance, stock compensation, other office support costs and professional fees, including outside accounting/audit, legal, and investor fund raising advisory services.
General and administrative expenses increaseddecreased by $382,360$664,287, or 59.1%39%, to $1,029,054$1,048,858 for the three months ended December 31, 2013June 30, 2014 from $646,694$1,713,144 for the three months ended December 31, 2012.June 30, 2013. The increase wasdecrease is primarily comprised of $138,163$208,830 of lower professional fees related to merger activity during the three months ended June 30, 2013 that was not incurred during the three months ended June 30, 2014 as we did not have a comparable expense of this type; $504,481 of lower stock based employee compensation, as we did not incur any stock based employee compensation during the three months ended June 30, 2014; $144,693 of lower one time settlements of previous claims, as we incurred a gain on settlements of $75,469 during the three months ended June 30, 2014 as compared to a loss of $69,224 for the three months ended June 30, 2013; and $65,284 decrease in other general and administrative expenses. The decrease was partially offset by $152,664 of higher administrative salaries and benefits expense resulting from our expansion of personnel to support the increased sales volume; $48,123 increaseand $106,337 of higher auto and travel and entertainment costs related primarily to our increased participation in occupancy costs from our expansion of our campuscar shows during the three months ended June 30, 2014 as compared to support our growth and new engineering and design facilities used to expand development; $115,000 settlement of a previous claim; and $81,074 increasethe same period in other general and administrative expenses incurred to support the additional sales and marketing efforts.
Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreasedincreased by $1,803$25,738, or 8.8%128%, to $18,588$45,909 for the three months ended December 31, 2013June 30, 2014 from $20,391$20,171 for the three months ended December 31, 2012.June 30, 2013.
Interest Expense: Interest expense increased by $148,409$369,514 or 394.8%502% to $186,003$443,053 for the three months ended December 31, 2013June 30, 2014 from $37,595$73,539 for the three months ended December 31, 2012.June 30, 2013. The increase is primarily attributable to $103,791 of non-cash interest expense and $42,941 of accrued interest during the three months ended December 31, 2013 attributable to the amortization of the convertible debt discount and 3% interest on our $3,000,000 of senior secured convertible notes issued on June 27, 2013. The interest incurred on the convertible debt is convertible into common shares upon the holders request to convert.
| Nine Months Ended, | Percentage Change Inc (Dec) | ||||||||||||
| December 31, 2013 | December 31, 2012 | Change | |||||||||||
| Revenue | |||||||||||||
| Vehicles and parts | $ | 3,570,722 | $ | 1,277,476 | $ | 2,293,246 | 179.5% | ||||||
| Design services | — | 1,245,985 | (1,245,985 | ) | (100.0)% | ||||||||
| Total revenue | 3,570,722 | 2,523,461 | 1,824,583 | 72.3% | |||||||||
| Costs of goods sold | |||||||||||||
| Vehicles and parts | 2,852,665 | 1,056,141 | 1,796,524 | 170.1% | |||||||||
| Design services | — | 859,451 | (859,451 | ) | (100.0)% | ||||||||
| Total Costs of Goods Sold | 2,852,665 | 1,915,592 | 937,073 | 48.9% | |||||||||
| Gross Margin | 718,057 | 607,869 | 110,188 | 18.1% | |||||||||
| Operating expenses | |||||||||||||
| Research and development | 489,723 | 29,815 | 459,908 | 1,542.5% | |||||||||
| Sales and marketing | 942,238 | 115,710 | 826,528 | 714.3% | |||||||||
| General and administrative | 3,576,843 | 1,984,012 | 1,592,831 | 80.3% | |||||||||
| Depreciation and amortization | 65,332 | 60,944 | 4,388 | 7.2% | |||||||||
| Total operating expenses | 5,074,136 | 2,190,481 | 2,883,655 | 131.6% | |||||||||
| Loss from operations | (4,356,079) | (1,582,612) | (2,773,467) | 175.2% | |||||||||
| Other income (expenses) | |||||||||||||
| Interest expense | (362,784) | (138,281) | (224,503) | 162.4% | |||||||||
| Expenses of reverse merger transaction | (365,547) | — | (365,547) | — | |||||||||
| Gain on extinguishment of derivative liability | 40,548 | — | 40,548 | — | |||||||||
| Change in fair value of derivative liability | -73,892 | — | -73,892 | — | |||||||||
| Net Loss | $ | (5,117,754 | ) | $ | (1,720,893 | ) | $ | (3,396,861 | ) | 197.4% | |||
Expenses of Reverse Merger Transaction: During the ninethree months ended December 31,June 30, 2013, we incurred $365,547 of expenses related to the reverse merger transaction. This includes $39,547 of liabilities assumed, $46,000 in legal fees, and dividends of $280,000 paid to our existing shareholdersstockholders prior to the Merger. We did not have a comparable expense of this type during the ninethree months ended December 31, 2012.June 30, 2014.
Gain on Extinguishment of Derivative Liability: On June 17, 2014 we entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note whereby in exchange for the issuance of 389,923 shares of our common stock, the Note holders agreed to remove all specified adjustments to the conversion price of these Notes except for standard anti-dilution provisions whereby if we consummate a reorganization transaction that pays dividends or we enter into a stock split of our common shares, the conversion price would adjust proportionally. As a result of this amendment, we recorded a gain of $2,586,732 which represented the remaining derivative liability as of June 17, 2014 and we no longer record a derivative liability.
Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of our $3,000,000 convertible notes issued on June 27,26, 2013 was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has beenwas characterized as a derivative liability that iswas re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the ninethree months ended December 31, 2013,June 30, 2014, we recorded a $73,892 loss$2,446,054 gain due to the change in the derivative liability from issuance date to December 31, 2013. We did not haveJune 17, 2014 as compared to a comparable gain duringloss of $89,765 for the three months ended December 31, 2012.
Net Income (Loss): Net loss decreased by $5,429,228, or 222%, to a net income of $40,548 resulted from certain note holders request to convert their convertible debt to stock in accordance with the convertible note. We did not have a comparable gain during$2,985,984 for the three months ended December 31, 2012.
Liquidity and Capital Resources
Our working capital deficiency as of June 30, 2014 and Steve Saleen. The closingMarch 31, 2014 are follows:
| As of | As of | |||||||
| June 30, 2014 | March 31, 2014 | |||||||
| Current Assets | $ | 623,998 | $ | 2,230,294 | ||||
| Current Liabilities | (4,381,046 | ) | (5,280,580 | ) | ||||
| Net Working Capital Deficiency | $ | (3,757,048 | ) | $ | (3,050,286 | ) | ||
Summary of the transactions contemplated by the Merger Agreement occurred on June 26, 2013.
| Cash Flows | ||||||||
| Three months | Three months | |||||||
| Ended | Ended | |||||||
| June 30, 2014 | June 30, 2013 | |||||||
| Net cash used in Operating Activities | $ | (1,423,194 | ) | $ | (1,584,811 | ) | ||
| Net cash used in Investing Activities | (210,159 | ) | (9,100 | ) | ||||
| Net cash provided by Financing Activities | 160,680 | 2,602,132 | ||||||
| (Decrease) Increase in Cash during the Three months | (1,472,673 | ) | 1,008,221 | |||||
| Cash, Beginning of Period | 1,499,889 | 4,434 | ||||||
| Cash, End of Period | 27,216 | 1,012,655 | ||||||
For the three months ended June 30, 2014 and 2013, our principal sources of liquidity have been obtained from cash provided by financing, including adjustments to recorded assetsthrough the private issuance of notes and liabilities, which might be necessary if we were unable to continue as a going concern.
As further presented in our condensed consolidated financial statements and related notes, during the three months ended June 30, 2014, we incurred a loss from operations of $1,603,749 and utilized $1,423,194 of cash in operations. We also had a stockholders’ deficit and working capital deficit of $4,530,646 and $3,757,048, respectively as of June 30, 2014, and as of that date, we owed $612,716 in past unpaid payroll taxes, $352,795 of our outstanding notes payable were in default and $583,150 of our accounts payable is greater than 90 days past due. These and other factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of our company to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013,June 30 2014, we had cash on hand in the amount of $10,840. In January$27,216 and Februarywe are not generating sufficient funds from operations to cover current operating expenses without obtaining additional financing. During the three months ended June 30, 2014, we issued 2,003,333 sharesraised $250,000 through the issuance of convertible notes and we entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from us an aggregate of 1,016,667 of restricted common stock to certain accredited individuals ("Stock Subscriptions")shares at an offeringa per share price of $0.15 per share for totalaggregate proceeds of $300,500. We$152,500. However, additional funding will be needed to continue operations through September 30, 2014. In addition, we will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate theour business beyond March 31,September 30, 2014. No assurance can be given that any additionalfuture financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, itsuch financing may contain undue restrictions and covenants on itsour operations, in the case of debt financing or cause substantial dilution for itsour stockholders (including the issuance of securities sufficient to result in a change in control of our company), in the case orof equity financing.
| December 31, | March 31, | ||||||
| 2013 | 2013 | ||||||
| Cash | $ | 10,840 | $ | 4,434 | |||
| Total current assets | 559,036 | 746,493 | |||||
| Total assets | 1,161,372 | 1,124,070 | |||||
| Total current liabilities | 7,751,739 | 4,722,099 | |||||
| Total liabilities | 9,227,637 | 5,272,357 | |||||
At December 31, 2013,June 30, 2014, we had a working capital deficit of $7,192,703$3,757,048 compared to a working capital deficit of $3,975,606$3,050,286 at March 31, 2013. Current2014. The increase in working capital deficit primarily relates to the decrease in cash to $27,216 as of June 30, 2014 from $1,499,889 as of March 31, 2014. This was offset partially by the decrease in current liabilities increased to $7,751,739from $4,381,045 at December 31, 2013June 30, 2014 from $4,722,099$5,280,580 at March 31, 20132014 primarily as a result ofdue to the decrease in accounts payable, accrued payroll taxes,notes payable and accrued interest derivative liability, andoffset partially by an increase in current portion of notes payable primarilydeferred vendor consideration related to additional borrowings.
Net cash used byin operating activities for the ninethree months ended December 31,June 30, 2013 totaled $3,375,364$1,423,194 after the cash used in the net lossincome of $5,117,754$2,985,984 was decreased by $843,505$4,529,672 in non-cash charges offsetand increased by $898,885$120,494 in net changes to the working capital accounts. This compares to cash used byin operating activities for the ninethree months ended December 31, 2012June 30, 2013 of $1,050,159$1,584,811 after the net loss for the period of $1,720,898$2,443,244 was decreased by $383,444$691,466 in non-cash charges and increased by $287,290$166,967 in changes to the working capital accounts.
Net cash used in investing activities was $285,090$210,159 for ninethree months ended December 31, 2013. This comparesJune 30, 2014 as compared to $237$9,100 of cash used in investing activities for the ninethree months ended December 31, 2012.June 30, 2013. This increase is primarily related to purchasing of tooling, leasehold improvements and other research and development activities.
Net cash provided by financing activities for the ninethree months ended December 31, 2013June 30, 2014 was $3,666,860.$160,680. Of this amount, $3,000,000$250,000 came through the issuance of our unsecured convertible notes, $160,000 came from the issuance of 1,066,667 shares of our senior secured convertible notes; $550,000common stock and $25,000 came from accounts to be settled through the issuance of note payable to a shareholder; and $544,000 came from the issuance of 3,836,665 shares of common stock.equity securities. Cash of $223,895$274,320 was used to pay principal on long term notes and cash of $203,243 was used to pay principal on notes payable to related parties.notes. This compares to $1,046,512$2,602,132 in cash provided by financing activities during the ninethree months ended December 31, 2012,June 30, 2013, of which $864,573 came from$3,000,000 was obtained through the saleissuance of common stock; $250,000 came fromour secured convertible notes payable to a related party; $25,000 waspartially offset by $221,303 used to pay principal payments on note payable to anotes from related party;parties and $43,061$176,565 was used to pay principal on notes payable.
Secured Convertible Notes Payable
On June 26, 2013, pursuant to a Securities Purchase Agreement, we issued senior secured convertible notes, having a total principal amount of $3,000,000, to 12 accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements. The Notes will pay 3.0% interest per annum with a maturity of 4 years.years (June 25, 2017) and are secured by all of our assets and intellectual property. No cash interest payments will beare required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each Note is convertible at any time into our common stock at a specified conversion price, which currently is currently $0.075 per share Theshare. Prior to June 2014, the Note conversion price iswas subject to specified adjustments for certain changes in the numbers of outstanding shares of our common stock, including conversions or exchanges thereof, and the agreements included an anti-dilution provisions that allowed for the automatic reset of such. Ifthe conversion or exercise price upon any future sale of our common stock instruments at or below the then-current exercise price. On June 17, 2014 in exchange for the issuance in aggregate of 389,923 shares are issued, except inof our common stock, we entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note (“3% First Amendment”) to remove all specified exempt issuances, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduceto the conversion price except for standard anti-dilution provisions whereby if we consummate a reorganization transaction, pay dividends or enter into a stock split of our common shares the conversion price would adjust proportionally. In addition, if a Fundamental Transaction, as defined, were to equaloccur, the potential liquidated damages was set to a fixed amount.
Unsecured convertible notes
In March and April 2014, we issued 7% Unsecured Convertible Notes, having a total principal amount of $2,250,000 and $250,000, to 5 accredited investors of which $2,000,000 was received from 3 investors who participated in the June 26, 2013 offering. The notes were issued in a private placement, exempt from the Securities Act registration requirements. The notes pay 7.0% interest per annum with a maturity of 3 three years (March and April 2017). No cash interest payments are required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. Each note is initially convertible at any time into our common stock at a specified conversion price, which currently is $0.07 per share. The conversion price is adjustable to the lower of $0.07 or the three lowest daily volume weighted average price of our common stock during the twenty consecutive trading days immediately preceding any conversion date. In addition, the conversion price adjusts for standard anti-dilution provisions whereby if we consummate a reorganization, pay dividends or enter into a stock split of our common shares the conversion price would adjust proportionally.
In June 2014, in exchange for the issuance in aggregate of 357,143 shares of our common stock we entered into a First Amendment to Saleen Automotive, Inc. 7% Convertible Note whereby effective as of June 17, 2014, the conversion price in no event adjusts below $0.03 per share. In addition, if a Fundamental Transaction, as defined, were to occur, the dilutivepotential liquidated damages was set to a fixed amount.
Private Placement Stock Subscriptions
In October 2013, our board of directors approved our issuance, regardlesspursuant to Subscription Agreements, as amended in January 2014, of up to 11,666,66 restricted shares of our common stock (the “Subscription Shares”) for an aggregate purchase price of $1,749,999 (the “Subscription Proceeds”) to accredited investors in a private placement. In addition, our board of directors approved the issuance to each Subscriber of warrants (the “Warrants” and together with the Subscription Agreements, the “Financing”), to purchase 100% of the sizeSubscription Shares purchased by such Subscriber in the Financing, having a term of five years and a per share exercise price of $0.15. During the dilutive issuance.
Defaults on Notes Payable
As of December 31, 2013,June 30, 2014, we were in default on $984,465 and $385,972$352,795 of secured and unsecured notes payable, respectively.payable. While we are in discussions with the note holders to arrange extended payment terms, the initiation of collection actions by these note holders may severely affect our ability to execute on our business plan.plan and operations. In addition, Saleen Signature Cars received a Complaint from ourthe bank to which it issued a Senior Secured note payable to a bank,Note, which was filed on February 6, 2014 in California Superior Court, Riverside County. The Complaint alleges, among others, breach of promissory note due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control asIn April 2014, we entered into a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. We are currently involved in discussionssettlement arrangement with the bank whereby the bank dismissed this case in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest for May, June and July 2014. In accordance with the settlement arrangement, we were required to seek a mutually agreeable outcomepay $418,429 to this bank in August 2014 as full settlement of remaining principal amount owed. In August 2014, the claim; however,bank agreed to extend this date by 90 days to November 2014 in exchange for $30,000 to be applied towards principal and interest on the outcome is uncertain at the present time.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2013,June 30, 2014, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, and notwithstanding that there were no accounting errors with respect to our financial statements, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of that date to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to
Our disclosure controls or internal controls over financial reporting were designed to provide only reasonable assurance that such disclosure controls or internal control over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Control
During the quarterthree months ended December 31, 2013,June 30, 2014, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
From November 13, 2013April to December 9, 2013,May 2014, we entered into Subscription Agreements with 156 accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from us an aggregate of 2,503,3331,016,667 shares of our common stock at a per share price of $0.15 for aggregate net proceeds of $368,000$152,500 (the “Financing”).
On May 7, 2014, we, along with our subsidiaries and Steve Saleen, entered into a Settlement Agreement and Mutual Release with Thomas Del Franco and Jason B. Cruz (the “Del Franco Parties”), pursuant to which the Del Franco Parties agreed to fully and finally settle a claim filed against us for outstanding Bond and note payables to Thomas Del Franco, which consisted of Bond and note payables of $317,230 and $200,000, respectively, and unpaid interest of $187,535 in exchange for (1) our payment to Mr. Del Franco of $250,000 and (2) issuance of 2,250,000 shares of our common stock.
In June 2014, we entered into a Settlement Agreement and Mutual Release with Jim Marsh American Corporation (“Marsh”) for an outstanding principal and interest of $100,000 and $53,374, respectively, in exchange for (1) issuance of 800,000 shares of our common stock and (2) cash payment of $35,000.
In June 2014, in exchange for the issuance in aggregate of 389,923 shares of our common stock valued at $58,488, we entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note (“3% First Amendment”) to remove all specified adjustments to the conversion price except for standard anti-dilution provisions whereby if we consummate a reorganization transaction, pay dividends or enter into a stock split of our common shares the conversion price would adjust proportionally.
In June 2014, in exchange for the issuance in aggregate of 357,143 shares of our common stock valued at $53,571, we 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.
During the three months ended June 30, 2014, we issued 1,000,000 shares of common stock valued at $170,000 in exchange for services.
We reclassified $470,534 of previously recorded accounts to be settled by common stock recorded as of March 31, 2014 to additional paid in capital.
In connection with the foregoing securities issued in the Financing,issuances, we did not pay any underwriting discounts or commissions. None of the sales of securities described or referred to above in connection with the Financing waswere registered under the Securities Act of 1933, as amended (the “Securities Act”). In making the sales without registration under the Securities Act, we relied upon one or more of the exemptions from registration contained in Section 4(2) of the Securities Act, and in Regulation D promulgated under the Securities Act. No general solicitation or advertising was used in connection with the sales.
EXHIBIT INDEX
| Exhibit Number | ||
Description of Exhibit | ||
| 10.1 | Settlement Agreement and Mutual Release dated May 7, 2014, among Thomas Del Franco, Jason B. Cruz, Steve Saleen, Saleen Automotive, Inc. | |
| 31.1 | Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS** | XBRL Instance. | |
| 101.SCH** | XBRL Taxonomy Extension Schema. | |
| 101.CAL** | XBRL Taxonomy Extension Calculation. | |
| 101.DEF** | XBRL Taxonomy Extension Definition. | |
| 101.LAB** | XBRL Taxonomy Extension Labels. | |
| 101.PRE** | XBRL Taxonomy Extension Presentation. |
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Saleen Automotive, Inc. | ||
Date: | / | |
Steve Saleen | ||
| Chief Executive Officer |
| 12 |