UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2008 |
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number:
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA | 65-0637308 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
2174 HEWLETT AVENUE, SUITE 206
MERRICK, NY 11566
(Address of Principal Executive Offices)
(Zip Code)
(516) 377-6311
(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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the Registrant’s common stock as of June 30, 2008 was 554,017 shares.
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
The financial statements of Northeast Automotive Holdings, Inc. (the "Company"), included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission. Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the financial statements and notes thereto included in the audited financial statements of the Company as included in the Company's Form 10 -K for the year ended December 31, 2007.
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | ||||||
2008 | 2007 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash | $ | 1,172,824 | $ | 328,658 | |||
Inventory (Note 4) | 3,631,386 | 4,804,127 | |||||
Accounts receivable | 396,278 | 829,498 | |||||
Total Current Assets | 5,200,488 | 5,962,283 | |||||
Equipment, net (Note 5) | 24,255 | 23,464 | |||||
Other assets (Note 6) | 16,511 | 26,153 | |||||
TOTAL ASSETS | $ | 5,241,254 | $ | 6,011,900 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current Liabilities: | |||||||
Accounts payable | $ | 431,779 | $ | 298,168 | |||
Note payable to bank (Note 7) | 100,000 | 100,000 | |||||
Credit line (Note 7) | 280,221 | 849,842 | |||||
Demand loans payable (Note 7) | 1,873,790 | 1,816,576 | |||||
Credit Card loan payable (Note 7) | 35,000 | 173,299 | |||||
Due to stockholders (Note 7) | 1,741,238 | 1,605,707 | |||||
Accrued expenses | 291,999 | 361,367 | |||||
Payroll taxes withheld and accrued | 11,479 | 152,645 | |||||
Total Current Liabilities | 4,765,506 | 5,357,604 | |||||
Commitments and contingencies (Note 12) | - | - | |||||
Stockholders' equity | |||||||
Preferred stock, .0001 par value, 10,000,000 shares authorized, 10,000,000 shares issued and outstanding June 30, 2008 and 0 shares issued and outstanding December 31, 2007 | 1,000 | - | |||||
Common stock, .001 par value, 300,000,000 shares authorized, 554,017 shares issued and outstanding June 30, 2008 and 887,285 shares issued and outstanding December 31, 2007 | 554 | 887 | |||||
Additional Paid in Capital | 3,556,363 | 3,457,030 | |||||
Deficit | (3,080,993 | ) | (2,802,445 | ) | |||
476,924 | 655,472 | ||||||
Less: Treasury stock (200,000 common shares) | (1,176 | ) | (1,176 | ) | |||
Total Stockholders' Equity | 475,748 | 654,296 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 5,241,254 | $ | 6,011,900 |
See Notes to Financial Statements |
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three | Three | Six | Six | ||||||||||
Months | Months | Months | Months | ||||||||||
Ended | Ended | Ended | Ended | ||||||||||
June 30, | June 30, | June 30, | June 30, | ||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||
Net sales | $ | 13,679,407 | 19,162,353 | 31,938,897 | 39,573,108 | ||||||||
Cost of sales | 13,625,613 | 18,819,033 | 31,434,719 | 38,632,080 | |||||||||
Gross profit | 53,794 | 343,320 | 504,178 | 941,028 | |||||||||
Operating expenses: | |||||||||||||
Officers salaries | 79,756 | 129,756 | 201,444 | 292,579 | |||||||||
Interest expense | 87,093 | 74,489 | 176,791 | 154,037 | |||||||||
Selling, general and administrative | 189,177 | 167,419 | 403,191 | 390,564 | |||||||||
Total operating expenses | 356,026 | 371,664 | 781,426 | 837,180 | |||||||||
Profit (Loss) from operations | (302,232 | ) | (28,344 | ) | (277,248 | ) | 103,848 | ||||||
Interest Income | - | - | - | 1,848 | |||||||||
Income taxes (Note 11) | - | (5,115 | ) | 1,300 | 9,427 | ||||||||
Net profit (loss) | $ | (302,232 | ) | (23,229 | ) | (278,548 | ) | 96,269 | |||||
Net profit (loss) per share basic and diluted | $ | (0.55 | ) | (0.03 | ) | (0.50 | ) | 0.11 | |||||
Weighted average number of shares outstanding | 554,017 | 887,285 | 554,017 | 887,285 |
See Notes to Financial Statements |
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months | Six Months | ||||||
Ended | Ended | ||||||
June 30, 2008 | June 30, 2007 | ||||||
(unaudited) | (unaudited) | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net profit (loss) | $ | (278,548 | ) | $ | 96,269 | ||
Adjustments to reconcile net profit to net cash used by operating activities: | |||||||
Depreciation and amortization | 2,556 | - | |||||
Changes in operating assets and liabilities: | |||||||
(Increase) decrease in accounts receivable | 433,220 | 70,025 | |||||
(Increase) decrease in inventory | 1,172,741 | (863,967 | ) | ||||
(Increase) decrease in other assets | 9,642 | 35,274 | |||||
Increase (decrease) in accounts payable | 133,611 | 301,270 | |||||
Increase (decrease) in accrued expenses | (69,368 | ) | 174,614 | ||||
Increase (decrease) in payroll taxes | (141,166 | ) | (165,058 | ) | |||
CASH PROVIDED (USED) BY OPERATING ACTIVITIES | 1,262,688 | (351,573 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of fixed assets | (3,347 | ) | - | ||||
CASH USED BY INVESTING ACTIVITIES | (3,347 | ) | - | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds of line of credit | 3,586,106 | 4,511,552 | |||||
Repayment of line of credit | (4,155,727 | ) | (4,457,803 | ) | |||
Proceeds of stockholders loans | 480,425 | 170,931 | |||||
Repayment of stockholders loan | (244,894 | ) | (50,503 | ) | |||
Proceeds of demand loans | 257,214 | 417,245 | |||||
Repayment of demand loans | (200,000 | ) | (8,000 | ) | |||
Repayment on credit card loan | (138,299 | ) | (2,925 | ) | |||
CASH PROVIDED (USED)BY FINANCING ACTIVITIES | (415,175 | ) | 580,497 | ||||
NET INCREASE (DECREASE) IN CASH | 844,166 | 228,924 | |||||
CASH | |||||||
Beginning of period | 328,658 | 188,037 | |||||
End of period | $ | 1,172,824 | $ | 416,961 | |||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||
Cash paid for: | |||||||
Income tax payments | $ | - | $ | - | |||
Interest payments | $ | 176,791 | $ | 154,037 | |||
SUPPLEMENTAL FINANCE AND INVESTMENT INFORMATION | |||||||
Conversion of debt to preferred stock | $ | 100,000 | $ | - |
See Notes to Financial Statements. |
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2008 and 2007 are unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
The Company buys used automobiles at auctions, then repairs, cleans, transports and resells them wholesale throughout the United States.
NAME CHANGE OF THE COMPANY
The Board of Directors of Northeast Auto Acceptance Corp. (the “Company”) approved the Merger of the Company, a Florida Corporation with Northeast Automotive Holdings, Inc., a Nevada Corporation. Pursuant to an Information Statement filed on November 8, 2007 with the Securities and Exchange Commission, Northeast Automotive Holdings, Inc. executed an Agreement and Plan of merger with the Company, with Northeast Automotive Holdings, Inc. being the surviving entity. The purpose of this merger was to change the legal domicile of the Company from Florida to Nevada.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost or market.
Depreciation
The cost of equipment is depreciated over the estimated useful lives of the related assets of five years.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Northeast Auto Acceptance (New York). All intercompany accounts and transactions have been eliminated.
These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States.
Revenue Recognition
The Company buys used autos and recognizes revenue when it resells them and the title is transferred to the buyer.
Income Taxes
The Company accounts for income taxes under the asset and liability method as required by SFAS No. 109, "Accounting for Income Taxes", issued by the Financial Accounting Standards Board ("FASB"). Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax basis of assets and liabilities. 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.
Recently Issued Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (“FASB”) issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application of EITF 03-6-1 is prohibited. It also requires that all prior-period EPS data be adjusted retrospectively. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.
In April 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”) which amends the factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets (“FAS No. 142”). FSP FAS 142-3 applies to intangible assets that are acquired individually or with a group of assets and intangible assets acquired in both business combinations and asset acquisitions. It removes a provision under FAS No. 142, requiring an entity to consider whether a contractual renewal or extension clause can be accomplished without substantial cost or material modifications of the existing terms and conditions associated with the asset. Instead, FSP FAS 142-3 requires that an entity consider its own experience in renewing similar arrangements. An entity would consider market participant assumptions regarding renewal if no such relevant experience exists. FSP FAS 142-3 is effective for year ends beginning after December 15, 2008 with early adoption prohibited. We have not yet determined the effect, if any, of the adoption of this statement on our financial condition or results of operations.
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Non-controlling interest in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We have not yet determined the impact of the adoption of SFAS No. 160 on our consolidated financial statements and footnote disclosures.
On December 4, 2007, the FASB issued SFAS No.141R, Business Combinations (SFAS No. 141R). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have not yet determined the impact of the adoption of SFAS No. 141R on our consolidated financial statements and footnote disclosures.
Recently Adopted Accounting Pronouncements
In[MSOffice1] September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" ("FSP 157-1") and FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 effective January 1, 2008 for all financial assets and liabilities as required. The adoption of SFAS 157 was not material to the Company's financial statements or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” (“SFAS 159”) which is effective for fiscal years beginning after November 15, 2007. SFAS 159 is an elective standard which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company has not elected the fair value option for any assets or liabilities under SFAS 159.
Interim Financial Information
The accompanying interim financial statements of Northeast Automotive Holdings, Inc. are unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim period. The results of operations for the period ended June 30, 2008 are not necessarily indicative of the operating results for the entire year.
NOTES TO FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2008 and 2007 are unaudited)
NOTE 3 – ACCOUNTS RECEIVABLE
June 30, | December 31, | ||||||
2008 | 2007 | ||||||
Accounts receivable | $ | 396,278 | $ | 829,498 |
The accounts receivable are due from the sale of used autos. No provision for doubtful accounts has been recorded.
NOTE 4 – INVENTORIES
Inventory consists of the following: | June 30, | December 31, | |||||
2008 | 2007 | ||||||
Automobiles purchased for resale | $ | 3,631,386 | $ | 4,804,127 |
Inventories are stated at the lower of cost or market.
The automobile inventory is limited by the amount of working capital the Company has at any one time.
NOTE 5 – OFFICE EQUIPMENT
The following is a summary of equipment: | June 30, | December 31, | |||||
2008 | 2007 | ||||||
Equipment | $ | 4,243 | $ | 4,243 | |||
Office equipment | 7,673 | 4,327 | |||||
Office furniture | 25,148 | 25,148 | |||||
Leasehold improvements | 2,700 | 2,700 | |||||
Total | 39,764 | 36,418 | |||||
Less: Accumulated depreciation | (15,509 | ) | (12,954 | ) | |||
$ | 24,255 | $ | 23,464 |
NOTE 6 – OTHER ASSETS
Other assets consists of the following: | June 30, | December 31, | |||||
2008 | 2007 | ||||||
Prepaid federal corporate taxes | $ | - | $ | - | |||
Prepaid state corporate taxes | 14,711 | 24,353 | |||||
Security deposit | 1,800 | 1,800 | |||||
$ | 16,511 | $ | 26,153 |
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2008 and 2007 are unaudited)
NOTE 7 – NOTES AND LOANS PAYABLE
June 30, 2008 | December 31, 2007 | ||||||
Line of credit - On October 4, 2004, the Company was approved for a line of credit of $975,000, as an inventory financing ("Floor Plan") loan with interest set at 2% above the Wall Street Journal Prime rate. The agreement requires any advances to be repaid for a vehicle on the earliest of forty eight (48) hours from the time of sale or within twenty four (24) hours from the time the Company receives payment by or on behalf of the purchase of such vehicle or demand. The agreement is personally guaranteed by the officers and their respective spouses. The collateral for the loan is any vehicle owned by the Company. | $ | 280,221 | $ | 849,842 | |||
Note payable bank - note payable to bank due February 2007, is an open line of credit interest payable monthly at 1% over the prime rate, secured by a lien on all of the Company's assets and personally guaranteed by the officers. Interest is paid monthly on account. | 100,000 | 100,000 | |||||
Convertible demand notes - The convertible demand notes in the amounts of $150,000, $250,000 and $300,000, issued September 15, 2004, December 19, 2005 and June 15, 2007 respectively, earn interest at the rate of 9% through May 31, 2008, and at the rate of 7% thereafter, The notes are convertible at $0.25 per share. Interest is payable monthly. | 700,000 | 700,000 | |||||
Unsecured demand notes payable. Earn interest at the rate of 9% through May 31, 2008 and at the rate of 7% thereafter. Interest is payable monthly. | 1,173,790 | 1,116,576 | |||||
Credit cards payable - Credit cards payable are unsecured, pay interest from 4.99% to 13.25% per annum and are payable in monthly installments. The average rate is 9.36%. | 35,000 | 173,299 | |||||
Due to stockholders - The stockholder loans are unsecured, pay interest at 9% per annum through May 31,2008 and 7% thereafter, are subordinated to the bank loan and have no specific terms of repayment | 1,741,238 | 1,605,707 | |||||
$ | 4,030,249 | $ | 4,545,424 |
DEBT EXCHANGE
On April 22, 2008 a Debt Exchange Agreement (“Agreement”) was entered into between Northeast Automotive Holdings, Inc. (the “Company” or “NEAH”) and William Solko (the “Holder”). The Agreement calls for the Holder to waive, release, forgive and cancel a portion of the debt in the amount of $100,000 owed to the Holder by the Company.
NOTE 8 – PREFERRED STOCK
On April 22, 2008 a Debt Exchange Agreement (“Agreement”) was entered into between Northeast Automotive Holdings, Inc. (the “Company” or “NEAH”) and William Solko (the “Holder”). The Agreement calls for the Holder to waive, release, forgive and cancel a portion of the debt in the amount of $100,000 owed to the Holder by the Company.
In exchange and in consideration for the cancellation of the forgiveness of the $100,000 of Debt, NEAH will issue to the Holder 10,000,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”).
Each share of the Series A Preferred carries with it (i) voting rights equal to 30 times the number of Common Stock votes, (ii) no dividends, (iii) liquidation preference equal to eight times the sum available for distribution to Common Stock holders, (iv) automatically convert after three years to one (1) common share, (v) not be subject to reverse stock splits and other changes to the common stock capital of the Company, and (vi) convertible at the option of the holder after forty-five (45) days.
NOTE 9 – COMMON STOCK
On April 22, 2008 a Debt Exchange Agreement (“Agreement”) was entered into between Northeast Automotive Holdings, Inc. (the “Company” or “NEAH”) and William Solko (the “Holder”). The Agreement calls for the Holder to waive, release, forgive and cancel a portion of the debt in the amount of $100,000 owed to the Holder by the Company. In addition, in consideration for this Agreement, the Holder hereby agrees to cancel 333,333 shares of the Holders’ 500,000 shares Common Shares. All the shares have been restated for the reverse stock split.
NOTE 10- REVERSE STOCK SPLIT
The Board of Directors and Shareholders have voted and approved a 1-for-30 reverse share split (the “Reverse Stock Split”) of the common stock of the Corporation, $0.001 par value per share (the “Common Stock”). This reverse stock split has been recognized in the financial statements retroactively from inception.
NOTE 11 – RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2008 and June 30, 2007, the Company paid $ 20,000 and $60,000 respectively to the President's wife for administrative services.
On April 22, 2008 a Debt Exchange Agreement (“Agreement”) was entered into between Northeast Automotive Holdings, Inc. (the “Company” or “NEAH”) and William Solko (the “Holder”). The Agreement calls for the Holder to waive, release, forgive and cancel a portion of the debt in the amount of $100,000 owed to the Holder by the Company. In addition, in consideration for this Agreement, the Holder hereby agrees to cancel 333,333 shares of the Holders’ 500,000 shares Common Shares. All the shares have been restated for the reverse stock split.
In exchange and in consideration for the cancellation of the forgiveness of the $100,000 of Debt, NEAH will issue to the Holder 10,000,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”).
NOTE 12 – INCOME (LOSS) PER COMMON SHARE
Profit or loss per common share is calculated as the profit or loss for the period divided by the weighted average number of shares of the Company's common stock.
NOTE 13 – OFF BALANCE SHEET RISK
Included in the accompanying balance sheet is inventory of used automobiles at a carrying value of $3,631,386 as of June 30, 2008, which represents management's estimate of its net realizable value which approximates market. Such value is based on forecasts for sales of used automobiles in the ensuing year. The used automobile industry is characterized by rapid price changes. Should demand for used automobiles prove to be significantly less than anticipated, the ultimate realizable value of such products could be substantially less than the amount shown in the balance sheet. This risk is increased by the Company's need to move inventory due to the lack of working capital.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis addresses material changes in the results of operations and financial condition of Northeast Automotive Holdings, Inc. and Subsidiaries (the “Company” or “we”) for the periods presented. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the related Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Results of Operations and Financial Condition included in the Company’s Form 10-K for the fiscal year ended December 31, 2007, the unaudited interim Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Report on Form 10-Q (“Form 10-Q”) and the Company’s other SEC filings and public disclosures.
This Form 10-Q may contain “forward-looking statements”. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements about the Company’s market opportunities, strategies, competition and expected activities and expenditures, and at times may be identified by the use of words such as “may”, “will”, “could”, “should”, “would”, “project”, “believe”, “anticipate”, “expect”, “plan”, “estimate”, “forecast”, “potential”, “intend”, “continue” and variations of these words or comparable words. Forward-looking statements inherently involve risks and uncertainties. Accordingly, actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risks described below under “Risk Factors” in Part II, Item 1A. The Company undertakes no obligation to update any forward-looking statements for revisions or changes after the date of this Form 10-Q.
Overview
We are a wholesale automobile sales company which seeks to exploit the inefficiencies and geographic differences in the used vehicle market by purchasing high quality, late model used vehicles from dealers and institutional sellers in Northeastern states and transporting the vehicles for resale in the Pacific Northwest. We are involved only in the wholesale purchase and sale of vehicles acting as a middleman between various dealer and institutional sellers and dealer purchasers. We generally sell our vehicles only through established third-party auctions which act as a marketplace for used vehicles. We thus help align institutional used vehicle sellers and wholesale buyers over a wide geographic area.
Recent Accounting Pronouncements
In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"). SAB 104 clarifies existing guidance regarding revenue recognition. Neither the Company's adoption of SAB 104 nor its adoption of proposed Standards will have an impact on its consolidated results of operations, financial position or cash flows.
No other recently issued accounting standards adopted by the Company during 2007, 2006 and 2005 nor any proposed standards will have an impact on its consolidated results of operations, financial position or cash flows.
For the Three Months Ended June 30, 2008 and June 30, 2007
The following table sets forth certain data derived from the unaudited consolidated statements of operations, expressed as a percentage of net revenues for each of the three month periods ended June 30, 2008 and June 30, 2007.
Three Months ended June 30, | |||||||
2008 | 2007 | ||||||
Percentage of net revenues: | |||||||
Net revenues | 100 | % | 100 | % | |||
Cost of revenues | 99.6 | % | 98.2 | % | |||
Gross profit | 0.4 | % | 1.8 | % | |||
Sales, general and administrative expenses | 1.4 | % | 0.9 | % | |||
Other operating expenses | 1.2 | % | 1.1 | % | |||
Total operating expenses | 2.6 | % | 1.9 | % | |||
Profit (loss) from operations | (2.2 | )% | (0.1 | )% |
Revenues
Revenue for the three month period ended June 30, 2008 were $13,679,407 a decrease of $5,482,946 or 28.6 % as compared to revenues for the three month period ended June 30, 2007 of $19,162,353. The decrease in revenue was a result of a decrease in the number of vehicles we sold in the three month period in 2008 over 2007. Specifically, in the three month period ended June 30, 2008 we sold 991 vehicles at an average sales price of $13,804 as compared to 1,281 vehicles at an average sales price of $14,959 during the comparable period in 2007.
Cost of Sales and Gross Profit Margin
The Company's cost of sales is composed primarily of the cost of purchasing vehicles for resale. Cost of revenues was $13,625,613 or 99.6% of net revenues during the three month period ended June 30, 2008 as compared to $18,819,033 or 98.2% for the comparable period in 2007, a decrease of $5,193,420 or 27.6%. Thus, our gross margin was 0.4% for the three month period ended June 30, 2008 as compared to 1.8% for the comparable period in 2007. The decrease in our cost of revenue as a percent of revenue is attributable to a decrease in the cost of the vehicles sold during the three month period ended June 30, 2008 as compared to the comparable period in 2007.
Operating Expenses
Our operating expenses are comprised primarily of salaries, consulting fees and sales, general and administrative expenses.
Sale, General and Administrative
Sale, general and administrative (“SGA”) expenses are composed principally of commission, salaries of administrative personnel, fees for professional services and facilities expenses. These expenses were $189,177 for the three month period ended June 30, 2008 or 1.4% of net revenue as compared to $167,419 or 0.9% of net revenue for the comparable period in 2007, an increase in such expenses of $21,758 or 13.0% The increase in the ratio of SGA expenses to net revenue was primarily due to an increase in operating expenses.
Other Expenses
Our combined expenses for officers salaries and interest was $166,849 for the three month period ended June 30, 2008 or 1.2 % of net revenue compared to the comparable period in 2007 when such expenses were $204,245 or 1.1% of net revenue. The decrease in such expenses is attributable to decreased officers’ salaries in 2008. The following table shows the changes in the components of these expenses during the comparable periods.
Three Month Period Ended June 30, 2008 | Three Month Period Ended June 30, 2007 | Change | Percent Change | ||||||||||
Officers Salaries | $ | 79,756 | $ | 129,756 | $ | (50,000 | ) | (38.5 | )% | ||||
Interest Expense | $ | 87,093 | $ | 74,489 | $ | 12,604 | 16.9 | % |
Operating Gain (Loss)
Operating gain or loss is calculated as our revenues less all of our operating expenses. Our operating (loss) for the three month period ended June 30, 2008 was ($302,232) or (2.2%) of net revenue as compared to an operating (loss) of ($28,344) or (0.1%) of net revenue for comparable period in 2007, a increase of ($273,888). This increase in operating (loss) was primarily as a result of a decrease in gross revenues which was greater than the decrease of operating expense.
For the Six Months Ended June 30, 2008 and June 30, 2007
The following table sets forth certain data derived from the consolidated statements of operations, expressed as a percentage of net revenues for each of the six month periods ended June 30, 2008 and June 30, 2007.
Six Months Ended June 30, | |||||||
2008 | 2007 | ||||||
Percentage of net revenues: | |||||||
Net revenues | 100 | % | 100 | % | |||
Cost of revenues | 98.4 | % | 97.6 | % | |||
Gross profit | 1.6 | % | 2.4 | % | |||
Sales, general and administrative expenses | 1.3 | % | 1.0 | % | |||
Other operating expenses | 1.2 | % | 1.1 | % | |||
Total operating expenses | 2.5 | % | 2.1 | % | |||
Profit (loss) from operations | (0.9 | )% | 0.3 | % |
Revenues
Revenue for the six month period ended June 30, 2008 were $31,938,897 a decrease of $7,634,211 or 19.3% over revenues for the six month period ended June 30, 2007 of $39,573,108. The decrease in revenue was a result of a decrease in the number of vehicles we sold in the six month period in 2008 over 2007. Specifically, in the six month period ended June 30, 2008 we sold 2,212 vehicles at an average sales price of $14,439 as compared to 2,695 vehicles at an average sales price of $14,684 during the comparable period in 2007.
Cost of Revenues and Gross Profit Margin
The Company's cost of revenues is composed primarily of the cost of purchasing vehicles for resale. Cost of revenues as a percentage of revenue was $31,434,719 or 98.4% of net revenues during the six month period ended June 30, 2008 as compared to $38,632,080 or 97.6% for the comparable period in 2007, a decrease of $7,197,361. Thus, our gross margin was 1.6% for the six month period ended June 30, 2008 as compared to 2.4 % for the comparable period in 2007. The decrease in our cost of revenue is attributable to a decrease in the cost of the vehicles sold during the six month period ended June 30, 2008 as compared to the comparable period in 2007.
Operating Expenses
Our operating expenses are comprised primarily of salaries, consulting fees and sales, general and administrative expenses.
Sale, General and Administrative
Sale, general and administrative (“SGA”) expenses are composed principally of commission, salaries of administrative personnel, fees for professional services and facilities expenses. These expenses were $403,191 for the six month period ended June 30, 2008 or 1.3% of net revenue as compared to $390,564 or 1.0 % of net revenue for the comparable period in 2007, an increase in such expenses of $12,627 or 3.2% The increase in the ratio of SGA expenses to net revenue was primarily due to an increase in operating expenses.
Other Expenses
Our combined expenses for officers salaries, consulting fees and interest was $378,235 for the six month period ended June 30, 2008 or 1.2% of net revenue compared to the comparable period in 2007 when such expenses were $446,616 or 1.1% of net revenue. The decrease in such expenses is attributable to decreased officers salaries. The following table shows the changes in the components our these expenses during the comparable periods.
Six Month Period Ended June 30, 2008 | Six Month Period Ended June 30, 2007 | Change | Percent Change | ||||||||||
Officers Salaries | $ | 201,444 | $ | 292,579 | $ | (91,135 | ) | (31.1 | )% | ||||
Interest Expense | $ | 176,791 | $ | 154,037 | $ | 22,754 | 14.8 | % |
Operating Gain (Loss)
Operating gain (loss) (or profit (loss) from operations) is calculated as our revenues less all of our operating expenses. Our operating gain (loss) for the six month period ended June 30, 2008 was ($277,248) or (0.9%) of net revenue as compared to an operating gain of $103,848 or 0.3% of net revenue for comparable period in 2007, a decrease of $381,096 or (367.0%). This decrease in operating gain was primarily as a result of a decrease in gross revenues which were greater than the decrease of operating expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2008, we had cash and cash equivalents of $1,172,824 invested in standard bank checking accounts and highly liquid money market instruments. Such investments are subject to interest rate and credit risk. Such risks and a change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations. As of June 30, 2008, we had an outstanding balance of $280,221 on our revolving credit facility with Manheim Auto Financial Services, Inc. Borrowings under such revolving credit facility would bear interest at a variable rate equal to prime plus 2.0%. In addition, as of June 30, 2008, we had an outstanding balance of $100,000 on a bank revolving credit facility which bears interest at a variable rate equal to prime plus 1.0%.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of March 31, 2008, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Limitations on the Effectiveness of Internal Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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 limitations on all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost effective internal control system, financial reporting misstatements due to error or fraud may occur and not be detected on a timely basis.
There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the above paragraph.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
The Company is subject to various risks, including the risks described below. The Company’s business, operating results, and financial condition could be materially and adversely affected by any of these risks. Additional risks not presently known to the company or that the Company currently deems immaterial may also impair the business and its operations.
Economic Conditions and Gasoline Prices May Affect Sales. In the normal course of business, the Company is subject to changes in general or regional U.S. economic conditions, including, but not limited to, consumer credit availability, consumer credit delinquency and default rates, interest rates, gasoline prices, inflation, personal discretionary spending levels, and consumer sentiment about the economy in general. Any significant changes in economic conditions could adversely affect consumer demand and/or increase our costs resulting in lower profitability for the Company. In addition, our transportation costs are partially tied to the cost of gasoline and any additional increases to the cost of gasoline may increase our costs and may result in lower profitability.
Our Business is Highly Competitive. The reselling of late model used vehicles is a highly competitive business. The Company’s competition includes publicly and privately owned franchised new car dealers and independent dealers, as well as millions of private individuals. The company’s competitors may sell the same or similar makes of vehicles that the Company offers in the same or similar markets at competitive prices. Further, new entrants to the market could result in increased wholesale costs for used vehicles and lower-than-expected vehicle sales and margins. Additionally, competition on vehicle sales is increasing as these products are now being marketed and sold over the Internet. Customers are using the Internet to compare pricing for cars and related financing, which may further reduce the Company’s profitability.
Retail and Wholesale Prices May Vary Depending Upon Factors Beyond the Company’s Control. Any significant changes in retail or wholesale prices for used and new vehicles could result in lower sales and margins for the Company. If any of the Company’s competitors seek to gain or retain market share by reducing prices for used vehicles, the Company would likely reduce its prices in order to remain competitive, which may result in a decrease in its sales and profitability and require a change in its operating strategies.
There are Risks Associated with Purchasing Inventory. A reduction in the availability or access to sources of inventory would adversely affect the Company’s business. A failure to adjust the price that the Company offers to purchase vehicles from sellers to stay in line with market trends, or a failure to recognize those trends, could negatively impact the Company’s ability to acquire inventory.
We are highly Dependant Upon Our Management and Workforce. The Company’s success depends upon the continued contribution of its corporate management team. Consequently, the loss of the services of key employees could have a material adverse effect on the Company’s results of operations. In addition, in order to expand the Company’s business, the Company will need to hire additional personnel. The market for qualified employees in the industry and in the regions in which the Company operates is highly competitive and may subject the company to increased labor costs during periods of low unemployment.
We are Dependant Upon Our Information Systems. The Company’s business is dependent upon the efficient operation of its information systems. In particular, the Company relies on its information systems to effectively manage its sales, inventory and customer information. The failure of the Company’s information systems to perform as designed or the failure to maintain and continually enhance or protect the integrity of these systems could disrupt the Company’s business, impact sales and profitability, or expose the Company to customer or third-party claims.
Our Availability to Capital May Vary. Changes in the availability or cost of capital and working capital financing, including the availability of long-term financing to support development of the Company, could adversely affect the company’s growth and operating strategies. Further, the Company’s current credit facilities contain certain financial covenants and the Company’s future credit facilities may contain covenants and/or performance triggers. Any failure by the Company to comply with these covenants and/or performance triggers could have a material adverse effect on the Company’s business.
Our Purchases and Sales are Geographically Concentrated. The Company’s performance is subject to local economic, competitive, and other conditions prevailing in geographic areas where the Company operates. Since currently, all of our vehicles are purchased in the Northeast and are sold in the Pacific Northwest; the Company’s current results of operations depend substantially on general economic conditions and consumer spending habits in these markets. In the event that any of the geographic areas in which the Company does business experiences a downturn in economic conditions, it may adversely affect the Company’s business. Furthermore, in the event that the regional price discrepancies of vehicles that the Company exploits should decrease or disappear, it may adversely affect the Company’s business.
We Currently Have Just One Director. Our Board of Directors is currently comprised of just one member, our Chief Executive Officer William Solko. Thus, without any independent directors, conflicts of interest between the Company and our Chief Executive Officer may occur regarding issues such as executive compensation. We intend to increase the size of the Board of Directors in 2008.
Control of the Company by Our Majority Stockholder. Our Chief Executive Officer, William Solko, is the majority stockholder of the Company and owns 56.4% of the shares issued and outstanding. Accordingly, the present majority stockholder of the Company is in a position to elect all of the directors of the Company and control its policies.
Our Costs Are Partially Dependant Upon Fuel Costs. Because all of the vehicles we purchase must be shipped from the Northeast to the Pacific Northwest, we are dependant upon variations in the cost of fuel. Any significant rise in the cost of fuel will increase our transportation costs and we may not be able to pass these increased costs along to our customers, resulting in lower net profits on each vehicle we sell.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer
32 Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
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.
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
Date: August 12, 2008 | By: | /s/ William Solko | |
William Solko, Chief Executive | |||
Officer and Chief Financial Officer |