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, 2009
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number: 000-51997
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
(Do not check if a smaller reporting company) |
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 August 19, 2009 was 554,017 shares.
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
FORM 10-Q
June 30, 2009
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION | 3 | |
Item 1. | Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 |
Item 4. | Controls and Procedures | 16 |
PART II— OTHER INFORMATION | 16 | |
Item 1. | Legal Proceedings | 16 |
Item 1A. | Risk Factors | 16 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 |
Item 3. | Defaults Upon Senior Securities | 17 |
Item 4. | Submission of Matters to a Vote of Security Holders | 17 |
Item 5. | Other Information | 17 |
Item 6. | Exhibits | 17 |
SIGNATURES | 17 |
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 512,606 | $ | 934,118 | ||||
Inventory (Note 4) | 1,510,493 | 1,485,247 | ||||||
Accounts receivable | 199,270 | 421,909 | ||||||
Total Current Assets | 2,222,369 | 2,841,275 | ||||||
Equipment, net (Note 5) | 18,974 | 21,698 | ||||||
Other assets (Note 6) | 6,785 | 8,479 | ||||||
TOTAL ASSETS | $ | 2,248,128 | $ | 2,871,452 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 172,786 | $ | 159,040 | ||||
Note payable to bank (Note 7) | 100,000 | 100,000 | ||||||
Credit line (Note 7) | 125,599 | 198,006 | ||||||
Demand loans payable (Note 7) | 795,346 | 904,246 | ||||||
Credit Card loan payable (Note 7) | - | - | ||||||
Due to stockholders (Note 7) | 1,234,346 | 1,746,269 | ||||||
Accrued expenses | 123,470 | 133,946 | ||||||
Payroll taxes withheld and accrued | 2,483 | 1,961 | ||||||
Total Current Liabilities | 2,554,030 | 3,243,468 | ||||||
Stockholders' equity | ||||||||
Preferred stock, 0.0001 par value, 10,000,000 shares authorized, 10,000,000 issued and outstanding | 1,000 | 1,000 | ||||||
Common stock, .001 par value, 300,000,000 shares authorized, 554,017 shares issued and outstanding June 30, 2009 and December 31, 2008 | 554 | 554 | ||||||
Capital Stock to be issued (500,000 Shares) | 20,000 | 20,000 | ||||||
Additional Paid in Capital | 3,957,424 | 3,957,424 | ||||||
Deficit | (4,283,704 | ) | (4,349,817 | ) | ||||
(304,726 | ) | (370,839 | ) | |||||
Less: Treasury stock (200,000 common shares) | (1,176 | ) | (1,176 | ) | ||||
Total Stockholders' Equity | (305,902 | ) | (372,015 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,248,128 | $ | 2,871,452 |
3
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three | Three | Six | Six | |||||||||||||
Months | Months | Months | Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales | $ | 4,562,565 | 13,679,407 | 9,364,486 | 31,938,897 | |||||||||||
Cost of sales | 4,292,413 | 13,625,613 | 8,783,234 | 31,434,719 | ||||||||||||
Gross profit | 270,152 | 53,794 | 581,252 | 504,178 | ||||||||||||
Operating expenses: | ||||||||||||||||
Officers salaries | 12,270 | 79,756 | 92,026 | 201,444 | ||||||||||||
Interest expense | 33,347 | 87,093 | 94,124 | 176,791 | ||||||||||||
Selling, general and administrative | 154,084 | 189,177 | 324,739 | 403,191 | ||||||||||||
Total operating expenses | 199,701 | 356,026 | 510,889 | 781,426 | ||||||||||||
Profit (Loss) from operations | 70,451 | (302,232 | ) | 70,363 | (277,248 | ) | ||||||||||
Income taxes | - | - | 4,250 | 1,300 | ||||||||||||
Net profit (loss) | $ | 70,451 | (302,232 | ) | 66,113 | (278,548 | ) | |||||||||
Deem preferred dividend | - | 401,061 | - | 401,061 | ||||||||||||
Net profit (loss) available to common stockholders | $ | 70,451 | (703,293 | ) | 66,113 | (679,609 | ) | |||||||||
Net profit (loss) per share, basic (Note 9) | $ | 0.13 | (1.27 | ) | 0.12 | (1.23 | ) | |||||||||
Weighted average number of shares outstanding - Basic | 554,017 | 554,017 | 554,017 | 554,017 | ||||||||||||
Net profit (loss) per share, diluted (Note 9) | $ | 0.01 | (1.27 | ) | 0.01 | (1.23 | ) | |||||||||
Weighted average number of shares outstanding - Diluted | 11,054,017 | 554,017 | 11,054,017 | 554,017 |
See Notes to Financial Statements
4
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2009 | June 30, 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net profit (loss) | $ | 66,113 | $ | (278,548 | ) | |||
Adjustments to reconcile net profit to net cash used by operating activities: | ||||||||
Depreciation and amortization | 2,724 | 2,556 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in accounts receivable | 222,639 | 433,220 | ||||||
(Increase) decrease in inventory | (25,246 | ) | 1,172,741 | |||||
(Increase) decrease in other assets | 1,694 | 9,642 | ||||||
Increase (decrease) in accounts payable | 13,746 | 133,611 | ||||||
Increase (decrease) in accrued expenses | (10,400 | ) | (69,368 | ) | ||||
Increase (decrease) in payroll taxes | 522 | (141,166 | ) | |||||
Total adjustments | 205,679 | 1,538,680 | ||||||
CASH PROVIDED (USED) BY OPERATING ACTIVITIES | 271,792 | 1,262,688 | ||||||
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 | 1,397,167 | 3,586,106 | ||||||
Repayment of line of credit | (1,469,574 | ) | (4,155,727 | ) | ||||
Proceeds of stockholders loans | 10,869 | 480,425 | ||||||
Repayment of stockholders loan | (522,866 | ) | (244,894 | ) | ||||
Proceeds of demand loans | - | 257,214 | ||||||
Repayment of demand loans | (108,900 | ) | (200,000 | ) | ||||
Repayment on credit card loan | - | (138,299 | ) | |||||
CASH PROVIDED (USED)BY FINANCING ACTIVITIES | (693,304 | ) | (415,175 | ) | ||||
NET INCREASE (DECREASE) IN CASH | (421,512 | ) | 844,166 | |||||
CASH | ||||||||
Beginning of year | 934,118 | 328,658 | ||||||
End of period | $ | 512,606 | $ | 1,172,824 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
Cash paid for: | ||||||||
Interest payments | $ | 94,124 | $ | 176,791 |
See Notes to Financial Statements.
5
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2009 and 2008 are unaudited)
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
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, 2009 are not necessarily indicative of the operating results for the entire year.
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.
GOING CONCERN
The financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a working capital deficiency of $ 331,737 at June 30, 2009 and the Company has an accumulated deficit of $ 4,283,704 since inception.
While the Company is attempting to produce sufficient revenues, the Company's cash position may not be enough to support the Company's daily operations. Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to increase revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
6
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
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.
Adopted Accounting Principles
In the first quarter of 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) as amended by FASB staff position FSP 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” SFAS No. 141(R) generally requires an entity to recognize the assets acquired, liabilities assumed, contingencies, and contingent consideration at their fair value on the acquisition date. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. SFAS No 141(R) is applicable to business combinations on a prospective basis beginning in the first quarter of 2009. We did not complete any business combinations in the first quarter of 2009.
7
In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delayed the effective date of SFAS No. 157, “Fair Value Measurements” (SFAS No. 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 the beginning of the first quarter of 2009. Therefore, in the first quarter of 2009, we adopted SFAS No. 157 for non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 for non-financial assets and non-financial liabilities that are not measured and recorded at fair value on a recurring basis did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. FSP 132 (R)-1 does not change the accounting treatment for postretirement benefits plans. FSP 132(R)-1 is effective for us for fiscal year 2009.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4). FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. FSP 157-4 is effective for us beginning in the second quarter of fiscal year 2009. The adoption of FSP 157-4 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is an intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Additionally, FSP 115-2/124-2 changes the presentation of an other-than-temporary impairment in the income statement for those impairments involving credit losses. The credit loss component will be recognized in earnings and the remainder of the impairment will be recorded in other comprehensive income. FSP 115-2/124-2 is effective for us beginning in the second quarter of fiscal year 2009. Upon implementation at the beginning of the second quarter of 2009, FSP 115-2/124-2 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosure about Fair Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1 requires interim disclosures regarding the fair values of financial instruments that are within the scope of FAS 107, “Disclosures about the Fair Value of Financial Instruments.” Additionally, FSP 107-1/APB 28-1 requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change the accounting treatment for these financial instruments and is effective for us beginning in the second quarter of fiscal year 2009.
8
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2009 and 2008 are unaudited)
NOTE 3 – ACCOUNTS RECEIVABLE
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
Accounts receivable | $ | 199,270 | $ | 421,909 |
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, | ||||||
2009 | 2008 | |||||||
Automobiles purchased for resale | $ | 1,510,493 | $ | 1,485,247 |
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, | ||||||
2009 | 2008 | |||||||
Equipment | $ | 4,243 | $ | 4,243 | ||||
Office equipment | 7,673 | 7,673 | ||||||
Office furniture | 25,148 | 25,148 | ||||||
Leasehold improvements | 2,700 | 2,700 | ||||||
Total | 39,764 | 39,764 | ||||||
Less: Accumulated depreciation | (20,790 | ) | (18,066 | ) | ||||
$ | 18,974 | $ | 21,698 |
NOTE 6 – OTHER ASSETS
Other assets consists of the following: | June 30, | December 31, | ||||||
2009 | 2008 | |||||||
Prepaid federal corporate taxes | $ | - | $ | - | ||||
Prepaid state corporate taxes | 4,985 | 6,679 | ||||||
Security deposit | 1,800 | 1,800 | ||||||
$ | 6,785 | $ | 8,479 |
9
NORTHEAST AUTOMOTIVE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts and Disclosures at and for the Six Months Ended June 30, 2009 and 2008 are unaudited)
NOTE 7 – NOTES AND LOANS PAYABLE
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
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. | $ | 125,599 | $ | 198,006 | ||||
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 | ||||
9% convertible demand notes -The 9% 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, are convertible at $0.25 per share. Interest is payable monthly. | $ | - | $ | 100,000 | ||||
Unsecured demand notes payable. Interest is payable monthly at the rate of 6% through February 2009 and 5% thereafter.. | $ | 795,346 | $ | 804,246 | ||||
Due to stockholders - The stockholder loans are unsecured, pay interest at 9% per annum, are subordinated to the bank loan and have no specific terms of repayment. | $ | 1,234,346 | $ | 1,746,269 |
NOTE 8 – RELATED PARTY TRANSACTIONS
None
NOTE 9 – INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding during the period.
10
Diluted net income per share is computed by using the weighted-average number of shares of common stock outstanding and, when dilutive, potential shares from options and warrants to purchase common stock, using the treasury stock method.
The following table illustrates the computation of basic and dilutive net income per share and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:
Three Months ended | Six Months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net profit (loss) available to common stockholders | $ | 70,451 | $ | (703,293 | ) | $ | 66,113 | $ | (679,609 | ) | ||||||
Denominator: | ||||||||||||||||
Basic weighted-average shares outstanding | 554,017 | 554,017 | 554,017 | 554,017 | ||||||||||||
Effect of convertible preferred stock | 10,000,000 | 10,000,000 | 10,000,000 | 10,000,000 | ||||||||||||
Shares to be issued | 500,000 | 500,000 | 500,000 | 500,000 | ||||||||||||
Diluted weighted-average shares outstanding | 11,054,017 | 554,017 | 11,054,017 | 554,017 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.13 | $ | (1.27 | ) | $ | 0.12 | $ | (1.23 | ) | ||||||
Diluted | $ | 0.01 | $ | (1.27 | ) | $ | 0.01 | $ | (1.23 | ) |
NOTE 10 – OFF BALANCE SHEET RISK
Included in the accompanying balance sheet is inventory of used automobiles at a carrying value of $1,510,493 as of June 30, 2009, 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.
11
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, 2008, 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.
Adopted Accounting Principles
In the second quarter of 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)) as amended by FASB staff position FSP 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” SFAS No. 141(R) generally requires an entity to recognize the assets acquired, liabilities assumed, contingencies, and contingent consideration at their fair value on the acquisition date. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. SFAS No 141(R) is applicable to business combinations on a prospective basis beginning in the second quarter of 2009. We did not complete any business combinations in the second quarter of 2009.
12
In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delayed the effective date of SFAS No. 157, “Fair Value Measurements” (SFAS No. 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 the beginning of the first quarter of 2009. Therefore, in the first quarter of 2009, we adopted SFAS No. 157 for non-financial assets and non-financial liabilities. The adoption of SFAS No. 157 for non-financial assets and non-financial liabilities that are not measured and recorded at fair value on a recurring basis did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements
In December 2008, the FASB issued FSP 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1). FSP 132(R)-1 requires additional disclosures for plan assets of defined benefit pension or other postretirement plans. The required disclosures include a description of our investment policies and strategies, the fair value of each major category of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets, and the significant concentrations of risk within plan assets. FSP 132 (R)-1 does not change the accounting treatment for postretirement benefits plans. FSP 132(R)-1 is effective for us for fiscal year 2009.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP 157-4). FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. FSP 157-4 is effective for us beginning in the second quarter of fiscal year 2009. The adoption of FSP 157-4 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairment” (FSP 115-2/124-2). FSP 115-2/124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is an intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Additionally, FSP 115-2/124-2 changes the presentation of an other-than-temporary impairment in the income statement for those impairments involving credit losses. The credit loss component will be recognized in earnings and the remainder of the impairment will be recorded in other comprehensive income. FSP 115-2/124-2 is effective for us beginning in the second quarter of fiscal year 2009. Upon implementation at the beginning of the second quarter of 2009, FSP 115-2/124-2 is not expected to have a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosure about Fair Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1 requires interim disclosures regarding the fair values of financial instruments that are within the scope of FAS 107, “Disclosures about the Fair Value of Financial Instruments.” Additionally, FSP 107-1/APB 28-1 requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes of the methods and significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change the accounting treatment for these financial instruments and is effective for us beginning in the second quarter of fiscal year 2009.
For the Six months Ended June 30, 2009 and June 30, 2008
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 six months period ended June 30, 2009 and June 30, 2008.
13
Six months ended June 30, | ||||||||
2009 | 2008 | |||||||
Percentage of net revenues: | ||||||||
Net revenues | 100 | % | 100 | % | ||||
Cost of revenues | 93.8 | % | 98.4 | % | ||||
Gross profit | 6.2 | % | 1.6 | % | ||||
Sales, general and administrative expenses | 3.5 | % | 1.3 | % | ||||
Other operating expenses | 2.0 | % | 1.2 | % | ||||
Total operating expenses | 5.5 | % | 2.5 | % | ||||
Profit (loss) from operations | 0.8 | % | (0.0 | ) % |
Revenues
Revenue for the six month periods ended June 30, 2009 were $9,364,485 a decrease of $ 22,574,411or 70.6% as compared to revenues for the six months period ended June 30, 2008 of $31,938,897. The decrease in revenue was a result of a decrease in the number of vehicles we sold in the six months period in 2009 over 2008. Specifically, in the six months period ended June 30, 2009 we sold 730 vehicles at an average sales price of $12,857 as compared to 2,211 vehicles at an average sales price of $14,446 during the comparable period in 2008.
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 $8,783,234or 93.8% of net revenues during the six months period ended June 30, 2009 as compared to $31,434,719 or 98.4% for the comparable period in 2008, a decrease of $22,651,485 or 72.0%. Thus, our gross margin was 6.2% for the six months period ended June 30, 2009 as compared to 1.6% for the comparable period in 2008. 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 six months period ended June 30, 2009 as compared to the comparable period in 2008.
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 $324,739 for the six months period ended June 30, 2009 or 3.5% of net revenue as compared to $403,191 or 1.3% of net revenue for the comparable period in 2008, a decrease in such expenses of $78,452 or 19.5% The decrease in the ratio of SGA expenses to net revenue was primarily due to a decrease in operating expenses.
Other Expenses
Our combined expenses for officers salaries and interest was $186,150 for the six months period ended June 30, 2009 or 2.0% of net revenue compared to the comparable period in 2008 when such expenses were $378,235 or 1.2% of net revenue. The decrease in such expenses is attributable to decreased officers’ salaries in 2009 as well as a decrease in interest expense. The following table shows the changes in the components of these expenses during the comparable periods.
14
Six months Period Ended June 30 2009 | Six months Period Ended June 30, 2008 | Change | Percent Change | |||||||||||||
Officers Salaries | $ | 92,026 | $ | 201,444 | $ | (109,418) | (54.3%) | |||||||||
Interest Expense | $ | 94,124 | $ | 176,791 | $ | (82,667) | (46.8%) |
Operating Gain (Loss)
Operating gain or loss is calculated as our revenues less all of our operating expenses. Our operating gain for the six months period ended June 30, 2009 was $66,113 or 0.7 % of net revenue as compared to an operating (loss) of $(278,548) or (0.9%) of net revenue for comparable period in 2008, an increase of $344,661. This increase in operating gain was primarily as a result of an increase in gross profits as well as a decrease of operating expense.
Capital Resources and Liquidity
Our liquidity is directly related to market trends and events, as well as our ability to interpret those trends and events and react accordingly. We are active in the used vehicle market daily, and we believe that while there will always be uncertainties and unusual events that may shape the market, we are highly capable of dissecting the data available to us, and both willing and able to make whatever changes are needed in a timely fashion to protect our liquidity. Unusual events may include the rise or fall of the cost of fuel, unforeseen economic changes in the geographic areas with which our company operates, or even acts of God. While we feel we are well capitalized at this time with the cash we have on hand, we do have a line of credit with Manheim Automotive Financial Services in the amount of $1,000,000 with which we typically have only 50% in use.
We have no material commitments for capital expenditures at this time. Our capital resources are used primarily for the purpose of purchasing inventory. However, we are under no obligation or contract to purchase inventory at any specific time or from any specific source.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2009, we had cash and cash equivalents of $512,606 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, 2009, we had an outstanding balance of $125,599 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, 2009, 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%.
15
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 June 30, 2009, 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
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 1A. RISK FACTORS
There are no material changes to our risk factors previously disclosed on Form 10-K, dated December 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of Equity Securities and Use of Proceeds during the period ended June 30, 2009.
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the period ended June 30, 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of our security holders during the period ended June 30, 2009.
ITEM 5. OTHER INFORMATION
There is no other information required to be disclosed under this item which was not previously disclosed.
ITEM 6. EXHIBITS
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and Chief Financial Officer |
32.1 | 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 19, 2009 | By: | /s/ William Solko |
William Solko, Chief Executive | ||
Officer and Chief Financial Officer |
17