UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
AMENDMENT NO. 1
| x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010
| ¨ | Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 333-137755
General Automotive Company
(Exact name of small business issuer as specified in its charter)
| Nevada | 20-3893833 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
5422 Carrier Drive, Suite 309 Orlando, FL 32819
(Address of principal executive offices)
407-363-5633
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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. x Yes ¨ 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 ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 23,854,417 common shares as of May 14, 2010.
EXPLANATORY NOTE
This Amendment No.1 to the Quarterly Report on Form 10-Q/A (this “Amendment No.1”) of General Automotive Company (“the Company”) amends the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, originally filed on May 17, 2010 (the “Original Filing”).
This Amendment No.1 is being filed to provide additional Management Discussion and Analysis of Operation regarding Liquidity and Capital Recourses – page 13 of the Original Filing. This Amendment also includes expanded disclosure of the basis for valuation of Note 5: Stock Warrants and Options – page11 of the Original Filing. Finally, this Amendment No.1 is being filed to provide expanded disclosure of the S.P.E.C. ,Inc. Acquisition - page12 of the Original Filing.
Except as described in this explanatory note, no other information in the Original Filing is being modified or amended by this Amendment No. 1 and this Amendment No. 1 does not otherwise reflect events occurring after May 17, 2010, which is the filing date of the Original Form 10Q. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Form 10-Q and the Registrant’s other filings with the SEC.
per share over a five year period. The Chief Operating Officer was granted the option to purchase stock of the Company over a five year period at a strike price of $.04 per share. The total of options granted to officers of the Company was 15,000,000 shares and were fully vested at the grant date. In accordance with FAS 123R “Accounting for Stock-Based Compensation – Revised” (ASC 718-10 and ASC 505-50) the company calculated the fair value of these options at grant date. Based on the circumstances of the Company at the time, a volatility rate of 146% and a risk free interest rate of 2.71% was used in the Black-Scholes model to compute a fair value of $300,000 for these options. An additional 115,000 options to purchase stock of the Company were issued in December 2009 to employees as an employment incentive. These shares were fully issued at the grant date and were issued at an exercise price of 10 day moving market average per share over a five year period.
During the three months ended March 31, 2008, the Company recognized the issuance of 37,500 shares of common stock to its president in connection with an employment agreement wherein the president would receive quarterly stock grants over a five year period for a total of 5% of the issued and outstanding common stock of the Company as of the closing of the merger and the currently ongoing private placement of securities. The total grant was estimated to be 750,000 shares, which would have vested at a rate of 5% per quarter. The compensation costs charged as operating expense for grants under the plan was $28,125 for the three months ended March 31, 2008. During the fourth quarter of 2008, the employment agreement with the Company’s president was amended and the stock grant was replaced with stock options. Accordingly the 37,500 shares issued were returned to the company and the $28,125, expense was reversed.
Stock Warrants and Options.
As of March 31, 2010, there were outstanding warrants, consultant options and officer and director options for the purchase of 21,262,451 shares, with a weighted average strike price of $0.27 per share. The Company has issued warrants and options at various points from inception through the period ending March 31, 2010. The Company estimates the fair value of all warrants and optioned issued using the Black-Scholes option pricing model. Each material component of the Black-Scholes option pricing model is based on a calculated Beta score comprised of several similar companies in the Company’s industry to arrive at a representative volatility rate for each respective period.
The Company determines the industry comparative Beta by developing a composite Beta of Equity of organizations with similar operations. Generally, the Beta is a 3 year (36 month) compilation; from time to time the industry volatility must be reassessed prior to the 3 year interval. The Company originally had a composite Beta Volatility computed in 2008. This initial calculation was prepared by external consultants and audited as of December 31, 2008. Subsequently, and prior to accounting for the options issued in October 2009, the Beta Volatility was reviewed in response to material economic changes that have been realized in the automotive aftermarkets parts industry in general. As a result of this review, our management determined that the appropriate volatility should be adjusted to 1.46 from the 1.13 used in prior periods. We further assumed that no dividends would be issued.
The exercise term of each warrant or option grant can vary and is based on a number of factors. In general, warrants issued in conjunction with debt have a 3 year term; while employment contract granted options have a 5 year term. The 5 year term associated with the employment contracts reflects Management’s long-term commitment to business continuity and growth of the organization.
The following table summarizes the assumptions underlying our various option grants:
General Automotive Company
OPTION/WARRANT VALUATION
AT ISSUANCE
Group | Debt Conversion | Officers | Board Member | Investor | Officers | ||||||||||
Grant date: | 11/02/04 | 11/02/04 | 11/02/04 | 09/30/05 | 10/30/09 | ||||||||||
Term - years | 3.00 | 3.00 | 3.00 | 3.00 | 5.00 | ||||||||||
Input Variables | |||||||||||||||
Date | 11/02/04 | 11/02/04 | 11/02/04 | 09/30/05 | 10/30/09 | ||||||||||
Expected Life in months | 36 | 36 | 36 | 36 | 60 | ||||||||||
Annual Volatility | 1.13 | 1.13 | 1.13 | 1.13 | 1.46 | ||||||||||
Annual Dividend Percentage | 0 | 0 | 0 | 0 | 0 | ||||||||||
Treasury Strips (Zero-coupon) Percentage | 2.71 | % | 2.71 | % | 2.71 | % | 2.71 | % | 2.71 | % | |||||
Vesting | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||
Stock and options issued for services.During the three months ended March 31, 2009 the Company issued 90,000 shares of common stock in connection with investor relations and financial consulting services which were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. These services are to be performed over various terms ranging from one to six months and have been valued at a total of $40,500 representing the quoted market price of the Company’s common stock on the date of the grant. $16,500 was expensed during the current quarter. The remaining $24,000 is included in other current assets on the consolidated balance sheet at March 31, 2009 and is being expensed over the remaining service period of four months.
During the twelve months ended December 31, 2009 the Company issued 8,090,000 shares of common stock in connection with marketing and financial consulting services which were exempt from registration under Rule 506 of Regulation D of the Securities Act of 1933, as amended. These services are to be performed over various terms ranging from one to twelve months and have been valued at a total of $360,500 representing the quoted market price of the Company’s common stock on the date of the grant. The Company granted 13,500,000 options to purchase stock of the Company at a strike price of $.04 per share over a three year period. These services are to be performed over a three year period and have been valued at $270,000. At March 31, 2010, $419,167 is included in other current assets and $82,500 was charged to SG&A expense for the three months ended March 31, 2010 for marketing and financial consulting services.
There was no additional stock, stock options or warrants issued for services for the three months ended March 31, 2010.
| 6. | Joint Venture.On July 22, 2008, as reported on Form 8-K filed, July 25, 2008, the Company and SenCer Inc., a New York corporation (“SenCer”), formed General Automotive Advanced Technology Group, LLC (the “Joint Venture”). In connection therewith, the Company and SenCer entered into an Operating Agreement which sets forth the regulations, terms and conditions under which the Joint Venture will be operated. |
The Operating Agreement provides that the Company and SenCer shall initially hold 50% membership interests in the Joint Venture. Initially, the Company shall contribute such services and incur such costs and expenses as it shall deem necessary to determine the commercial viability of the Joint Venture’s business, which services have an agreed-upon value of $200,000. In the event the Company becomes satisfied that the business is commercially viable, the Company shall make additional capital contributions of up to an aggregate of $750,000, in cash, to fund the operations of the Joint Venture and SenCer shall contribute to the Joint Venture a license to use SenCer’s ceramic composite technology for any and all transportation applications, all pursuant to an exclusive license agreement by and between the Joint Venture and SenCer also dated July 22, 2008. The license has an agreed-upon value of $2,000,000. If commercial viability has not
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| 7. | Acquisition Event. On February 3, 2010, we entered into an Asset Purchase Agreement pursuant to which we agreed to acquire certain Assets of S.P.E.C., Inc., an Alabama corporation for cash and stock. We reported the transaction on Form 8-K filed February 5, 2010. |
The transaction was scheduled to close by April 15, 2010, but did not as we were unable to secure the financing necessary to close. On or about April 15, 2010, the parties informally agreed to extend the closing dated to May 31, 2010, which period has also expired without the transaction closing as we were unable to secure the financing necessary to close. As of June 18, 2010, S.P.E.C., Inc. has not declared a default. However, it now appears unlikely that we will be able to secure a source of financing that will enable us to close the transaction. Even if we were able to secure the necessary financing, there can be no assurance that S.P.E.C., Inc. will agree to close the transaction as the parties have not executed a written extension of the closing date.
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Our cost of goods sold during the three months ended March 31, 2010 was $2,270,161 compared to $2,652,543 for the three months ended March 31, 2009. The decrease in revenue combined with more effective product sources strategies have resulted in the total decrease in cost of goods sold of $382,382. Our aggregate decrease in gross profit was $169,900 in the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. Our gross profit margin was 10.29% for the three months ended March 31, 2010 compared to 13.96% for the same period of 2009. Our more effective purchasing practices were responsible for the higher gross profit margin in the three months ended March 31, 2009. Currently, OES is continuing its program to increase the number of domestic and international sources for its products.
Our selling, general and administrative expenses were $17,378 lower for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This decrease in expenses was due primarily to cost containment initiatives that were implemented in 2009 allowing better overall efficiency in the operations during the quarter ended March 31, 2010. Additionally there were reductions in executive costs of approximately $100,000 offset by an increase in marketing, consulting, and commission fees associated with financing agreements of approximately $70,000. There were no recorded non-registration penalties on common stock sales during 2008 for the three months ended March 31, 2010 compared with the approximately $27,000 accumulated for the quarter ended March 31, 2009. There stock based compensation awards during the three months ended March 31, 2010 were minimal, $2,538, and were a result of amortized vesting of the employee options granted in December 2009.
Interest expense in the three months ended March 31, 2010 is approximately $19,601 more that the three months ended March 31, 2009. The increased interest expense reflects the addition of new mezzanine financing agreements executed in the first quarter ended March 31, 2010.
The Company has active programs to increase revenues and reduce costs for the remainder of fiscal 2010. We intend to further increase our margins by enhancing our sourcing efforts in Asia during the remainder of 2010. Additionally public company costs continue to be monitored and where possible either eliminated to reduce these expenses.
During the three months ended March 31, 2010 we recorded a net loss of $262,206, an increase of $174,661 compared to a loss of $87,545 for the three months ended March 31, 2009.
Liquidity and Capital Resources
As of March 31, 2010, we had current assets in the amount of $2,499,648, consisting primarily of, accounts receivable, and inventory. On the same date, we had current liabilities of $3,906,798, consisting mostly of accounts payable and a line of credit. Thus, as of March 31, 2010, we had a working capital deficit of $1,195,647 as compared to a working capital deficit of $936,401 at December 31, 2009. This increase in our working capital deficit during the three months ended March 31, 2010 is directly related to the decrease in revenue during the period.
Our ongoing operations consumed more cash than they generated in 2009. As of December 31, 2009, we expect that the cash flows derived from our existing ongoing operations together with our cash resources available under the OES Line of credit are unlikely to be sufficient to meet our needs for the next twelve months. In order to bridge these short term cash needs, since approximately October 2009, we have been raising additional working capital by selling short term promissory notes in private transactions. As of December 31, 2009, we had borrowed $100,000 through these efforts and as of March 31, 2010, we had raised a total of $300,000. The notes are generally due within 24 months of initial issuance and bear interest at a rate of 12%. Our ability to repay these notes, as well as to continue to obtain the cash necessary to meet our ongoing operational needs over the next twelve months, is dependent upon our ability to either raise additional capital through the sales of debt or equity or upon an improvement in cash flows from our ongoing operations. There can be no assurance that we will be able to raise the capital necessary to meet these commitments on favorable terms or at all, nor can there be any assurance that we will be successful in improving our existing operations such that they will generate sufficient cash flows for meet our liquidity needs over the next twelve months. If we are unable to do so our business and operations will be adversely affected.
Our ability to satisfy our liquidity needs over the longer term is contingent upon a combination of improved revenues/gross profit from our existing operations and any additional operations we are able to obtain from acquisitions or joint-venture transaction. Our management is actively seeking to acquire additional, complementary businesses or joint venture opportunities that will enhance the value of the Company as wells as improve our cash flows. Our Management has invested time evaluating several proposals for possible acquisition or joint-venture, however, majority of these opportunities were not pursued and none have closed during the period ended December 31, 2010. There can be no assurance that we will be able to identify and acquire complementary businesses or enter into joint ventures on favorable terms or at all, nor can there be any assurance that we will be successful in improving our existing operations such that they will generate sufficient cash flows for meet our long term liquidity needs. If we are unable to do so our business and operations will be adversely affected.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our allowance for accounts receivable and stock-based compensation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied.
The Company’s significant accounting policies are described in note 1 of our financial statements herein and Note 1 of our Form 10-K for the year ended December��31, 2009. The methodology for its estimates and assumptions are as follows:
Allowance for Uncollectable Accounts.The Company maintains current receivable amounts and regularly monitors and assesses its risk of not collecting amounts owed to it by customers. This evaluation is based upon an analysis of amounts currently and past due along with relevant history and facts particular to the customer. Based upon the results of this analysis, the Company records an allowance for uncollectible accounts. This analysis requires the Company to make significant estimates and as such, changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
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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 there under duly authorized.
GENERAL AUTOMOTIVE COMPANY
| By: | /s/ Dan Valladao | |
| Dan Valladao | ||
| Chief Executive Officer | ||
| June 22, 2010 |
| By: | /s/ Shawn Powell Joseph | |
| Shawn Powell Joseph | ||
| Chief Financial Officer | ||
| June 22, 2010 |
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