UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 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: 18,354,417 common shares as of November 22, 2010.
Part I | | |
| Item 1. | | |
| | | 3 |
| | | 4 |
| | | 5 |
| | | 6 |
Item 2. Item 3. | | 10 13 |
Item 4T. Part II Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6. | | 13 13 13 13 13 13 13 13 14 15 |
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PART I. FINANCIAL INFORMATION
GENERAL AUTOMOTIVE COMPANY AND SUBSIDIARIES
| | | September 30, 2010 | | | December 31, 2009 | |
| | | (Unaudited) | | | (Audited) | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash | | $ | 99,305 | | | $ | 3,701 | |
| Accounts receivable, net | | | 1,721,461 | | | | 1,424,711 | |
| Inventories | | | 573,849 | | | | 224,333 | |
| Other current assets | | | 348,102 | | | | 506,740 | |
| Total current assets | | | 2,742,717 | | | | 2,159,485 | |
| Property and equipment, net | | | 20,761 | | | | 26,099 | |
| Other assets, net | | | 69,924 | | | | 188,434 | |
| | | $ | 2,833,402 | | | $ | 2,374,018 | |
| | | | | | | | | |
| Liabilities and Shareholders’ Deficit | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,509,262 | | | $ | 1,246,666 | |
| Line of credit | | | 1,388,195 | | | | 1,177,686 | |
| Accrued expenses | | | 456,144 | | | | 299,167 | |
| Notes payable -current | | | 8,586 | | | | 6,898 | |
| Notes payable to related parties | | | 660,000 | | | | 460,000 | |
| Total current liabilities | | | 4,022,187 | | | | 3,190,417 | |
| | | | | | | | | |
| Long-term liabilities | | | 563,314 | | | | 120,002 | |
| | | | | | | | | |
| Shareholders’ deficit: | | | | | | | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding | | | - | | | | - | |
| Common stock; $0.001 par value; 90,000,000 shares authorized, 18,354,417 issued and outstanding at September 30, 2010 and 23,854,417 issued and outstanding at December 31, 2009 | | | 18,354 | | | | 23,854 | |
| Additional paid-in capital | | | 10,221,777 | | | | 10,522,312 | |
| Accumulated deficit | | | (11,992,230 | ) | | | (11,482,567 | ) |
| Total shareholders’ deficit | | | (1,752,099 | ) | | | (936,401 | ) |
| | | $ | 2,833,402 | | | $ | 2,374,018 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements
ITEM 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| Revenues | | $ | 3,337,201 | | | $ | 2,549,479 | | | $ | 8,666,556 | | | $ | 9,006,344 | |
| Costs of goods sold | | | 3,033,938 | | | | 2,275,710 | | | | 7,752,686 | | | | 7,880,887 | |
| Gross profit | | | 303,263 | | | | 273,769 | | | | 913,870 | | | | 1,125,457 | |
| | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 453,115 | | | | 444,930 | | | | 1,291,781 | | | | 1,504,169 | |
| | | | | | | | | | | | | | | | | |
| Total expenses, net | | | 453,115 | | | | 444,930 | | | | 1,291,781 | | | | 1,504,169 | |
| Loss from operations | | | (149,852 | ) | | | (171,161 | ) | | | (377,911 | ) | | | (378,712 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | |
| Interest expense | | | (45,545 | ) | | | (29,014 | ) | | | (131,752 | ) | | | (333,176 | ) |
| Other, net | | | - | | | | - | | | | - | | | | 5,836 | |
| Total other income (expense), net | | | (45,545 | ) | | | (29,014 | ) | | | (131,752 | ) | | | (327,340 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (195,397 | ) | | $ | (200,175 | ) | | $ | (509,663 | ) | | $ | (706,052 | ) |
| | | | | | | | | | | | | | | | | |
| Loss per share | | | | | | | | | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | |
| Basic and diluted | | | 18,354,417 | | | | 15,854,417 | | | | 20,187,750 | | | | 15,845,528 | |
See accompanying notes to consolidated financial statements
ITEM 1. Financial Statements (continued)
CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)
| | | Nine months ended September 30, | |
| | | 2010 | | | 2009 | |
| Cash flows from operating activities | | | | | | |
| Net cash used in operating activities | | $ | (781,167 | ) | | $ | (418,415 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Decrease in other assets | | | (61,491 | ) | | | - | |
| Establishment of New Operating Division | | | 82,753 | | | | (140,058 | ) |
| Net cash provided by (used in) investing activates | | | 21,262 | | | | (140,058 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Net borrowings under lines of credit | | | 210,509 | | | | 136,379 | |
| Borrowings on notes payable | | | 445,000 | | | | - | |
| Borrowings (payments) on notes payable to related parties | | | 200,000 | | | | 300,000 | |
| Net cash provided by financing activities | | | 855,509 | | | | 436,379 | |
| | | | | | | | | |
| Net increase (decrease) in cash | | | 95,604 | | | | (122,094 | ) |
| Cash, beginning of year | | | 3,701 | | | | 151,482 | |
| Cash, end of period | | $ | 99,305 | | | $ | 29,388 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Interest paid | | $ | 131,752 | | | $ | 73,176 | |
| | | | | | | | | |
| Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements
ITEM 1. Financial Statements (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidated Financial Statements.
In the opinion of management, the accompanying consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of General Automotive Company and its subsidiaries (collectively, the “Company”) at September 30, 2010 and December 31, 2009 and the results of its (i) operations for the three month and nine month periods ended September 30, 2010 and 2009 and (ii) cash flows for the nine month periods ended September 30, 2010 and 2009. The financial information included herein is unaudited.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Regulation S-X. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009. The results of operations for the three and nine month period ended September 30, 2010 are not necessarily indicative of the operating results for the full year.
Going Concern.
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company incurred losses in the current quarter of $195,397 and has an accumulated deficit of $11,992,230 at September 30, 2010. The Company’s current liabilities exceeded its current assets by $1,279,470 as of September 30, 2010. Additionally the Company is reporting a shareholders’ deficit of $1,752,099 as of September 30, 2010 as compared to a shareholders’ deficit of $936,401 at December 31, 2009. Management believes that it will be successful in its plans to return the Compa ny to profitability; however there can be no assurances that we will be able to obtain additional financing, increase revenues and improve gross margins in order to be able to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its entire operations.
| | Earnings (loss) per share. |
| | Basic earnings (loss) per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common stock issuable upon exercise of stock options and warrants and conversion of debt using the treasury stock method. Adjustments to earnings per share calculation include reversing interest related to the convertible debts and changes in derivative instruments. During periods when losses are incurred dilutive common shares are not considered in the EPS computations as their effect would be anti-dilutive. Common share equivalents of 3 4,448,284 sharesat September 30, 2010 and 15,854,417 shares at September 30, 2009 representing outstanding warrants and options were not included in the computation of diluted earnings per share for the three month period ended September 30, 2010 and September 30, 2009 as their effect would have been anti-dilutive. |
Inventory. Inventory consists principally of finished goods.
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant Estimates include the realizable value of accounts receivable and the reserve for bad debts and the realizable value of our inventory.
Recent accounting pronouncements.
In January 2010, the FASB issued authoritative guidance that requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. The new guidance requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases, sales, issuances and settlements for fair value measurements using significant unobservable inputs. We adopted the guidance in the three month period ended March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of the guidance did not have a material impact on our consolidated financial statements, and we do not currently expect the adoption of this guidance to have a material impact on our consolidated financial statements for future periods.
In February 2010, the FASB issued updated authoritative guidance regarding the reporting of subsequent events, removing the requirement for an issuer to disclose a date through which subsequent events have been evaluated. The guidance was effective upon issuance in February 2010, and was adopted as of our Quarterly Report on Form 10-Q for the three months ended March 31, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We will assess the impact, if any, of the adoption of the guidance on our consolidated financial statements when this guidance becomes effective for us; however we do not currently believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
| | The Company’s wholly owned subsidiary, OES, operates under a revolving line of credit with a bank. The maximum borrowing under this OES Line is $2,000,000 and carries an interest rate of prime plus 1.0% (3.25% at September 30, 2010). The accounts receivable, inventory and other non-secured assets of OES secure the line. In addition, the OES Line is a note payable on demand, is subject to certain financial covenant ratios and was guaranteed by the Company. At September 30, 2010, the Company was not in default of the covenants agreements associated with the line of credit. At September 30, 2010, the outstanding balance of the OES Line was $1,388,195. Draws under these lines are limited to 85% of eligible accounts receivable and 50% of inventory and as such our unused portion of the line was $78,617 at September 30, 2010. |
| | During 2006 the Company secured a $200,000 loan from a related party with interest at 7% per annum. Subsequently $40,000 was repaid leaving a balance of $160,000. This note is due on demand. |
| | On April 20, 2009 the Company secured a $300,000 loan from a related party. The principal was due and payable in full on May 5, 2009. As of September 30, 2010 $150,000 of the principal amount remains outstanding and accrued interest at an annual rate of 20% that is calculated based upon a 360-day year. On August 18, 2010 the annual interest rate of 20% was reduced to 12% per annum. Interest associated with this loan from a related party in the amount of $23,538 has been recorded for the nine months ending September 30, 2010. |
| | On February 8, 2010 the Company secured a $100,000 loan from a related party. The principal is due and payable in full on February 7, 2011. The principal accrues interest at an annual rate of 10% that is calculated based upon a 360-day year. Interest is accrued and paid monthly. As of September 30, 2010, interest in the amount of $6,040 has been recorded for the nine months ending September 30, 2010. |
| | On August 18, 2010, the Company entered into a loan agreement with a related party in which the Company secured an additional $250,000 loan . The annual interest rate of 12% is due in monthly installments, with the principal becoming due and payable on August 17, 2011. The new loan agreement consolidates all existing loans agreements from the related party and has a preferred stock conversion provision attached thereto. The annual interest rate associated with the note is 12%. As of September 30, 2010 $9,460 of interest has been recorded. |
| | During the quarter ended September 30, 2010, the Company entered into an additional unsecured promissory note agreement with an individual in the principal amount of $5,000 bearing an interest rate of 12% per annum. Consistent with the other promissory note agreements that the Company has executed, payment of interest is due and payable monthly. The note matures in 24 months from the date of inception and is due and payable in full. |
| | During the quarter ended June 30, 2010, the Company entered into an additional 17 unsecured promissory notes, totaling $245,000 agreements with individuals, in principal amounts ranging from $5,000 - $40,000, that bear an annual interest rate of 12%, and require monthly payments of interest only totaling $2,450. Each promissory note matures in 24 month from the date of inception at which time the principal of the note is due and payable in full. |
| | During the quarter ended March 31, 2010, the Company entered into unsecured promissory note agreements with 8 individuals, totaling $200,000, in principal amounts ranging from $10,000 - $50,000, that bear an annual interest rate of 12%, and require monthly payments of interest only totaling $2,000. Each promissory note matures in 24 months from the date of inception at which time the principal of the note is due and payable in full. |
| | 3. Common Stock and Equity Securities. |
Common Stock
On October 30, 2009, 4,000,000 shares were issued to both Byrd Financial Group and EMC Consulting Group, respectively for consulting and marketing contracts as disclosed in form 8K, dated November 4, 2009. The resulting transaction reflected a fair market value of $160,000 for Byrd Financial Group’s consulting service and $160,000 for EMC’s marketing services to be amortized over a six month period. On April 29, 2010, 2,500,000 shares issued to Byrd Financial Group were rescinded. Additionally, 3,000,000 issued to EMC Consulting Group were also rescinded, on March 29, 2010. During the quarter ended, June 30, 2010, the $100,000 expense for Byrd Financial Group and the $120,000 for the EMC Consulting Group were reversed.
The Company estimates the fair value of all warrants and options 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.
There was no additional stock, stock options or warrants issued for services or cash for the nine months ended September 30, 2010.
A summary of option activity presented below:
| | | Shares | | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | Intrinsic Value |
| Outstanding at December 31, 2009 | | | 31,595,000 | | | $ | 0.04 | | 3.50 | | $315,950 |
| Granted | | | - | | | | - | | - | | - |
| Exercised | | | - | | | | - | | - | | - |
| Forfeited or expired | | | | | | | | | | | - |
| Outstanding at September 30, 2010 | | | | | | $ | 0.04 | | 3.50 | | $315,950 |
| | | | | | | | | | | | |
| Exercisable at September 30, 2010 | | | 31,595,000 | | | $ | 0.04 | | 3.50 | | $315,950 |
As of September 30, 2010, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $0.00 and the aggregate intrinsic value of currently exercisable stock options was approximately $0.00. The intrinsic value of each option is the difference between the fair market value of the common stock and the exercise price of such option to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.05 closing stock price of the common stock on September 30, 2010. There were 31,595,000 in-the-money options outstanding and exercisable as of September 30, 2010.
Since there were no options exercised during the nine months ended September 30, 2010, there was no intrinsic value of options exercised.
The total fair value of options granted during the nine months ended September 30, 2010, was approximately $0 (none were granted).
The following table summarizes information about fixed price stock options at September 30, 2010:
Exercise Price | | Weighted Average Number Outstanding | | Weighted Average Contractual Life | | | Weighted Average Exercise Price | | | Number Exercisable | | | Exercise Price | |
| $ | .04 | | 31,595,000 | | | 3.50 | | | $ | 0.04 | | | | 31,595,000 | | | $ | 0.04 | |
| | 4. 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 been achieved by July 15, 2009 (originally January 15, 2009), the Joint Venture will be dissolved unless the Company elects to continue its existence. At present, commercial viability has been established but financing has not been secured. While financing is being obtained, SenCer and the Company have elected to proceed with the Joint Venture on a month to month basis.
The Company shall be the sole managing member of the Joint Venture, responsible for the day-to-day operations of the Joint Venture as well as certain marketing activities of the Joint Venture. SenCer shall design and develop applications and prototype products for clients of the Joint Venture. Certain major decisions, such as entering into a change of control transaction, amending the Operating Agreement, admitting new members to the Joint Venture and dissolving the Joint Venture shall require member approval.
Effective December 7, 2009, the Company terminated the Joint Venture agreement with SenCer and the Advanced Technology Group, LLC venture was dissolved. The Company entered into a new joint venture agreement with SenCer on December 7, 2009. The Company shall now hold a 33.3% membership interest in the Joint Venture, GreenCell, Inc.. SenCer shall initially hold 33.3% membership interest in the Joint Venture. The remaining 33.34% membership interest will be part of an initial public offering. The Company is in the process of determining whether consolidating the joint venture is necessary; however as of September 30, 2010 there was no activity in the Joint Venture to consolidate.
| | 5. Acquisition Event. On February 5, 2010 the Company announced that it had signed an agreement to acquire privately held S.P.E.C., Inc. based in Birmingham, AL (SPEC) for 750,000 restricted shares of its common stock plus $2,065,000 cash. Closing of the SPEC transaction is subject to completion of due diligence and other considerations. |
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 September 30, 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.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements:
Forward-looking statements in this Form 10-Q including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements made in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements — o ur ability to successfully develop, market, and sell our brands and products in a timely manner, and the outcomes of our efforts related to mergers and acquisitions. Additional factors include, but are not limited to, the size and growth of the market for our products, competition, pricing pressures, market acceptance of our products, the effect of economic conditions, the value and exploitation of our intellectual property rights, the results of financing efforts, risks in new product development, and other risks including but not limited to those identified in this report and our other periodic filings with the Securities and Exchange Commission.
Results of Operations:
On August 9, 2010, the Company established ProValue Parts, LLC (“PVP”). ProValue is our brand of aftermarket parts formerly being marketed under OE Source. Established as a wholly-owned subsidary of the Company, PVP will leverage our expertise in supplying OEM and Genuine product in response to existing demand in the aftermarket.
Three Months Ended September 30, 2010 Compared With Three Months Ended September 30, 2009
We generated $3,337,201 in revenues from operations during the three months ended September 30, 2010, compared to $2,549,479 during the three months ended September 30, 2009. The increase of $787,722 (30.90%) in revenues can be contributed to a return to normalized purchasing volumes of one of our key customers. Further, the addition of new customers in the ProValue Parts subsidiary, combined with more effective product source strategies within OE Source, have resulted in the an overall increase in revenue for the period.
Our cost of goods sold during the three months ended September 30, 2010 was $3,033,938 compared to $2,275,710 for the three months ended September 30, 2009. The increase in revenue was offset by an increase in the cost of goods, resulting in a marginally higher gross profit for the three months ending September 30, 2010 when compared to the same period in 2009. The increase in cost of goods sold can be attributed to additional charges incurred to fulfill order delivery commitments to key customers. Our aggregate increase in gross profit was 10.77%, $29,494 in the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. Our gross profit margin was 9.09% for the three months ended September 30, 2010 compared to 10.74% for the same period of 2009. Currently, OES is continuing its program to increase the number of domestic and international sources for its products. ProValue Parts is expanding its product offerings and working to establish new sourcing relationships.
Our selling, general and administrative expenses were marginally higher, $8,185 for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. Benefits realized as a result of continued cost containment initiatives that were implemented in 2009 were offset by the satisfaction of the executive separation agreement of the former Chief Executive Officer as well as completion of consulting and marketing agreements executed in October 2009. The stock based compensation awards during the three months ended September 30, 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 September 30, 2010 increased $16,531when compared to the three months ended September 30, 2009. The interest expenses for the quarter ended September 30, 2010 included expense associated with the promissory note financing agreements that have been executed at various periods during 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 or reduced these expenses.
During the three months ended September 30, 2010 we recorded a net loss of $195,397, a marginal improvement of $4,778 compared to a loss of $200,175 for the three months ended September 30, 2009.
Nine Months Ended September 30, 2010 Compared with the Nine Months Ended September 30, 2009
We generated $8,666,556 in revenues during the nine months ended September 30, 2010, compared to $9,006,344 during the nine months ended September 30, 2009. The decrease in revenues was due primarily to strategic changes in both our customer and vendor supply chains. The gross profit margin decreased for the nine months ended September 30, 2010 to 10.54% compared to 12.50% for the nine months ended September 30, 2009.
Our cost of goods sold during the nine months ended September 30, 2010 decreased $128,201 (1.63%) compared to the nine months ended September 30, 2009. Our total gross profits were $211,587 lower in the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. OES is continuing its program to increase the number of domestic and international sources for its products. Although the automotive aftermarkets parts industry continues to experience some contraction, we are beginning to realize higher line item gross margins as a result of our more effective purchasing practices during the nine months ended September 30, 2010.
Our selling, general and administrative expenses were $212,388 lower for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009. The decrease in selling, general and administrative costs reflects aggregate reduction in accounting, legal and consulting service fees for the nine months ended September 30, 2010 when compared to the same period in 2009.
Interest expense in the nine months ended September 30, 2009 includes $260,000 for the fair value of lender warrants issued in connection with the bridge loan of $300,000.
The net operating loss for the nine months of 2010 decreased from the same period of 2009 by $196,389.
Liquidity and Capital Resources
As of September 30, 2010, we had current assets in the amount of $2,742,717, consisting primarily of, accounts receivable, and inventory. On the same date, we had current liabilities of $4,022,187, consisting mostly of accounts payable and a line of credit. Thus, as of September 30, 2010, we had a working capital deficit of $1,279,470 as compared to a working capital deficit of $1,030,932 at December 31, 2009.
Our ongoing operations consumed more cash than they generated in 2009. As of September 30, 2010, 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 $127,000 through these efforts and as of September 30, 2010, we had raised a total of $572,000. 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 to 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 transactions. Our management is actively seeking to acquire additional, complementary businesses or joint venture opportunities that will enhance the value of the Company as well 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 September 30, 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, n or can there be any assurance that we will be successful in improving our existing operations such that they will generate sufficient cash flows to 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:
Going Concern.
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company incurred losses in the current quarter of $194,397 and has an accumulated deficit of $11,992,230 at September 30, 2010. The Company’s current liabilities exceeded its current assets by $1,279,470 as of September 30, 2010. Additionally the Company is reporting a shareholders’ deficit of $1,572,099 as of September 30, 2010 as compared to a shareholders’ deficit of $936,401 at December 31, 2009. Management believes that it will be successful in its plans to return the Compan y to profitability; however there can be no assurances that we will be able to obtain additional financing, increase revenues and improve gross margins in order to be able to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its entire operations.
Allowance for Uncollectible 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.
Stock-based compensation. Stock-based compensation represents the cost related to common stock granted to employees and related parties of the Company. The Company measures stock-based compensation cost at the date the common stock was issued, based on the quoted market price of the Company’s common stock and recognizes the cost as expense over the requisite service period.
Recent Accounting Pronouncements
In January 2010, the FASB issued authoritative guidance that requires new disclosures and clarifies certain existing disclosure requirements about fair value measurements. The new guidance requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases, sales, issuances and settlements for fair value measurements using significant unobservable inputs. We adopted the guidance in the three month period ended March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of the guidance did not have a material impact on our consolidated financial statements, and we do not currently expect the adoption of this guidance to have a material impact on our consolidated financial statements for future periods.
In February 2010, the FASB issued updated authoritative guidance regarding the reporting of subsequent events, removing the requirement for an issuer to disclose a date through which subsequent events have been evaluated. The guidance was effective upon issuance in February 2010, and was adopted as of our Quarterly Report on Form 10-Q for the three months ended March 31, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We will assess the impact, if any, of the adoption of the guidance on our consolidated financial statements when this guidance becomes effective for us; however we do not currently believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
Off Balance Sheet Arrangements
As September 30, 2010, there were no off balance sheet arrangements.
This item is not applicable to the Company because we are a smaller reporting company.
Management’s Report On Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of September 30, 2010, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2010 in reporting on a timely basis information required to be disclosed by us in the reports we file or submit under the Exchange Act because of material weaknesses relating to internal controls as described in Item 9A (T) of the Company’s Form 10-K f or the year ended December 31, 2009.
During the fiscal quarter ended September 30, 2010, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that the material weaknesses in internal control as described in Item 9A(T) of the Company’s Form 10-K for the year ended December 31, 2009, have not been fully remediated. We are committed to finalizing our remediation action plan and implementing the necessary enhancements to our policies and procedures to fully remediate the material weaknesses discussed above.
None.
This item is not applicable to the Company because we are a smaller reporting company.
None.
None.
Not applicable.
Exhibit
Number Description of Exhibit
| Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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
November 22, 2010
By: /s/ Shawn Powell Joseph__
Shawn Powell Joseph
Chief Financial Officer
November 22, 2010
15
