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EX-32.1 - Saleen Automotive, Inc.ex32-1.htm
EX-32.2 - Saleen Automotive, Inc.ex32-2.htm
EX-31.1 - Saleen Automotive, Inc.ex31-1.htm
EX-31.2 - Saleen Automotive, Inc.ex31-2.htm

 

 

 

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 September 30, 2015

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

 

SALEEN AUTOMOTIVE, INC.

(Exact Name of Registrant as Specified in Charter)

 

Nevada   333-176388   45-2808694
(State or Other Jurisdiction   (Commission   (I.R.S. Employer
of Incorporation)   File No.)   Identification No.)
         

2735 Wardlow Road

Corona, California

      92882
(Address of Principal Executive Offices)       (Zip Code)

 

(800) 888-8945

Registrant’s telephone number, including area code:

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [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 to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] 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.

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

As of November 19, 2015, there were 489,962,102 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

 

 

 

 
 

 

SALEEN AUTOMOTIVE, INC.

FORM 10-Q

INDEX

 

      Page
PART I – FINANCIAL INFORMATION
 
ITEM 1. Unaudited Condensed Consolidated Financial Statements:    
  a) Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and March 31, 2015   F-1
  b) Condensed Consolidated Statements of Operations (Unaudited) for the three and six month periods ended September 30, 2015 and 2014   F-2
  c) Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited) for the six month period ended September 30, 2015   F-3
  d) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six month periods ended September 30, 2015 and 2014   F-4
  e) Notes to Condensed Consolidated Financial Statements (Unaudited)   F-6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk   12
ITEM 4. Controls and Procedures   12
 
PART II – OTHER INFORMATION
 
ITEM 6. Exhibits   13

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Financial Statements:

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30, 2015    March 31, 2015 
  

(unaudited)

     
ASSETS          
Current Assets          
Cash  $14,999   $143,083 
Accounts receivable, net of allowance for doubtful accounts of $271,658 at September 30, 2015 and March 31, 2015   17,422    4,945 
Inventory   237,131    725,687 
Prepaid expenses and other current assets   2,461    37,079 
Total Current Assets   272,013    910,794 
           
Property and equipment, net   543,297    592,116 
Other assets   5,000    5,000 
TOTAL ASSETS  $820,310   $1,507,910 
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current Liabilities          
Accounts payable  $1,843,119   $1,677,309 
Due to related parties   123,063    326,512 
Notes payable   571,750    671,750 
Current portion of convertible notes, net of discount of $34,448 and $250,892 at September 30, 2015 and March 31, 2015, respectively   239,438    267,332 
Notes payable to related parties   315,584    267,000 
Payroll and other taxes payable   708,368    745,503 
Accrued interest on notes payable   536,070    387,005 
Customer deposits   1,587,477    1,896,568 
Deferred royalty revenue   500,000     
Deferred vendor consideration   275,000    275,000 
Derivative liability   318,829    1,268,588 
Other current liabilities   189,232    178,891 
Total Current Liabilities   7,207,930    7,961,458 
Convertible notes payable, net of discount of $1,144,007 and $1,585,935 at September 30, 2015 and March 31, 2015, respectively   3,557,605    3,215,677 
Total Liabilities   10,765,535    11,177,135 
           
Commitments and Contingencies        
Stockholders’ Deficit          
Common Stock; $0.001 par value; 500,000,000 shares authorized; 489,962,102 and 174,857,028 issued and outstanding at September 30, 2015 and March 31, 2015, respectively   489,961    174,856 
Preferred stock; $0.001 par value; 1,000,000 shares authorized; 384,142 and none issued and outstanding at September 30, 2015 and March 31, 2015   384     
Additional paid in capital   19,144,833    18,530,191 
Accumulated deficit   (29,580,403)   (28,374,272)
Total Stockholders’ Deficit   (9,945,225)   (9,669,225)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $820,310   $1,507,910 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

  

F-1
 

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

 

   Three month periods ended
September 30,
   Six month periods ended
September 30,
 
   2015   2014   2015   2014 
Revenue, net  $627,187   $866,524   $2,219,177   $2,563,901 
                     
Costs of goods sold   587,355    769,990    1,839,180    2,201,275 
Gross margin    39,832    96,534    379,997    362,626 
                     
Operating expenses                    
Research and development   37,827    250,130    149,684    412,436 
Sales and marketing   192,127    443,767    402,658    999,392 
General and administrative   458,046    792,062    1,075,255    1,898,063 
Depreciation and amortization   31,330    63,806    57,630    109,715 
Total operating expenses   719,330    1,549,765    1,685,227    3,419,606 
Loss from operations   (679,498)   (1,453,231)   (1,305,230)   (3,056,980)
Other income (expenses)                    
Interest expense   (300,034)   (571,748)   (822,900)   (1,014,801)
Recognition of derivative liability           (174,437)    
Private placement costs       (85,882)   

   (85,882)
Loss on debt extinguishment   

    

    

(27,760

)   

 
Gain on extinguishment of derivative liability   13,508        658,051    2,586,732 
Change in fair value of derivative liabilities   140,986    27,156    466,145    2,473,210 
Net (loss) income  $(825,038)  $(2,083,705)  $(1,206,131)  $902,279 
Net (loss) income per share:                    
Basic  $(0.00)  $(0.01)  $(0.00)  $0.01 
Diluted  $(0.00)  $(0.01)  $(0.00)  $0.00 
Shares used in computing net (loss) income per share:                    
Basic   487,675,203    151,186,865    274,251,149    142,095,832 
Diluted   487,675,203    151,186,865    274,251,149    207,471,094 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

F-2
 

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited)

For the six month period ended September 30, 2015

 

  Common Stock $0.001 Par   Preferred Stock $0.001 Par   Additional
Paid In
   Accumulated   Stockholders’ 
  Number   Amount   Number   Amount   Capital   Deficit   Deficit 
Balance, March 31, 2015  174,857,028   $174,856       $   $18,530,191   $(28,374,272)  $(9,669,225)
Cancellation of Common Stock held by Steve Saleen, CEO in exchange for Super Voting Preferred Stock  (82,133,875)   (82,134)   82,134    82    82,052          
Shares issued for services            63,000    63    113,337         113,400 
Fair value of shares issued upon conversion of convertible notes and accrued interest  394,858,572    394,859              (14,454)        380,405 
Fair value of shares issued as payments on accounts payable  2,380,377    2,380              45,227         47,607 
Fair value of shares issued upon settlement of accounts payable, related party            239,008    239    253,975         254,214 
Fair value of stock-based compensation                      134,505         134,505 
Net loss                           (1,206,131)   (1,206,131)
Balance, September 30, 2015  489,962,102   $489,961    384,142   $384   $19,144,833   $(29,580,403)  $(9,945,225)

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

F-3
 

 

Saleen Automotive Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   For the six month periods ended
September 30,
 
   2015   2014 
Cash flows from operating activities          
Net (loss) income  $(1,206,131)  $902,279 
Adjustments to reconcile net (loss) income to net cash used in operating activities          
Depreciation and amortization   57,630    109,715 
Gain on change in fair value of derivative liabilities   (466,145)   (2,473,209)
Gain on extinguishment of derivative liability   (658,051)   (2,586,732)
Gain on settlement of notes payable and accounts payable, related party       (72,315)
Amortization of discount on convertible notes   658,373    832,068 
Fair value of share based compensation   134,505    353,975 
Loss on debt extinguishment   

27,760

    

 
Private placement costs       85,882 
Recognition of derivative liability   174,437     
Fair value of shares issued for services   113,400    170,000 
Changes in working capital:          
(Increase) Decrease in:          
Accounts receivable   (12,477)   (97,402)
Inventory   488,556    92,861 
Prepaid expenses and other assets   34,618    79,124 
Increase (Decrease) in:          
Accounts payable   213,417    (350,935)
Due to related parties   50,767    165,335 
Payroll and taxes payable   (37,135)   (85,675)
Accrued interest   160,955    143,358 
Customer deposits   (309,091)   719,933 
Deferred royalty revenue   400,000     
Deferred vendor consideration       275,000 
Other liabilities   10,339    22,542 
Net cash used in operating activities   (164,273)   (1,714,196)
Cash flows from investing activities          
Purchases of property and equipment   (8,811)   (224,859)
Net cash used in investing activities   (8,811)   (224,859)
Cash flows from financing activities          
Proceeds from unsecured convertible notes       156,000 
Proceeds from unsecured convertible notes – related parties       250,000 
Proceeds from notes payable – related parties   90,000    150,000 
Proceeds from exercise of warrant       7,500 
Principal payments on notes payable – related parties   (45,000)    
Principal payments on notes payable       (294,573)
Proceeds from issuance of Common Stock       177,500 
Net cash provided by financing activities   45,000    446,427 
Net decrease in cash   (128,084)   (1,492,628)
Cash at beginning of period   143,083    1,499,889 
Cash at end of period  $14,999   $7,261 

 

(continued)

 

F-4
 

 

Saleen Automotive Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(continued)

 

   Six month periods ended September 30, 
   2015   2014 
Supplemental disclosures of cash flow information:          
Cash paid during the year for          
Interest  $3,484   $15,534 
Income taxes  $   $ 
           
Supplemental schedule of non-cash financing activities:          
Derivative liability related to conversion feature  $   $241,882 
Issuance of Common Stock on conversion of secured convertible Notes Payable and accrued interest       596,953 
Issuance of Common Stock on conversion of unsecured convertible Notes payable and accrued interest   380,405     
Issuance of Common Stock on payment of interest on Notes payable        244,869 
Issuance of Common Stock as payment on Notes payable        292,367 
Issuance of Common Stock as settlement of accounts payable   47,607     
Issuance of Super Voting Preferred Stock as settlement of accounts payable, related parties   254,214     
Fair value of beneficial conversion feature        250,000 
Fair value of shares issued in exchange for amendment of convertible debts recorded as debt discount        112,059 
Cancellation of Common Stock in exchange for Super Voting Preferred Stock   82,134     
Reclass of note payable to offset deferred royalty revenue   100,000     
Reclass of amounts to be settled through the issuance of equity securities       470,534 

 

See accompanying notes which are an integral part of these condensed consolidated financial statements.

 

F-5
 

 

Saleen Automotive Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Three and Six Month Periods Ended September 30, 2015 and 2014

 

The accompanying condensed consolidated financial statements of Saleen Automotive, Inc. and subsidiaries (“Saleen,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2016, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2015, which are included in the Company’s Annual Report on Form 10-K for such year filed on July 14, 2015. The consolidated balance sheet as of March 31, 2015, has been derived from the audited financial statements included in the Form 10-K filed on July 14, 2015.

 

NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of the Company

 

Saleen Automotive, Inc. (formerly W270, Inc.) (the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011. The Company designs, develops, manufactures and sells high performance vehicles built from base chassis’ of Ford Mustangs, Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. The Company is a low volume vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by the manufacturers (Ford, Chevrolet, Dodge and Tesla) of OEM American sports and electric vehicles. A high performance car is an automobile that is designed and constructed specifically for speed and performance. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling, aerodynamics and braking systems to support it. The Company’s Saleen-branded products include a complete line of upgraded high performance vehicles, automotive aftermarket specialty parts and lifestyle accessories.

 

Merger

 

On May 23, 2013, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, its wholly-owned subsidiary, Saleen Florida Merger Corporation, its wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of the Company’s wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of the Company’s wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of the Company’s Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of the Company’s Common Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of the Company’s Common Stock (on a fully-diluted basis) was owned, collectively, by Saleen (including 341,943 shares of the Company’s Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of the Company’s Common Stock, issued to Saleen pursuant to the Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger the Company is solely engaged in the Saleen Entities’ business, Saleen Automotive’s then officers became the Company’s officers and Saleen Automotive’s then three directors became members of the Company’s five-member board of directors. On June 17, 2013, the Company consummated a merger with WSTY Subsidiary Corporation, its wholly-owned subsidiary, pursuant to which the Company amended its articles of incorporation to change its name to Saleen Automotive, Inc. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January 2014, the Company effected an increase in the number of its common shares authorized to 500,000,000 and all the remaining shares of Super Voting Preferred Stock were converted into Common Stock of the Company and the Super Voting Preferred Stock ceased to be a designated series of the Company’s preferred stock.

 

F-6
 

 

Consolidation Policy

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Saleen Automotive, Inc., a Florida corporation, Saleen Signature Cars, a California corporation and Saleen Sales Corporation, a California corporation. Intercompany transactions and balances have been eliminated in consolidation.

 

Going Concern

 

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the six months ended September 30, 2015, the Company incurred an operating loss of $1,206,131 and utilized $164,273 of cash in operations. The Company also had a stockholders’ deficit and working capital deficit of $9,945,225 and $6,935,917, respectively, as of September 30, 2015, and as of that date, the Company owed $708,368 in past unpaid payroll and other taxes, which the Company has an installment agreement with the IRS whereby the Company is paying $10,000 a month; $947,636 of outstanding notes payable were in default; $1,232,250 of accounts payable was greater than 90 days past due; and $358,111 is owed on past due rent. In addition, in May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under the Company’s 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of the Company’s indebtedness.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s independent auditors, in their audit report for the year ended March 31, 2015, expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profit from operations. At September 30, 2015, the Company had cash on hand in the amount of $14,999 and is not generating sufficient funds to cover operations. The Company has utilized funding to operate the business during the six months ended September 30, 2015 with advance royalty payments of $500,000 obtained from an Intellectual Property License Agreement entered into in June 2015. However, the Company will need and is currently working on obtaining additional funds, primarily through the issuance of debt or equity securities to operate its business through and beyond the date of this Form 10-Q filing. As further discussed in Note 11 and in the Company’s Form 8-K filed on October 21, 2015, in October 2015 the Company entered into a Binding Letter of Intent with SM Funding Group, Inc. (“SM Funding”) whereby SM Funding will purchase from the Company up to $2 million but not less than $1 million of senior convertible secured notes. In addition, the Company agreed to offer SM Funding or its affiliates up to $10 million of Preferred Stock. As of the date of this Form 10-Q filing, the Company has received $600,000 under this Letter of Intent. However, no assurance can be given that the Company will complete the financing transactions with SM Funding and no assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders in the case of convertible debt and equity financing.

 

Use of Estimates

 

Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management estimates include the estimated collectability of its accounts receivable, the valuation of long lived assets, warranty reserves, the assumptions used to calculate derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.

 

F-7
 

 

Fair Value of Financial Instruments

 

The Company accounts for the fair value of financial instruments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

 

Level 1 Quoted prices in active markets for identical assets or liabilities.

 

Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.

 

Level 3 Unobservable inputs based on the Company’s assumptions.

 

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued liabilities, customer deposits, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.

 

As of September 30, 2015 and March 31, 2015, the Company’s condensed consolidated balance sheets included the fair value of derivative liabilities of $318,829 and $1,268,588, respectively, which was based on Level 2 measurements.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine their classification is appropriate.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740-10-25. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry forward period under the Federal tax laws.

 

F-8
 

 

Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of any related deferred tax asset. Any change in the valuation allowance would be included in income in the year of the change in estimate.

 

Stock Compensation

 

The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes-Merton option pricing model to calculate the fair value of any equity instruments on the grant date that vests over a period of time.

 

The Company also uses the provisions of ASC 505-50, “Equity Based Payments to Non-Employees,” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.

 

Income (Loss) per Share

 

The basic EPS is calculated by dividing the Company’s net income or loss available to common stockholders by the weighted average number of common shares during the period. Outstanding shares of Super Voting Preferred Stock are included in the calculation as they are considered as a common stock equivalent. The diluted EPS is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity securities unless the effects thereof are anti-dilutive, that is inclusion of such shares would reduce the net loss or increase the net income.

 

For the three and six months ended September 30, 2015, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. As of September 30, 2015, stock options, warrants, and convertible notes convertible or exercisable into 6,870,333, 13,313,099, and 275,943,724 shares of common stock, respectively, have been excluded from diluted loss per share because they are anti-dilutive.

 

For the three months ended September 30, 2014, basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. For the six months ended September 30, 2014, basic shares outstanding were 142,095,832 and diluted shares outstanding were 207,471,094, which included the diluted effect of potentially dilutive equity and debt shares of 65,375,262 and excluded 13,146,432 of potential common shares that were anti-dilutive.

 

Significant Concentrations

 

No customer comprised of sales greater than 10% for the three months ended September 30, 2015 and sales to one customer comprised 17% of revenues for the six months ended September 30, 2015. One customer comprised accounts receivable in excess of 10% at September 30, 2015 and no customer comprised of accounts receivable in excess of 10% at March 31, 2015.

 

Sales to two separate customers comprised 10% and 15% of revenues for the three and six months ended September 30, 2014, respectively.

 

Recently Issued Accounting Standards

 

On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction and industry specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently evaluating the impact, if any, on adopting ASU 2014-09 on the Company’s results of operations or financial condition.

 

F-9
 

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

 

In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future condensed consolidated financial statements.

 

NOTE 2 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   September 30, 2015   March 31, 2015 
Tooling  $707,054   $698,243 
Equipment   210,980    210,980 
Leasehold improvements   203,310    203,310 
Total, cost   1,121,344    1,112,533 
Accumulated depreciation and amortization   (578,047)   (520,417)
Total Property, Plant and Equipment  $543,297   $592,116 

 

Depreciation and amortization expense was $57,630 and $109,715 for the six months ended September 30, 2015, and 2014, respectively.

  

F-10
 

 

NOTE 3 – NOTES PAYABLE

 

Notes payable are comprised as follows:

 

   September 30, 2015   March 31, 2015 
Senior secured note payable to a bank, secured by all assets of Saleen Signature Cars, guaranteed by the U.S. Small Business Administration and personally guaranteed by the Company’s CEO, payable in full in March 2015, currently in default (1)  $358,704   $358,704 
Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (2)    97,000    97,000 
Subordinated secured note payable, interest at 6% per annum, payable March 16, 2010, currently in default (3)   61,046    61,046 
Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default (4)   55,000    55,000 
Promissory note, interest at 6%, secured by a vehicle (5)   -    100,000 
Total notes payable  $571,750   $671,750 

 

(1) On February 6, 2014, Saleen Signature Cars received a Complaint from a bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non-timely payment of November and December 2013 principal amounts owed, which were paid as of March 31, 2014, and the occurrence of a change in control as a result of the Merger. The bank sought full payment of principal and interest owed. In April 2014, the Company entered into a settlement arrangement with the bank whereby the bank dismissed this case in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest through July 2014. From August 2014 to March 31, 2015, in exchange for payments totaling $90,000, the bank agreed to extend this arrangement through various dates with the last date being March 2015. On April 29, 2015, the bank filed a claim against the Company alleging breach of the loan agreement, breach of a commercial guaranty by Steve Saleen, Chairman and CEO, and the bank demanded full payment of principal and interest outstanding (see Note 10).
   
(2) Bonds and notes issued on March 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The Bonds accrue interest at 6% per annum and are secured by the personal property of Saleen Signature Cars. As of September 30, 2015 and March 31, 2015, respectively, the Bonds were in default due to non-payment.
   
(3) Note payable issued on March 16, 2010 due in full on March 16, 2011. The note accrued interest at 10% per annum and was secured by three vehicles held in inventory by Saleen Signature Cars. On June 7, 2013, the Company entered into a Settlement Agreement and Mutual General Release by canceling this note and issuing a new unsecured 6% note payable due on or before August 19, 2013. The note was in default as of September 30, 2015 and March 31, 2015 due to non-payment.
   
(4) In June 2014, the Company entered into a Settlement Agreement and Mutual Release agreement with a note holder for one of the notes that had an outstanding principal and interest of $100,000 and $53,374, respectively, in exchange for (1) issuance of 800,000 shares of its Common Stock and (2) cash payment of $35,000. The Company issued the common shares in June 2014 and determined the value to be $112,000, which was based on the value of the Common Stock of $0.14 as of the date of settlement. The remaining cash payment of $35,000 was unpaid and was included in notes payable as of September 30, 2015 and March 31, 2015. In addition, another separate note for $20,000 remains outstanding as of March 31, 2015 and is in default due to non-payment.
   
(5) The Company entered into a note agreement on March 25, 2015 for $100,000 principal and interest bearing at a rate of 6% per annum. The note was secured by a vehicle provided to the note holder by the Company and was due on demand after 60 days following the date the secured vehicle was returned to the Company. In June 2015, the note holder agreed to cancel this note and attribute the then principal outstanding of $100,000 as partial payment against advance royalties received in conjunction with an Intellectual Property License Agreement entered into with the note holder (see Note 7).

  

F-11
 

 

NOTE 4 – NOTES PAYABLE TO RELATED PARTIES

 

Notes payable to related parties are as follows:

 

   September 30, 2015   March 31, 2015 
Unsecured note payable to a stockholder at 10% per annum, due on April 1, 2014, currently in default.  $102,000   $102,000 
Unsecured 10% note payable to a stockholder and convertible note holder at 10% per annum, payable on demand   90,000     
Unsecured payable to a stockholder at 10% per annum, payable on demand   123,584    165,000 
Total notes payable, related parties  $315,584   $267,000 

 

NOTE 5 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable are as follows:

 

   September 30, 2015   March 31, 2014 
3% Senior secured convertible notes payable to a private accredited investor group, convertible at $0.075 per share, subject to adjustment, $2,001,720 due in June 2017 and $499,892 due in January 2019.  $2,501,612   $2,501,612 
           
7% Unsecured convertible notes payable to private accredited investor group, convertible into 82,484,267 shares of Common Stock (including accrued interest) as of September 30, 2015, interest accrued at 7% per annum, notes mature in March 2017   2,200,000    2,200,000 
           
Unsecured convertible notes payable to eight separate private accredited investors, convertible into 35,782,732 shares of Common Stock (including accrued interest) as of September 30, 2015, interest accrued at 8% to 12% per annum, notes mature on various dates from April 2015 to December 2016, in default   273,886    618,225 
    4,975,498    5,319,837 
Less: discount on notes payable   (1,178,455)   (1,836,828)
Notes payable, net of discount   3,796,983    3,483,009 
Less: notes payable, current   (239,438)   (267,332)
Notes payable, long-term  $3,557,605   $3,215,677 

 

As of September 30, 2015, $239,438 was included in current portion of convertible notes payable, which represented convertible notes payable of $273,886 less debt discount of $34,448.

 

3% Senior secured convertible notes

 

On June 26, 2013, pursuant to a Securities Purchase Agreement, as amended, the Company issued senior secured convertible notes, as amended, having a total principal amount of $3,000,000, to 12 accredited investors (“2013 Notes”). The 3% Notes pay 3.0% interest per annum with a maturity of 4 years from the date of issuance (June 2017 and January 2019) and are secured by all assets and intellectual property of the Company. No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.

 

Each 3% Note is convertible at any time into Common Stock at a specified conversion price, which initially was $0.075 per share. In June 2014, the Company entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note (“3% First Amendment”) and removed all specified adjustments to the conversion price except for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally. In addition, if a Fundamental Transaction, as defined in the 2013 Note agreement, were to occur the potential liquidated damage was set to a fixed amount. As an inducement for the amendment, the Company issued an aggregate of 389,923 shares of Common Stock with a fair value of $58,488 determined based on the market value of the Company’s Common Stock of $0.15 as the date of issuance. Further, the Company accounted for this amendment as a modification for accounting purposes, and as such, the derivative liability recorded when the note was originally issued was deemed extinguished.

 

F-12
 

 

On January 23, 2015, the Company entered into a Second Amendment to 3% Senior Secured Convertible Notes whereby the conversion price of the 2013 Notes were amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elects to convert all or part of the note. However, in no event shall the conversion price be less than $0.02. In conjunction with this amendment, the Company entered into two additional 3% Senior Secured Convertible Notes in the principal amount of $499,892 with two accredited investors who participated in the June 26, 2013 offering (“2015 Notes” and collectively “3% Notes”) of which $98,708 was converted from a revolver note payable previously entered into with one investor in November 2013.

 

In May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302 (see Note 3). A default under the loan agreement triggers a cross default under the 3% Notes enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of the indebtedness under the 3% Notes requiring the Company to pay, upon such acceleration, the sum of (1) 120% of the outstanding principal plus (2) 100% of all accrued and unpaid interest plus (3) all other amounts due under the 3% Notes. Upon the occurrence of an event of default under the 3% Notes interest accrues at the rate of 12% per annum. The Company continues to classify the 3% Notes as long term, as a judgment against the Company has not been granted and the Company disagrees with the compliant and plans to defend it’s position. As of the date of this filing of Form 10-Q, the Company has not received a notice of default from the holders of the 3% Notes.

 

In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of the 3% Notes. As a result, the Company determined that the conversion feature of the 3% Notes were not considered indexed to the Company’s own stock pursuant to FASB guidance on “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Therefore, the Company characterized the fair value of the 3% Note conversion feature of $106,781 in June 2015 as derivative liability. See Note 6 for further discussion.

 

During the six months ended September 30, 2015 and 2014, the Company amortized $16,490 and $184,456, respectively, of the valuation discount. The remaining unamortized valuation discount of $57,531 and $74,021 as of September 30, 2015 and March 31, 2015, respectively, has been offset against the face amount of the notes for financial statement purposes. As of September 30, 2015, the principal balance of the convertible Notes outstanding was $2,501,612 and potentially convertible into 132,731,249 shares of Common Stock including accrued and unpaid interest.

 

7% Unsecured convertible notes

 

In March and April 2014, as amended in June 2014, the Company issued 7% Unsecured Convertible Notes (the “7% Notes”), having a total principal amount of $2,250,000 and $250,000, respectively, to 5 accredited investors of which $2,000,000 was received from 3 investors who participated in the June 26, 2013 offering above. The 7% Notes pay interest at 7% per annum with a maturity of 3 years (March and April, 2017). No cash payments are required, except that unconverted outstanding principal and accrued interest shall be due and payable on the maturity date. Each 7% Note is initially convertible at any time into the Company’s Common Stock at a conversion price, which is adjustable to the lower of $0.07 or the three lowest daily volume weighted average prices of the Company’s Common Stock during the twenty consecutive trading days immediately preceding any conversion date. However, in no event shall the conversion price be lower than $0.03 per share. In addition, the conversion price adjusts for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally.

 

In June 2014, the Company entered into a First Amendment to Saleen Automotive, Inc. 7% Convertible Note whereby effective as of March 31, 2014 or the applicable issuance date for notes issued thereafter, the conversion price would in no event adjust below $0.03 per share. In addition, if a Fundamental Transaction, as defined in the Agreement, were to occur the potential liquidated damages was set to a fixed amount. As an inducement, the Company issued an aggregate of 357,143 shares of its Common Stock with a fair value of $53,571 based on the market value of the Company’s Common Stock of $0.15 as of the date of issuance.

 

F-13
 

 

As the initial conversion price of $0.07 reflected a price discount below the fair market value of the Company’s Common Stock as of the issuance date of the 7% Notes, the Company determined that there was deemed a beneficial conversion feature associated with these 7% Notes. As such, the Company recorded $2,250,000 and $250,000 in March 2014 and April 2014, respectively, representing the intrinsic value of the beneficial conversion feature at the issuance date of the 7% Notes in additional paid-in capital. The value of the beneficial conversion feature is being amortized as additional interest expense over the term of the 7% Notes, which totaled $362,824 and $422,206 for the six months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and March 31, 2015, the remaining unamortized valuation discount of $1,086,476 and $1,449,300, respectively, has been offset against the face amount of the notes for financial statement purposes. As of September 30, 2015, the outstanding principal balance of these notes was $2,500,000 and potentially convertible into 80,783,548 shares of Common Stock including accrued and unpaid interest.

 

In May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanded full payment of principal, interest and fees of $369,302 (see Note 3). If the bank is successful in their claim of default, such default would trigger a cross default under the 7.0% Notes enabling the holders thereof to, at their election, accelerate the maturity of the outstanding indebtedness under the 7% Notes requiring the Company to pay, upon such acceleration, the greater of (1) 120% of the outstanding principal (plus all accrued and unpaid interest) and (2) the product of (a) the highest closing price for the five trading immediately preceding the holder’s acceleration and (b) a fraction, of which the numerator is the entire outstanding principal, and of which the denominator is the then applicable conversion price. Upon the occurrence of an event of default under the 7% Notes interest accrues at the rate of 24% per annum. The Company continues to classify the 7% Notes as long term, as a judgment against the Company has not been granted and the Company disagrees with the compliant and plans to defend it’s position. As of the date of this filing of Form 10-Q, the Company has not received a notice of default from the holders of the 7% Notes.

 

In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of the 7% Notes. As a result, the Company determined that the conversion feature of the 7% Notes were not considered indexed to the Company’s own stock pursuant to FASB guidance on “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Therefore, the Company characterized the fair value of the 7% Note conversion feature of $15,441 in June 2015 as derivative liability. See Note 6 for further discussion.

 

Unsecured convertible notes

 

From September 2014 to December 2014, the Company issued Unsecured Convertible Promissory Notes (“Notes”) to eight separate accredited investors that had a remaining principal balance of $618,225 as of March 31, 2015. The Notes bear interest ranging from 8% to 12% per annum and mature on various dates from April 2015 to December 2016. The Company is currently in default of payment for Note that matured from April 2015 to July 6, 2015 in the principal amount outstanding of $52,879. The Company may not prepay the Notes without the Note holder’s consent. Further, the Notes contain provisions that under certain events of default, as defined in the agreements, the amount owed could increase by amounts ranging from 135% to 150% depending on the event of default. In addition, in the event of non-payment when due, the interest rates would increase to between 20% and 25% per annum from the date due until paid.

 

The Notes are convertible into shares of Common Stock of the Company at the option of the holder commencing on various dates following the issuance date of the Notes and ending on the later of the maturity date or date of full payment of principal and interest. The principal amount of the Notes along with, at the holder’s option, any unpaid interest and penalties, are convertible at price per share discounts ranging from 42% to 38% of the Company’s Common Stock trading market price during a certain time period, as defined in the agreement. Further, the conversion prices are subject to a floor such that the conversion prices will not be less than a certain price, as defined in the agreement, with such floor prices ranging from $0.001 to $0.00005 per share. In addition, the conversion prices are subject to adjustment in certain events, such as in conjunction with any sale, conveyance or disposition of all or substantially all of the Company’s assets or consummation of a transaction or series of related transactions in which the Company is not the surviving entity. The note agreements also require the Company to maintain a reserve of Common Stock, as determined based on a formula stated in the note agreements, which, upon request by the note holder, can be adjusted based on the formula and the then share price of the Company’s Common Stock as of the date of request. The note holder can convert up to the number of the then shares reserved for conversion of their related note. As of September 30, 2015, the Company was in default of such reserve requirements due to insufficient availability of authorized and available Common Stock shares to fulfill the note holders’ reserve requests. In October 2015, the Company increased its Common Stock authorized to 2,500,000,000, which is sufficient to cover the share issuable upon conversion (See Note 10).

 

F-14
 

 

During the six months ended September 30, 2015, Note holders converted $372,099 of principal and $8,306 of accrued interest into 394,858,572 shares of the Company’s Common Stock. In addition, in June 2015, the Company agreed to allow one note holder to assign their then note principal balance of $49,240, which was in default due to non-payment after maturity date and insufficient availability of Common Stock available upon conversion, to a separate note holder, who is also a note holder under the 3% Notes and 7% Notes, for the new note holder’s payment of $77,000 to the original note holder. As a result of this assignment, the Company recorded $27,760 as loss on extinguishment during the six months ended September 30, 2015 as a result of the increase in principal balance from $49,240 to $77,000. As of September 30, 2015, the principal balance of the convertible Notes outstanding was $273,886 and potentially convertible into 62,428,927 shares of Common Stock including accrued and unpaid interest.

 

The Company considered the current FASB guidance of “Contracts in Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability of whether or not within the issuers’ control means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion prices of the Notes were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. In addition, the Company determined that instruments with floor prices ranging from $0.001 to $0.00005 were de minimis and in substance not indexed to the Company’s own stock. As a result, the Company determined that the conversion features of the Notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the Notes, the initial fair value of the embedded conversion feature was $1,306,455. As such, the Company recorded a $1,306,455 derivative liability, of which $638,225 was recorded as debt discount offsetting the fair value of the Notes and the remainder of $668,230 recorded as private placement costs in the Consolidated Statement of Operations for the year ended March 31, 2015. The balance of the unamortized discount was $313,507 at March 31, 2015. During the six months ended September 30, 2015, the Company amortized $279,059 of the valuation discount, and the remaining unamortized valuation discount of $34,448 as of September 30, 2015 has been offset against the face amount of the Notes for financial statement purposes. The remainder of the valuation discount will be amortized as interest expense over the remaining term of the Notes.

 

In addition, as a result of the assignment of note discussed above, the Company recognized a derivative liability of $54,508 in June 2015. The derivative liability is re-measured at the end of every reporting period with the change in value reported in the statement of operations (see Note 6).

 

NOTE 6 – DERIVATIVE LIABILITY

 

In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments, which do not have fixed settlement provisions, are deemed to be derivative instruments. The conversion feature of the Company’s senior secured convertible notes and unsecured convertible notes (described in Note 5 above), did not have fixed settlement provisions because their conversion prices could be lowered if the Company issues securities at lower prices in the future or the ultimate determination of shares to be issued could exceed current available authorized shares. In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of the 3% senior secured and 7% unsecured convertible notes. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes had been characterized as a derivative liability and was re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

F-15
 

 

The derivative liability was valued at the following dates using a Weighted-Average Black-Scholes-Merton model with the following assumptions:

 

   September 30, 2015   3% and 7% Notes
June 2015
  

March 31, 2015

 
Conversion feature:               
Risk-free interest rate   0.01 – 0.92%   0.02 - 0.03    0.004 – 1.55 %
Expected volatility   202%   203%   179%
Expected life (in years)   .01 – 1.7  years    1.62 – 1.8 years    .2 – 1.6 years 
Expected dividend yield            
                
Fair Value:               
Conversion feature  $318,829   $119,929   $1,268,588 

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own stock’s volatility as the estimated volatility. The expected life of the conversion feature of the notes was based on the remaining terms of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of Common Stock in the past and does not expect to pay dividends to holders of its Common Stock in the future.

 

During the six months ended September 30, 2015 and 2014, the Company recognized $466,145 and $2,473,210, respectively, as other income, which represented the difference in the value of the derivative from the respective prior period. In addition, the Company recognized a gain of $658,051, which represented the extinguishment of derivative liabilities related to the conversion of the unsecured convertible notes during the six months ended September 30, 2015.

 

In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of certain of its Notes. As a result, the Company was required to record a derivative liability of $119,929 in June 2015.

 

NOTE 7 – ADVANCE ROYALTY

 

In June 2015, the Company entered into an Intellectual Property License Agreement (the “License Agreement”) with Saleen Motors International, LLC, a Delaware limited liability company (“SMI”) and a wholly owned subsidiary of GreenTech Automotive, Inc. (“GTA”) and non-affiliated subsidiary of the Company. Pursuant to the License Agreement, the Company granted to SMI an irrevocable, fully paid-up (subject to certain royalty fees), sublicensable license during the term of the License Agreement to use all of the Company’s intellectual property on an exclusive basis worldwide other than in North America, Europe, Middle East and Australia (as applicable, the “Territory”), to make, promote, sell and otherwise exploit the Company’s intellectual property in the Territory. The License Agreement has an initial term of 10 years, with automatic renewal for periods of five years at SMI’s election provided that the number of Saleen branded vehicles sold by SMI in the prior 12-month period is not less than the average number of Saleen-branded vehicles sold by the Company and subsidiaries in the most recently available three-year period. The License Agreement may be terminated by mutual written agreement, upon a material breach, which remains uncured (with SMI having the right to cure no more than 3 breaches of its obligation to pay royalties) for 15 days after written notice of such breach, or in the event of SMI’s bankruptcy.

 

In consideration of the license, SMI shall pay royalties, within 15 days after the product shipment date and in all events at least quarterly, based on a fee per Saleen-branded vehicle sold by SMI depending on its sales volume as set forth in the License Agreement, and shall pay royalties based on a percentage of SMI’s gross revenues for parts and merchandise (in each case net of discounts, returns, taxes and similar amounts) received on Saleen-branded non-vehicle products.

 

As part of the License agreement, SMI agreed to advance to the Company $500,000 in royalties of which $250,000 was applied from loan advances previously made to the Company under the 10% Notes made by GTA pursuant to the SPA and the 10.0% First Lien Convertible Note entered into in May 2015; $100,000 was applied from the cancelation of a note entered into between GTA and the Company in March 2015; and $150,000 was paid by GTA in cash to the Company. As of September 30, 2015, the Company recognized a deferred advance royalty of $500,000 and will recognize this amount as revenue based on actual future royalties resulting from sales by SMI under the License Agreement.

 

Except for the transactions under the agreements described above and the Company’s Joint Branding, Marketing, and Distribution Agreement with WM Industries Corp. (an affiliate of SMI and GTA) dated March 2014, none of the Company or its subsidiaries had any material relationship with SMI, GTA and its affiliates.

 

F-16
 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

The amounts of accounts payable to related parties as of September 30 and March 31, 2015 are as follows:

 

Related Party:  September 30, 2015   March 31, 2015 
Steve Saleen (a)  $54,220   $223,455 
Top Hat Capital (b)   62,500    62,500 
Crystal Research   6,343    6,343 
Molly Saleen, Inc. (c)        34,214 
   $123,063   $326,512 

 

(a) As of March 31, 2015 the Company owed $223,455 to Mr. Saleen for his unpaid officers’ salary. On June 16, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors. During the six months ended September 30, 2015, the Company incurred and owes $54,220 in officers’ salary expense due and payable to its Director, Chairman and CEO, Mr. Steve Saleen as of September 30, 2015.
   
(b) The Company previously incurred $75,000 of which the Company paid $12,500 in investment advisor and research services from Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of September 30 and March 31, 2015, $62,500 was payable to Top Hat Capital for these services.
   
(c) As of March 31, 2015 the Company owed $34,214 for apparel merchandise purchased on behalf of the Company by Molly Saleen, Inc., dba Mollypop (“Mollypop”), who’s owner, Molly Saleen, is the Chief Executive Officer of Mollypop and is the daughter of Steve Saleen. On June 22, 2015, the Company issued to Mollypop, 19,007.777 shares of Super Voting Preferred Stock to reimburse Mollypop for the amount owed of $34,214. The per share price of Super Voting Preferred Stock issued to Mollypop was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. During the six months ended September 30, 2015, the Company incurred $802 of such costs, which was paid.

 

Other Transactions

 

On June 22, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred Stock issued to MLG was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors.

 

NOTE 9 – STOCKHOLDERS’ EQUITY

 

Authorized Shares

 

In June 2015, the board of directors approved an increase in the Company’s authorized shares from 500,000,000 to 2,500,000,000. The increase became effective in October 2015 (see Note 11).

 

Issuance of Common Stock

 

During the six months ended September 30, 2015, the Company issued an aggregate of 394,858,572 shares of common stock upon conversion of the Company’s convertible notes payable and accrued interest amounting to $380,405 (see Note 5).

 

F-17
 

 

During the six months ended September 30, 2015, the Company entered into Settlement Agreement and Mutual Release agreement with a vendor whereby the Company issued and aggregate of 2,380,377 shares of Common Stock with a fair value of $47,607 in exchange for extinguishment of amount owed of $47,607. The value of the Common Stock was based on the market price of the Company’s Common Stock as of the date of the agreements.

 

Designation of Super Voting Preferred

 

On June 12, 2015, the Company filed a Certificate of Designation designating the rights and restrictions of 1,000,000 shares of Super Voting Preferred Stock, par value $0.001 per share, pursuant to resolutions approved by the Company’s Board of Directors on June 11, 2015 (see Note 11).

 

The holders of Super Voting Preferred Stock are entitled to vote together with the holders of Common Stock, as a single class, upon all matters submitted to holders of Common Stock for a vote. Each share of Super Voting Preferred Stock is entitled to a number of votes equal to the number of shares of our Common Stock into which it is convertible at the applicable record date. Each share of Super Voting Preferred Stock will immediately and automatically convert into 1,000 shares (subject to adjustment for splits, dividends and similar transaction) of Common Stock at such time that the Company files, at such time as determined by the Company’s board of directors, an amendment to its articles of incorporation effecting a reverse stock split of Common Stock or effecting an increase in the authorized shares of Common Stock, in each case so that the Company has a sufficient number of authorized and unissued shares of Common Stock to permit the conversion of all then outstanding shares of Super Voting Preferred Stock into Common Stock. In October 2015, the Company completed the increase in its authorized shares from 500,000 to 2,500,000,000 (see Note 10).

 

In the event of any liquidation, dissolution or winding up of the Company, the assets available for distribution to the stockholders will be distributed among the holders of the Super Voting Preferred Stock and the holders of Common Stock, pro rata, on an as-converted-to-common-stock basis. The holders of Super Voting Preferred Stock are entitled to dividends in the event that the Company pays cash or other dividends in property to holders of outstanding shares of Common Stock, which dividends would be made pro rata, on an as-converted-to-common-stock basis.

 

Issuance of Super Voting Preferred

 

During the six months ended September 30, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred Stock issued was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. The Company recorded these fees as general and administrative expense during the six months ended September 30, 2015.

 

During the six months ended September 30, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors.

 

During the six months ended September 30, 2015, the Company issued to Mollypop, 19,007.777 shares of Super Voting Preferred Stock to reimburse Mollypop for $34,214 of merchandise previously purchased by Mollypop on the Company’s behalf and owed to Mollypop as of March 31, 2015. The per share price of Super Voting Preferred Stock issued was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors.

 

In order to make available additional shares of Common Stock to facilitate the conversion of outstanding debt, during the six months ended September 30, 2015 the Company issued to Steve Saleen, the Company’s Chief Executive Officer and President, 82,133.875 shares of Super Voting Preferred Stock in exchange for 82,133,875 shares of Common Stock held by Mr. Saleen.

 

F-18
 

 

Omnibus Incentive Plan

 

The Company utilizes the Black-Scholes option valuation model to estimate the fair value of stock options granted. The Company’s assessment of the estimated fair value of stock options is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact.

 

Stock option activity is set forth below:

 

   Number of
Shares
   Weighted
Average
Exercise Price
per Share
   Aggregate
Intrinsic
Value
   Weighted-Average
Remaining
Contractual Term
(in years)
 
Balance at March 31, 2015   13,459,000   $   $     
Options granted during the period                
Options cancelled during the period   (1,058,000)   0.10         
Options exercised during the period                
Balance at September 30, 2015   12,401,000    0.10   $0    8.93 
Exercisable at September 30, 2015   6,870,333    0.10   $0    8.93 
Expected to vest after September 30, 2015   5,270,497    0.10   $0    8.93 

 

The aggregate intrinsic value shown in the table above represents the difference between the fair market value of the Company’s common stock of $0.0006 on September 30, 2015 and the exercise price of each option.

 

During the six months ended September 30, 2015, the Company recorded stock compensation expense of $134,505 of which $11,259, $79,900, and $43,346 was included in research and development, sales and marketing, and general and administrative expenses, respectively. Unearned compensation of $185,765 at September 30, 2015, related to non-vested stock options, will be recognized into expense over a weighted average period of .61 years.

 

During the six months ended September 30, 2014, the Company recorded stock compensation expense of $353,975 of which $47,972, $190,272, and $115,731 was included in research and development, sales and marketing, and general and administrative expenses, respectively.

 

Warrants

 

The following summarizes warrant activity for the Company during the nine months ended September 30, 2015:

 

   Warrants   Weighted Average
Exercise Price
   Weighted Average
Remaining
Contractual Term
 
Outstanding March 31, 2015   13,313,099   $0.15    3.4 
Issued during the period            
Exercised during the period            
Outstanding September 30, 2015   13,313,099   $0.15    3.4 

 

As of September 30, 2015, 13,313,099 warrants were exercisable and the intrinsic value of the warrants was nil.

  

NOTE 10 – COMMITMENTS AND CONTINGINCIES

 

Purchase Commitments

 

In April 2014, the Company entered into an agreement with BASF to exclusively use BASF’s products for paint work. The agreement continues from May 2014 until the Company purchases in aggregate $4,131,000 of BASF products. If the aggregate purchases of BASF products are less than $1,697,000 over a period of 36 consecutive months, the Company is required to repay BASF 6.1% of the shortfall between $1,697,000 and the amount it actually purchased over this period. In consideration for the Company’s exclusive use of BASF’s products and fulfilling this purchase commitment, BASF paid the Company $250,000, which was recorded as deferred vendor consideration. This amount will be recorded as reduction to costs of goods sold based upon a prorated percentage of the purchased amount over the purchase commitment if the Company determines there is a reasonable certainty in achieving the purchase commitment.

 

F-19
 

 

In May 2014, the Company entered into an agreement with FinishMaster, Inc. (“FinishMaster”) to exclusively use FinishMaster’s paint material supplies. The agreement continues from May 2014 until the Company purchases in aggregate $1,555,000 of FinishMaster products. In consideration for the Company’s exclusive use of FinishMaster’s products and fulfilling this purchase commitment, FinishMaster paid the Company $25,000, which was recorded as deferred vendor consideration, and FinishMaster will pay an additional $25,000 upon the achievement of purchase level milestones, as outlined in the agreement. Should the Company not complete a set purchase level milestone, the Company would be required to re-pay the $25,000 along with $11,475 compensation to FinishMaster. This amount will be recorded as reduction to costs of goods sold based upon a prorated percentage of the purchased amount over the purchase commitment if the Company determines there is a reasonable certainty in achieving the purchase commitment.

 

Litigation

 

The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. The Company is currently a party to several legal proceedings related to claims for payment that are currently accrued for in its financial statements as accrued liabilities, accounts or notes payable. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. Material legal proceedings that are currently pending are as follows:

 

The Company is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County, that claimed breach of contract related to an engine installed by a third party vendor. The suit claimed $200,000 in damages plus interest, legal fees and costs of litigation. SSC filed a cross complaint against MSY Trading, Inc. for breach of warranty, negligence, and indemnification. On January 10, 2014, the Company settled this claim by agreeing to pay of $112,500 over a period of 18 months of which we paid $45,500 through August 2014. Subsequent to this date the Company defaulted on payments. On October 30, 2014, a judgment was entered against SSC in the amount of $68,950, which the Company accrued for in accounts payable.

 

In December 2014, the Saleen Automotive, Inc. (formerly Saleen Electric Automotive, Inc.), the Company’s wholly-owned subsidiary, received a Complaint from Green Global Automotive B.V. (“GAA”) alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing, related to a European Distribution Agreement entered into in December 2011 between GAA and Saleen Automotive. The suit seeks contract and economic damages of $50,000 along with compensatory damages, restoration, lost profits and attorneys’ fees. The Company is currently evaluating the merits of this case, if any, and is working to ascertain the impact on its financial statements.

 

In February 2014, SSC received a Complaint from a Citizens Business Bank (the “Bank”) alleging, among other matters, breach of contract due to non-timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and the occurrence of a change in control as a result of the Merger. In April 2014, the Bank agreed to dismiss the suit in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest for May, June and July 2014, and the agreement to pay the remaining recorded balance due of $443,000 to the Bank in August 2014. From August 2014 to March 31, 2015, in exchange for payments totaling $90,000, the Bank agreed to extend this arrangement through various dates with the last date being March 2015. The Company did not pay the then outstanding principal and interest in March 2015 and the Bank did not agree to an additional extension. In May 2015, the Company was notified of a lawsuit filed by the Bank in the Superior Court of the State of California, County of Riverside, alleging breach of the Loan Agreement with the Bank (“Loan Agreement”), breach of a commercial guaranty by Steve Saleen and indebtedness for principal and interest of at least $369,302, and seeking appointment, which has not been granted by the court as of the date of this filing, of a limited purpose receiver and a temporary restraining order enjoining the Company from transferring the collateral securing the loan, which related to SSC. The main complaint by the Bank stems from the Company’s reverse merger that occurred in June 2013 whereby the Bank deemed this event to constitute a change in control, as defined in the loan agreement. The Company disagrees with the Bank’s interpretation and believes the claims by the bank are without merit. Although the Company currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on the Company’s financial statements, these matters are subject to inherent uncertainties and management’s views of these matters may change in the future.

 

F-20
 

  

NOTE 11 – SUBSEQUENT EVENTS

 

Authorized Shares

 

In June 2015, the board of directors approved an increase in the Company’s authorized shares from 500,000,000 to 2,500,000,000, which was effected in October 2015. As a result, the remaining shares of Super Voting Preferred Stock were converted into Common Stock of the Company and the Super Voting Preferred Stock ceased to be a designated series of the Company’s preferred stock.

 

Letter of Intent

 

On October 21, 2015, the Company entered into a Binding Letter of Intent (the “LOI”) with SM Funding Group, Inc. (“SM Funding”), W-Net Fund I, L.P., and Steve Saleen, pursuant to which the parties agreed to the terms of certain financing transactions with the Company.

 

Under the terms of the LOI, the Company and SM Funding will enter into a definitive purchase agreement whereby SM Funding or its affiliates will purchase from the Company senior convertible secured notes (the “Senior Notes”) in the aggregate amount of up to $2,000,000, but not less than $1,000,000, with an initial advance of $1,000,000 occurring within 7 business days after the execution of the LOI. The Company has received aggregate advances of approximately $600,000 under the LOI. The Senior Notes will have a term of 12 months, bear interest at a rate of 12% per annum, and will be, at the holder’s option, convertible into shares of preferred stock (“Preferred Stock”), to be issued by the Company in the Offering described below. The Senior Notes will be secured by all of the Company’s assets and will be senior to the Company’s current outstanding convertible debt held by existing 3% Note holders, but will not be senior to the Company’s senior secured note payable to Citizens Business Bank.

 

The Company will also offer to SM Funding or its affiliates that are accredited investors, in a private placement, up to $10,000,000 (the “Target Amount”) of Preferred Stock (the “Offering”), provided that the Offering may close for minimum proceeds of $8,000,000 (the “Minimum Amount”), including the conversion of the principal and interest under the Senior Notes. Upon completion of the Offering at the Target Amount, SM Funding Group will collectively and beneficially own 60.9% of the Company, the existing 3% Note and 7% Note holders will beneficially own 26.1% of the Company, Steve Saleen will beneficially own 10% of the Company (excluding a warrant to purchase 5% of the Company’s outstanding shares of Common Stock), and all other stockholders will beneficially own 3% of the Company.

 

The LOI may be terminated by mutual written consent of the Company and SM Funding, upon written notice from SM Funding that the results of its due diligence investigation are not satisfactory, or upon written notice by any party to the other parties if the financing under the Senior Notes in the amount of at least $1,000,000 has not been completed within 7 business days following the execution of the LOI.

 

F-21
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion summarizes the significant factors affecting the operating results, financial condition and liquidity and cash flows of Saleen Automotive, Inc. and subsidiaries for the three and six months ended September 30, 2015 and 2014. The discussion and analysis that follows should be read together with the financial statements of Saleen Automotive, Inc. and subsidiaries and the notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements regarding the use of working capital, anticipated growth strategies and the development of and applications for new technology; factors that may affect our operating results; statements concerning our customers and expansion of our customer base; statements concerning new products; statements related to future economic conditions or performance; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” or “plan,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, our ability to successfully achieve profitability and positive cash flows from operations, our ability to raise additional funds required to continue our operations and meet our planned business objectives, the dilutive impact of the sale of equity securities to obtain needed additional financing, the potential issuance of shares or securities convertible into or exchangeable for shares that would result in a change of control of our company in connection with a financing transaction, the impact of changes in demand for our products, our success with new product development, our success with current dealers and our ability to expand our dealer base, our ability to maintain or grow our market share, our ability to obtain Ford Mustang, Chevrolet Camaro, Dodge Challenger and Tesla Model S platform vehicles, our effectiveness in managing development and manufacturing processes, and the other risks as set forth under “Part I, Item 1A – Risk Factors” which are included in our Report on Form 10-K for the year ended March 31, 2015 as filed on July 14, 2015. These forward-looking statements represent our judgment as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

General Overview

 

We design, develop, manufacture and sell high performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by manufacturers (Ford, Chevrolet, Dodge and Tesla)) of OEM American sports and electric vehicles and the production of high performance USA-engineered sports cars. Saleen-branded products include a line of high performance and upgraded muscle and electric cars, automotive aftermarket specialty parts and lifestyle accessories. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it. Muscle cars are any of a group of American-made 2-door sports coupes with powerful engines designed for high performance driving. We are also planning to develop an American supercar. The term supercar describes an expensive (approximately $250,000 or more), limited production, fast or powerful (capable of reaching speeds in excess of 180 miles per hour) sports car with a centrally located engine.

 

3
 

 

Our customers worldwide include muscle and high performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture production, and consumers in the luxury supercar and motorsports market. We plan to develop a network of company-owned branded stores to complement our existing retail dealer locations.

 

We utilize automobile manufacturers Ford, Chevrolet, Dodge and Tesla platform vehicles for our high performance and electric vehicle production. All aftermarket parts and accessory products are engineered and manufactured exclusively by us. Our main retail outlets for our products are authorized Ford, Chevrolet, Dodge and exotic car dealers.

 

We plan to operate as a global high performance automotive brand and expand our production, sales and marketing operations extensively within the markets of the USA and into multiple international markets. In March 2014, we entered into an agreement to distribute the full collection of Saleen automobiles in China. We also plan to open our own retail outlets, market our expertise in specialist engineering and design services to third party clients, and introduce our next generation American supercar.

 

Merger

 

On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the then outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of our Common Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our Common Stock (on a fully-diluted basis) was owned, collectively, by Saleen (including 341,943 shares of our Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of our Common Stock, issued to Saleen pursuant to an Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors. On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January 2014, we effected an increase in the number of our common shares authorized to 500,000,000 and all the remaining shares of Super Voting Preferred Stock were converted into our Common Stock and the Super Voting Preferred Stock ceased to be a designated series of our preferred stock.

 

Critical Accounting Policies

 

Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management are contained starting on page 31 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 as filed on July 14, 2015.

 

4
 

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

Our revenue, operating expenses, and net loss for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 were as follows:

 

   For the Three months ended       Percentage 
   September 30,       Change 
   2015   2014   Change   Inc. (Dec.) 
Revenue, net  $627,187   $866,524   $(239,337)   (28)%
                     
Costs of goods sold   587,355    769,990    (182,635)   (24)%
Gross profit   39,832    96,534    (56,702)   (59)%
Operating expenses                    
Research and development   37,827    250,130    (212,303)   (85)%
Sales and marketing   192,127    443,767    (251,640)   (57)%
General and administrative   458,046    792,062    (334,016)   (42)%
Depreciation and Amortization   31,330    63,806    (32,476)   (51)%
Total operating expenses   719,330    1,549,765    (830,435)   (54)%
Loss from operations   (679,498)   (1,453,231)   773,733    (53)%
Other income (expenses)                    
Interest expense   (300,034)   (571,748)   271,714    (48)%
Private placement costs       (85,882)   85,882    (100)%
Gain on extinguishment of derivative liability   13,508        13,508     
Change in fair value of derivative liabilities   140,986    27,156    113,830    419%
Net Loss  $(825,038)  $(2,083,705)  $1,258,667    (60)%

 

Revenues: Revenue consists of sales of high performance vehicles and aftermarket retail parts. Our revenue from high performance muscle car vehicles generally includes the base chassis (Mustang, Camaro or Challenger), on which we normally obtain a minimal to no margin, and production conversion of the base Mustang, Camaro, Challenger and Tesla Model S chassis into a Saleen high performance vehicle. Parts represent aftermarket retail sales of Saleen lifestyle accessories and Saleen-branded products and automotive aftermarket specialty parts sold to our base of Saleen automotive vehicle enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to the owners of Ford Mustangs, Chevrolet Camaros and Dodge Challengers.

 

Total revenues for the three months ended September 30, 2015 were $627,187, a decrease of $239,337 or 28% from $866,524 for the three months ended September 30, 2014. The decrease in revenues was primarily related to lower chassis revenue, as more dealers during the three months ended September 30, 2015 versus the same period in the prior year opted to obtain and send to us the chassis rather than us having to procure the chassis. For chassis we procure, we record the related revenue and cost of the chassis with minimal to no margin. In addition, Ford’s change from the 2014 to the 2015 Mustang represented a major model change requiring us to make significant design and tooling modifications to our Saleen Mustang for which we experienced delays in obtaining tooling and other parts such as brakes and superchargers. During the same period in the prior year, Ford’s change from the 2013 to 2014 Mustang model year was minimal requiring minor changes and supply of parts was not disruptive. This was offset somewhat by higher volume of vehicles sold and increase in revenue from sales of aftermarket retail parts.

 

Cost of Goods Sold: Cost of goods sold consists of five major categories: base chassis, material, overhead, labor and purchased process services. Chassis costs relate to the purchased Ford Mustang, Chevrolet Camaro or Dodge Challenger vehicles in which we are the primary obligor. Material cost relates to the purchase of conversion parts used in the production of our high performance vehicles, and procurement of aftermarket parts, which are manufactured by third party suppliers using our proprietary tools and molds developed by us. Overhead costs include costs associated with manufacturing support, shop and warehouse supplies and expenses, small tools and equipment and other related warehouse and production costs. Our labor costs include the cost of personnel related to the production of our high performance vehicles and logistics of warehousing and shipping our aftermarket parts. Purchased process services related to the subcontracting of specific manufacturing processes to outside contractors, such as paint.

 

Total costs of goods sold for the three months ended September 30, 2015 were $587,355, a decrease of $182,635 or 24% from $769,990 of costs of goods sold for the three months ended September 30, 2014. The decrease was primarily attributable to the lower chassis costs, as dealers opted to obtain and send to us the chassis rather than us procuring the chassis on their behalf. This was offset somewhat by higher purchases of aftermarket parts due to increase in revenue from sales of aftermarket retail parts.

 

5
 

 

Gross Margin: Gross Margin from the sale of vehicles and parts decreased $56,702 to a margin of $39,832 for the three months ended September 30, 2015 from a gross margin of $96,534 for the three months ended September 30, 2014. Excluding a one-time charge of $62,500 incurred during the three months ended September 30, 2015, gross margin remained relatively consistent with the same period in the prior year. On a percentage basis and excluding this one time charge, gross margin was 16% for the three months ended September 30, 2015 versus 11% for the three months ended September 30, 2014. The increase in gross margin percentage was mainly related to lower chassis revenues.

 

Research and Development Expenses: Research and development expenses are expensed as incurred and represent engineering and design salaries and benefits and costs incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes.

 

Research and development expenses decreased by $212,303, or 85%, to $37,827 during the three months ended September 30, 2015 from $250,130 for the three months ended September 30, 2014. The decrease was primarily due to lower headcount and less expenses related to outside services along with lower non-cash stock based compensation expense.

 

Sales and Marketing Expense: Sales and marketing expenses relate to sales and marketing salaries and benefits, including our regional sales representatives, and costs incurred to promote our existing and new products, such as attending car shows and promotion through other media outlets, along with new car sales expenses such as commissions and incentives, and costs related to investor relations.

 

Sales and marketing expenses decreased by $251,640, or 57%, to $192,127 for the three months ended September 30, 2015 from $443,767 for the three months ended September 30, 2014. The decrease was primarily related to lower non-cash stock based compensation; lower commissions due to less volume of car sales; and lower public relation expenses.

 

General and Administrative Expense: General and administrative expenses include expenses for administrative salaries, including executive, finance/accounting, information personnel and administrative support staff and benefits. Other general and administrative costs also include occupancy costs of our facilities, travel and entertainment, auto, insurance, stock compensation, other office support costs and professional fees, including outside accounting/audit, legal, and investor fund raising advisory services.

 

General and administrative expenses decreased by $334,016, or 42%, to $458,046 for the three months ended September 30, 2015 from $792,062 for the three months ended September 30, 2014. The decrease was primarily comprised of lower non-cash stock based compensation expense; lower professional fees; lower general and administrative salaries as a result of headcount reduction; lower auto, travel and entertainment costs due to less car show expenses; and decrease in other expenses primarily resulting from our efforts to reduce costs.

 

Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $32,476, or 51%, to $31,330 for the three months ended September 30, 2015 from $63,806 for the three months ended September 30, 2014.

 

Interest Expense: Interest expense decreased by $271,714 or 48% to $300,034 for the three months ended September 30, 2015 from $571,748 for the three months ended September 30, 2014. The decrease was primarily attributable to lower non-cash interest expense incurred during the three months ended September 30, 2015 as compared to same period in the prior year resulting from our increase in convertible notes.

 

Private Placement Costs: In conjunction with the issuance of 8% convertible notes in September 2014, the conversion features of such notes was bifurcated from the notes and recorded as derivative liability. The Company recorded a $241,882 derivative liability with an offsetting charge to valuation discount of $156,000 with the remainder of $85,882 recorded as an expense included in other income (expense) during the three months ended September 30, 2014. We incurred no similar expense during the three months ended September 30, 2015.

 

6
 

 

Gain on Extinguishment of Derivative Liability: Gain on the extinguishment of derivative liability related to gains of $13,508 during the three months ended September 30, 2015 as a result of the extinguishment of derivative liabilities resulting from certain note holders’ request to convert their convertible debt to stock in accordance with the terms of their convertible notes. We incurred no similar expense during the three months ended September 30, 2014.

 

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of certain convertible notes issued by us was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of these notes are characterized as a derivative liability, which is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the three months ended September 30, 2015 and 2014, we recorded a gain of $140,986 and $271,156, respectively, due to the change in the fair value of our derivative liability.

 

Net Loss: Net loss decreased by $1,258,667, or 60%, to a net loss of $825,038 for the three months ended September 30, 2015 from a net loss of $2,083,705 for the three months ended September 30, 2014. The decrease in net loss was primarily attributable to a gain of $113,830 from the change in fair value of derivative liability; $85,882 of private placement costs incurred in the prior year; and $271,714 decrease in interest expense. This decrease in net loss was also positively impacted by $773,733 decrease in loss from operations related to $830,435 decrease in operating expenses offset by decrease of $56,702 in gross margin.

 

Six Months Ended September 30, 2015 Compared to Six Months Ended September 30, 2014

 

Our revenue, operating expenses, and net (loss) income for the six months ended September 30, 2015 as compared to the six months ended September 30, 2014 were as follows:

 

   For the Six months ended       Percentage 
   September 30,       Change 
   2015   2014   Change   Inc. (Dec.) 
Revenue, net  $2,219,177   $2,563,901   $(344,724)   (13)%
                     
Costs of goods sold   1,839,180    2,201,275    (362,095)   (16)%
Gross profit   379,997    362,626    17,371    5%
Operating expenses                    
Research and development   149,684    412,436    (262,752)   (64)%
Sales and marketing   402,658    999,392    (596,734)   (60)%
General and administrative   1,075,255    1,898,063    (822,808)   (43)%
Depreciation and Amortization   57,630    109,715    (52,085)   (47)%
Total operating expenses   1,685,227    3,419,606    (1,734,379)   (51)%
Loss from operations   (1,305,230)   (3,056,980)   1,751,750    (57)%
Other income (expenses)                    
Interest expense   (822,900)   (1,014,801)   191,901    (19)%
Private placement costs and loss on debt extinguishment   (27,760)   (85,882)   58,122    (68)%
Recognition of derivative liability   (174,437)            
Gain on extinguishment of derivative liability   658,051    2,586,732    (1,928,681)   (75)%
Change in fair value of derivative liabilities   466,145    2,473,210    (2,007,065)   (81)%
Net (Loss) Income  $(1,206,131)  $902,279   $(2,108,410)   (234)%

 

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Revenues: Revenue consists of sales of high performance vehicles and aftermarket retail parts. Our revenue from high performance muscle car vehicles generally includes the base chassis (Mustang, Camaro or Challenger), on which we normally obtain a minimal to no margin, and production conversion of the base Mustang, Camaro, Challenger and Tesla Model S chassis into a Saleen high performance vehicle. Parts represent aftermarket retail sales of Saleen lifestyle accessories and Saleen-branded products and automotive aftermarket specialty parts sold to our base of Saleen automotive vehicle enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to the owners of Ford Mustangs, Chevrolet Camaros and Dodge Challengers.

 

Total revenues for the six months ended September 30, 2015 were $2,219,177, a decrease of $344,724 or 13% from $2,563,901 for the six months ended September 30, 2014. The decrease in revenues was mainly related to lower chassis revenue, as more dealers during the six months ended September 30, 2015 versus the same period in the prior year opted to obtain and send to us the chassis rather than us having to procure the chassis, and lower conversion revenue due to product mix of vehicles sold as volume remained consistent on a year over year basis. For chassis we procure, we record the related revenue and cost of the chassis with minimal to no margin. In addition, Ford’s change from the 2014 to the 2015 Mustang represented a major model change requiring us to make significant design and tooling modifications to our Saleen Mustang for which we experienced delays in obtaining tooling and other parts such as brakes and superchargers. During the same period in the prior year, Ford’s change from the 2013 to 2014 Mustang model year was minimal requiring minor changes and supply of parts was not disruptive. The decrease was offset somewhat by an increase in revenue from sales of our aftermarket retail parts.

 

Cost of Goods Sold: Cost of goods sold consists of five major categories: base chassis, material, overhead, labor and purchased process services. Chassis costs relate to the purchased Ford Mustang, Chevrolet Camaro or Dodge Challenger vehicles in which we are the primary obligor. Material cost relates to the purchase of conversion parts used in the production of our high performance vehicles, and procurement of aftermarket parts, which are manufactured by third party suppliers using our proprietary tools and molds developed by us. Overhead costs include costs associated with manufacturing support, shop and warehouse supplies and expenses, small tools and equipment and other related warehouse and production costs. Our labor costs include the cost of personnel related to the production of our high performance vehicles and logistics of warehousing and shipping our aftermarket parts. Purchased process services related to the subcontracting of specific manufacturing processes to outside contractors, such as paint.

 

Total costs of goods sold for the six months ended September 30, 2015 were $1,839,180, a decrease of $362,095 or 16% from $2,201,275 of costs of goods sold for the six months ended September 30, 2014. The decrease was primarily attributable to the decrease in the volume of vehicle sales during the six months ended September 30, 2015 as compared to the same period in the prior year.

 

Gross Margin: Gross margin from the sale of vehicles and parts increased $17,371 to a margin of $379,997 for the six months ended September 30, 2015 from a gross margin of $362,626 for the six months ended September 30, 2014. Excluding a one-time charge of $62,500 incurred during the six months ended September 30, 2015, gross margin increased $79,871 over the same period in the prior year. On a percentage of revenue basis and excluding this one time charge, gross margin was 20% for the six months ended September 30, 2015 versus 14% for the three months ended September 30, 2014. The increase in gross margin percentage was mainly related to lower chassis revenues.

 

The increase in gross margin reflects the sales mix as compared to the same period in the prior year.

 

Research and Development Expenses: Research and development expenses are expensed as incurred and represent engineering and design salaries and benefits and costs incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes.

 

Research and development expenses decreased by $262,752, or 64%, to $149,684 during the six months ended September 30, 2015 from $412,436 for the six months ended September 30, 2014. The decrease is primarily due to lower headcount and less expenses related to outside services along with lower non-cash stock based compensation expense.

 

Sales and Marketing Expense: Sales and marketing expenses relate to sales and marketing salaries and benefits, including our regional sales representatives, and costs incurred to promote our existing and new products, such as attending car shows and promotion through other media outlets, along with new car sales expenses such as commissions and incentives, and costs related to investor relations.

 

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Sales and marketing expenses decreased by $596,734, or 60%, to $402,658 for the six months ended September 30, 2015 from $999,392 for the six months ended September 30, 2014. The decrease was primarily related to lower car show expenses, as we incurred higher car show expenses in the prior year related to the 50th anniversary celebration of the Ford Mustang, and lower non-cash stock based compensation.

 

General and Administrative Expense: General and administrative expenses include expenses for administrative salaries, including executive, finance/accounting, information personnel and administrative support staff and benefits. Other general and administrative costs also include occupancy costs of our facilities, travel and entertainment, auto, insurance, stock compensation, other office support costs and professional fees, including outside accounting/audit, legal, and investor fund raising advisory services.

 

General and administrative expenses decreased by $822,808, or 43%, to $1,075,255 for the six months ended September 30, 2015 from $1,898,063 for the six months ended September 30, 2014. The decrease is primarily comprised of lower professional fees; lower general and administrative salaries as a result of headcount reduction; lower auto, travel and entertainment costs due to less car show expenses; lower non-cash stock based compensation; and decrease in other expenses primarily resulting from our efforts to reduce costs.

 

Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $52,085, or 47%, to $57,630 for the six months ended September 30, 2015 from $109,715 for the six months ended September 30, 2014.

 

Interest Expense: Interest expense decreased by $191,901 or 19% to $822,900 for the six months ended September 30, 2015 from $1,014,801 for the six months ended September 30, 2014. The decrease is primarily attributable to lower non-cash interest expense incurred during the six months ended September 30, 2015 as compared to same period in the prior year resulting from our increase in convertible notes.

 

Recognition of Derivative Liability: In June 2015, we determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of certain of our Notes. As a result, we recognized a derivative liability of $119,929 in June 2015. In addition, as a result of the assignment of a convertible note to a separate note holder, we recognized a derivative liability of $54,508 in June 2015. We did not incur a comparable expense during the six months ended September 30, 2014.

 

Private Placement Costs and loss on debt extinguishment: In conjunction with a note holder agreeing to assign their then outstanding note and principal balance of $49,240 to a separate note holder in exchange for the new note holder’s payment of $77,000 to the original note holder, we recorded $27,760 as loss on extinguishment during the six months ended September 30, 2015 representing the increase in principal balance from $49,240 to $77,000. In conjunction with the issuance of 8% convertible notes in September 2014, the conversion features of such notes was bifurcated from the notes and recorded as derivative liability. The Company recorded a $241,882 derivative liability with an offsetting charge to valuation discount of $156,000 with the remainder of $85,882 recorded as private placement cost during the six months ended September 30, 2014.

 

Gain on Extinguishment of Derivative Liability: Gain on the extinguishment of derivative liability related to gains of $658,051 during the six months ended September 30, 2015 as a result of the extinguishment of derivative liabilities resulting from certain note holders’ request to convert their convertible debt to stock in accordance with the terms of their convertible notes. During the six months ended September 30, 2014, we recognized a gain of $2,586,732 related to the extinguishment of a derivative liability related to our 3% Senior Secured Convertible Notes.

 

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of certain convertible notes issued by us was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of these notes are characterized as a derivative liability, which is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the six months ended September 30, 2015, we recorded a gain of $466,145 due to the change in the fair value of our derivative liability. During the six months ended September 30, 2014, we recorded a $2,473,210 gain due to the change in the derivative liability from issuance date of which $2,446,054 related to the June 17, 2014 amendment.

 

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Net Loss: Net loss increased by $2,108,410, or 234%, to a net loss of $1,206,131 for the six months ended September 30, 2015 from a net income of $902,279 for the six months ended September 30, 2014. The increase in net loss was primarily attributable to decrease of $1,928,681 in gain on extinguishment of derivative liability; $2,007,065 decrease in change in fair value of derivative liability; and $174,437 recognition of a derivative liability offset somewhat by $191,900 decrease in interest expense. This increase in net loss was offset by $1,751,750 decrease in loss from operations related to $1,734,379 decrease in operating expenses along with $17,371 improvement in gross profit.

 

Liquidity and Capital Resources

 

Our working capital deficiency as of September 30, 2015 and March 31, 2015 are follows:

 

   As of
September 30, 2015
   As of
March 31, 2015
 
Current Assets  $272,013   $910,794 
Current Liabilities   (7,207,930)   (7,961,458)
Net Working Capital Deficiency  $(6,935,917)  $(7,050,664)

 

Summary of cash flow activity for the nine months ended September 30, 2015 and December 31, 2013 are as follows:

 

Cash Flows

 

   Six months   Six months 
   Ended   Ended 
   September 30, 2015   September 30, 2014 
Net cash used in Operating Activities  $(164,273)  $(1,714,196)
Net cash used in Investing Activities   (8,811)   (224,859)
Net cash provided by Financing Activities   45,000    446,427 
Decrease in Cash during the nine month period   (128,084)   (1,492,628)
Cash, Beginning of Period   143,083    1,499,889 
Cash, End of Period   14,999    7,216 

 

Our principal sources of liquidity have been obtained from cash provided by financing, including through the private issuance of notes and sale of equity securities, gross margin achieved from the sales of high performance vehicles and aftermarket parts along with customer deposits received in advance of shipment. Our principal uses of cash have been primarily for production and purchase of parts for our high performance vehicles; expansion of operations; development of new products and improvement of existing products; expansion of marketing efforts to promote our products and company; and capital expenditures primarily for tooling. We anticipate that significant additional expenditures will be necessary to develop and expand our automotive assets before sufficient and consistent positive operating cash flows will be achieved including sufficient cash flows to service existing debt. Additional funds will be needed in order to continue production and operations, obtain profitability and to achieve our objectives. As such, our cash resources are insufficient to meet our current operating expense and production requirements and planned business objectives beyond the date of this Form 10-Q filing without additional financing.

 

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As further presented in our condensed consolidated financial statements and related notes, during the six months ended March 31, 2015, we incurred a loss from operations of $1,305,230 and utilized $164,273 of cash in operations. We also had a stockholders’ deficit and working capital deficit of $9,945,225 and $6,935,917, respectively as of September 30, 2015, and as of that date, we owed $708,368 in past unpaid payroll and other taxes, which we have an installment agreement with the IRS whereby we are paying $10,000 a month; $947,636 of outstanding notes payable were in default; $1,232,250 of accounts payable was greater than 90 days past due; and $384,704 is owed on past due rent. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our condensed consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of our indebtedness. In addition, we currently do not maintain product liability and general insurance. These factors raise substantial doubt about our ability to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve revenues at a level that will achieve profitably and generate positive cash flows from operations. At September 30, 2015, we had cash on hand in the amount of $14,999 and we are not generating funds from operations to cover current production and operating expenses and we will have to obtain additional financing. As such, we will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for production and to operate our business through and beyond the date of this Form 10-Q filing. To this end and as further discussed in Note 10 to our condensed consolidated financial statements and Form 8-K filed on October 21, 2015, in October 2015 we entered into a Binding Letter of Intent with SM Funding Group, Inc. (“SM Funding”) whereby SM Funding will purchase from us up to $2 million but not less than $1 million of senior convertible secured notes. In addition, we agreed to offer SM Funding or its affiliates up to $10 million of Preferred Stock. As of the date of this Form 10-Q filing, we have received $600,000 under this Letter of Intent. However, no assurance can be given that we will complete the financing transactions with SM Funding and no assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions and covenants on our operations, in the case of debt financing or cause substantial dilution for our stockholders (including the issuance of securities sufficient to result in a change in control of our company), in the case of convertible debt and equity financing.

 

At September 30, 2015, we had a working capital deficit of $6,935,917 compared to a working capital deficit of $7,050,664 at March 31, 2015. The decrease in working capital deficit was primarily related to decrease in current liabilities of $753,528 primarily due to $949,759 decrease in derivative liability; $309,091 decrease in customer deposits; $203,449 decrease in accounts payables with related parties; and $79,130 decrease in notes payable. This decrease was offset by a decrease of $638,781 in current assets primarily due to $488,556 decrease in inventory and $128,084 decrease in cash.

 

Net cash used in operating activities for the fiscal year ended March 31, 2015 totaled $164,273 after the net loss of $1,206,131 was decreased by $41,909 of non-cash charges and by $999,949 in net changes to the working capital accounts. This compares to net cash used in operating activities for the six months ended September 30, 2014 of $1,714,196 after net income of $902,279 was decreased by $3,741,340 in non-cash charges and increased by $954,864 in net changes to the working capital accounts.

 

Net cash used in investing activities was $8,811 for six months ended September 30, 2015 as compared to $224,859 of cash used in investing activities for the six months ended September 30, 2014.

 

Net cash provided by financing activities for the six months ended September 30, 2015 was $45,000, which was comprised of $45,000 of principal payments on notes payable to related parties offset by $90,000 note payable received from a related party. This compares to net cash provided by financing activities for the six months ended September 30, 2014 of $446,427, of which $406,000 came through the issuance of our unsecured convertible notes, $177,500 came from the issuance of 1,183,344 shares of our common stock and $150,000 came from issuances of notes to related parties. Cash of $294,573 was used to pay principal on long-term notes.

 

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Defaults on Notes and Accounts Payable

 

As of September 30, 2015, we were in default on $947,636 of unsecured notes payable; $1,232,250 of accounts payable was past 90 days outstanding; and $384,704 was past due on rent for our facilities. While we are in discussions with the note holders and vendors to arrange extended payment terms, the initiation of collection actions by these note holders and vendors may severely affect our ability to execute on our business plan and operations. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of our indebtedness.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2015, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, and notwithstanding that there were no accounting errors with respect to our financial statements, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of that date to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our disclosure controls or internal controls over financial reporting were designed to provide only reasonable assurance that such disclosure controls or internal control over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential future conditions. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

 

Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

 

Changes in Internal Control

 

During the six months ended September 30, 2015, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

12
 

 

PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

 

Exhibit Number   Description of Exhibit
     
10.1   Binding Letter of Intent executed October 21, 2015, among Saleen Automotive, Inc., SM Funding Group, Inc., W-Net Fund I, L.P., and Steve Saleen. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-55236) filed with the Securities and Exchange Commission on October 27, 2015.
     
10.2   Subordination Agreement dated October 21, 2015, among W-Net Fund I, L.P., other holders of Saleen Automotive’s secured debt, Saleen Automotive, Inc. and SM Funding Group, Inc, and Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K (File No. 000-55236) filed with the Securities and Exchange Commission on October 27, 2015.
     
31.1   Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
     
31.2   Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
     
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS**   XBRL Instance.
101.SCH**   XBRL Taxonomy Extension Schema.
101.CAL**   XBRL Taxonomy Extension Calculation.
101.DEF**   XBRL Taxonomy Extension Definition.
101.LAB**   XBRL Taxonomy Extension Labels.
101.PRE**   XBRL Taxonomy Extension Presentation.

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Saleen Automotive, Inc.
  a Nevada Corporation
   
Date: November 23, 2015 /S/ Steve Saleen
  Steve Saleen
  Chief Executive Officer

 

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