Attached files
file | filename |
---|---|
EX-32.1 - Saleen Automotive, Inc. | ex32-1.htm |
EX-31.1 - Saleen Automotive, Inc. | ex31-1.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 Quarterly Period Ended September 30, 2019
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-55236
SALEEN AUTOMOTIVE, INC.
(Exact name of registrant issuer as specified in its charter)
Nevada | 45-2808694 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
2735 Wardlow Road, Corona, California | 92882 | |
(Address of Principal Executive Offices) | (Zip Code) |
(714) 400-2121
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
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 [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | [ ] | Accelerated filer | [ ] | |
Non-accelerated filer | [X] | Smaller reporting company | [X] | |
Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of registrant’s common stock outstanding as of June 1, 2020 was 24,536,963.
SALEEN AUTOMOTIVE, INC.
FORM 10-Q
INDEX
Page | ||||
PART I – FINANCIAL INFORMATION | ||||
ITEM 1. | Condensed Consolidated Financial Statements: | |||
a) | Condensed Consolidated Balance Sheets (Unaudited) | F-1 | ||
b) | Condensed Consolidated Statements of Operations (Unaudited) | F-2 | ||
c) | Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited) | F-3 | ||
d) | Condensed Consolidated Statements of Cash Flows (Unaudited) | F-4 | ||
e) | Notes to Condensed Consolidated Financial Statements (Unaudited) | F-5 | ||
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 | ||
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 9 | ||
ITEM 4. | Controls and Procedures | 9 | ||
PART II - OTHER INFORMATION | ||||
ITEM 1 | Legal Proceedings | 10 | ||
ITEM 1A | Risk Factors | 10 | ||
ITEM 2 | Unregistered sales of equity securities and use of proceeds | 10 | ||
ITEM 3 | Defaults upon senior securities | 10 | ||
ITEM 4 | Mine safety disclosures | 10 | ||
ITEM 5 | Other information | 10 | ||
ITEM 6 | Exhibits | 11 | ||
SIGNATURES | 12 |
2 |
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2019 | March 31, 2019 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 4,151,805 | $ | 3,374,234 | ||||
Accounts receivable (including $0 as of September 30, 2019 and $133,742 as of March 31, 2019 due from related party) | 634,755 | 136,387 | ||||||
Inventory | 264,084 | 108,498 | ||||||
Other current assets | 14,591 | - | ||||||
Total Current Assets | 5,065,235 | 3,619,119 | ||||||
Property and equipment, net | 1,353,003 | 650,353 | ||||||
Intellectual property | 1,482,304 | - | ||||||
Right-of-use assets | 4,001,449 | - | ||||||
Security deposits | 70,780 | 70,800 | ||||||
TOTAL ASSETS | $ | 11,972,771 | $ | 4,340,272 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 125,603 | $ | 351,726 | ||||
Accrued compensation | 455,887 | 632,689 | ||||||
Customer deposits | 99,692 | 511,081 | ||||||
Accrued liabilities | 2,745,134 | 167,554 | ||||||
Due to related parties | 61,672 | 519,364 | ||||||
Income taxes payable | 1,128,985 | 503,000 | ||||||
Notes payable | 87,179 | 224,159 | ||||||
Convertible note payable, past due | 100,000 | 100,000 | ||||||
Accrued interest on notes payable | 37,131 | 37,131 | ||||||
Contract liabilities | 1,323,696 | 1,068,150 | ||||||
Deferred rent | - | 263,955 | ||||||
Operating lease liabilities | 246,473 | - | ||||||
Accrued warranties | 20,000 | 20,000 | ||||||
Total Current Liabilities | 6,431,452 | 4,398,809 | ||||||
Operating lease liabilities – non-current | 3,755,622 | - | ||||||
Total Liabilities | 10,187,074 | 4,398,809 | ||||||
Commitments and Contingencies (Note 11) | ||||||||
Stockholders’ Equity (Deficit) | ||||||||
Preferred stock; $0.001 par value; 1,000,000 shares authorized; 667 Series B shares issued and outstanding as of September 30, 2019 and March 31, 2019 | 1 | 1 | ||||||
Common stock; $0.001 par value; 100,000,000 shares authorized; 24,536,963 issued and outstanding as of September 30, 2019 and March 31, 2019 | 24,537 | 24,537 | ||||||
Additional paid-in capital | 36,406,842 | 36,406,842 | ||||||
Accumulated deficit | (34,645,683 | ) | (36,489,917 | ) | ||||
Total Stockholders’ Equity (Deficit) | 1,785,697 | (58,537 | ) | |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 11,972,771 | $ | 4,340,272 |
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
Services | $ | 9,869,690 | $ | 3,162,136 | $ | 21,102,053 | $ | 4,179,011 | ||||||||
Products | 1,955,949 | 658,297 | 2,652,169 | 1,201,626 | ||||||||||||
Royalties | 32,656 | - | 39,623 | 4,043 | ||||||||||||
Total revenues, net | 11,858,295 | 3,820,433 | 23,793,845 | 5,384,680 | ||||||||||||
Costs of revenues | ||||||||||||||||
Services | 7,465,787 | 944,332 | 16,622,538 | 1,439,618 | ||||||||||||
Products | 1,637,783 | 742,828 | 2,035,929 | 1,149,132 | ||||||||||||
Total costs of revenues | 9,103,570 | 1,687,160 | 18,658,467 | 2,588,750 | ||||||||||||
Gross profit | 2,754,725 | 2,133,273 | 5,135,378 | 2,795,930 | ||||||||||||
Operating expenses | ||||||||||||||||
Advertising, sales, and marketing | 251,058 | 167,805 | 682,488 | 294,951 | ||||||||||||
General and administrative | 1,276,530 | 1,344,326 | 2,051,785 | 2,294,811 | ||||||||||||
Research and development | - | 16,964 | - | 24,321 | ||||||||||||
Depreciation and amortization | 37,168 | 10,843 | 97,724 | 38,530 | ||||||||||||
Total operating expenses | 1,564,756 | 1,539,938 | 2,831,997 | 2,652,613 | ||||||||||||
Income from operations | 1,189,969 | 593,335 | 2,303,381 | 143,317 | ||||||||||||
Other expense | ||||||||||||||||
Interest and financing costs | 101,011 | 7,809 | 102,109 | 17,880 | ||||||||||||
Total other expense | 101,011 | 7,809 | 102,109 | 17,880 | ||||||||||||
Net income before income tax expense | 1,088,958 | 585,526 | 2,201,272 | 125,437 | ||||||||||||
Income tax expense | 297,903 | - | 620,993 | - | ||||||||||||
Net income | $ | 791,055 | $ | 585,526 | $ | 1,580,279 | $ | 125,437 | ||||||||
Deemed dividend related to beneficial conversion feature of Series B Preferred Stock | - | - | - | 92,000 | ||||||||||||
Net income attributable to common stockholders | $ | 791,055 | $ | 585,526 | $ | 1,580,279 | $ | 33,437 | ||||||||
Net income per share attributable to common stockholders: | ||||||||||||||||
Basic | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.00 | ||||||||
Diluted | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.00 | ||||||||
Shares used in computing net income per share attributable to common stockholders: | ||||||||||||||||
Basic | 24,536,963 | 24,536,963 | 24,536,963 | 24,536,963 | ||||||||||||
Fully diluted | 27,036,953 | 27,036,953 | 27,036,953 | 27,036,953 |
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-2 |
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
For the Six Months Ended September 30, 2019
Additional | ||||||||||||||||||||||||||||
Preferred Shares | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||
Balance at March 31, 2019 | 667 | $ | 1 | 24,536,963 | $ | 24,537 | $ | 36,406,842 | $ | (36,489,917 | ) | $ | (58,537 | ) | ||||||||||||||
Cumulative-effect of change in accounting policy (ASC 842) | - | - | - | - | - | 263,955 | 263,955 | |||||||||||||||||||||
Net income | - | - | - | - | - | 789,224 | 789,224 | |||||||||||||||||||||
Balance at June 30, 2019 | 667 | 1 | 24,536,963 | 24,537 | 36,406,842 | (35,436,738 | ) | 994,642 | ||||||||||||||||||||
Net income | - | - | - | - | - | 791,055 | 791,055 | |||||||||||||||||||||
Balance at September 30, 2019 | 667 | $ | 1 | 24,536,963 | $ | 24,537 | $ | 36,406,842 | $ | (34,645,683 | ) | $ | 1,785,697 |
Saleen Automotive, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
For the Six Months Ended September 30, 2018
Additional | ||||||||||||||||||||||||||||
Preferred Shares | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||
Balance at March 31, 2018 | - | $ | - | 24,536,963 | $ | 24,537 | $ | 36,006,843 | $ | (39,001,178 | ) | $ | (2,969,798 | ) | ||||||||||||||
Net loss | - | - | - | - | - | (460,089 | ) | (460,089 | ) | |||||||||||||||||||
Balance at June 30, 2018 | - | - | 24,536,963 | 24,537 | 36,006,843 | (39,461,267 | ) | (3,429,887 | ) | |||||||||||||||||||
Cash proceeds from sales of Series B Preferred Stock and warrants in private placement to related party | 667 | 1 | - | - | 399,999 | - | 400,000 | |||||||||||||||||||||
Beneficial conversion feature of Series B Preferred Stock | - | - | - | - | 92,000 | - | 92,000 | |||||||||||||||||||||
Deemed dividend on beneficial conversion feature of Series B Preferred Stock | - | - | - | - | (92,000 | ) | - | (92,000 | ) | |||||||||||||||||||
Net income | - | - | - | - | - | 585,526 | 585,526 | |||||||||||||||||||||
Balance at September 30, 2018 | 667 | $ | 1 | 24,536,963 | $ | 24,537 | $ | 36,406,842 | $ | (38,875,741 | ) | $ | (2,444,361 | ) |
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-3 |
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,580,279 | $ | 125,437 | ||||
Adjustments to reconcile net income to net cash provided by (used) in operating activities | ||||||||
Depreciation | 97,724 | 38,530 | ||||||
Income tax expense | 620,993 | - | ||||||
Operating lease payments | (57,397 | ) | - | |||||
Amortization of right of use assets | 58,043 | - | ||||||
Changes in Assets and Liabilities | ||||||||
Accounts receivable | (498,368 | ) | 36,093 | |||||
Inventory | (155,586 | ) | (22,768 | ) | ||||
Other current assets | (14,571 | ) | (185,400 | ) | ||||
Accounts payable | (226,123 | ) | (729,632 | ) | ||||
Accrued compensation | (176,802 | ) | (83,658 | ) | ||||
Accrued interest on notes payable | - | (24,618 | ) | |||||
Customer deposits | (411,389 | ) | (172,160 | ) | ||||
Accrued liabilities | 2,582,572 | 58,776 | ||||||
Contract liabilities | 255,546 | 650,614 | ||||||
Net cash provided by (used in) operating activities | 3,654,921 | (308,786 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of property and equipment | (800,374 | ) | (52,812 | ) | ||||
Purchase of S7 Supercars asset | (1,482,304 | ) | - | |||||
Net cash (used in) provided by investing activities | (2,282,678 | ) | (52,812 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from sale of Series B Preferred Stock and warrants in private placement to related party | - | 400,000 | ||||||
Due to related parties, net | (457,692 | ) | (103,956 | ) | ||||
Repayment of notes payable and advances to related party | - | (200,000 | ) | |||||
Repayment of notes payable | (136,980 | ) | (49,000 | ) | ||||
Net cash (used in) provided by financing activities | $ | (594,672 | ) | $ | 47,044 | |||
Net change in cash | 777,571 | (314,554 | ) | |||||
Cash at beginning of the period | 3,374,234 | 523,120 | ||||||
Cash at end of the period | $ | 4,151,805 | $ | 208,566 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Cash paid during the period for interest | $ | - | $ | 42,497 | ||||
Fair value of beneficial conversion feature of Series B Preferred Stock | $ | - | $ | 92,000 |
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-4 |
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2019, which has been derived from audited consolidated financial statements, and the accompanying interim condensed consolidated financial statements as of September 30, 2019 and for the three-months and six-months ended September 30, 2019 and 2018, have been prepared by management pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the financial condition, results of operations and cash flows of Saleen Automotive, Inc. (the “Company”) as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three-months and six months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending March 31, 2020, or for any other interim period during such year. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC, although the Company believes that the disclosures made are adequate to make the information not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the SEC on October 4, 2019.
Description of the Company
Saleen Automotive, Inc. (the “Company”) is an original equipment manufacturer (“OEM”) of high-performance vehicles (“Saleen Original”) that are built from the ground up. The Company also designs, develops, manufactures, and sells high-performance vehicles built from base chassis of major American automobile manufacturers (“Saleen Signature Cars”). The Company also provides engineering, development, and design consulting services on a project basis for automotive manufacturers worldwide. The Company currently has customers worldwide, including muscle and high-performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture productions, and consumers in the luxury supercar and motorsports markets.
Saleen Automotive, Inc. was incorporated under the laws of the State of Nevada on June 24, 2011. On May 23, 2013, the Company entered into a merger agreement with Saleen California Merger Corporation, Saleen Florida Merger Corporation, Saleen Automotive, Inc., and SMS Signature Cars (“SMS”) (collectively, the “Saleen Entities”), and Steve Saleen (“Saleen”). The merger closed on June 26, 2013, and the Saleen Entities merged with the Company and approximately 93% of the Company’s common stock was owned, collectively, by Saleen and the former holders of the outstanding capital stock of Saleen Automotive. The transaction was accounted for as a recapitalization with the Saleen Entities deemed the acquiring companies for accounting purposes, and the Company deemed the legal acquirer. In June 2013, the Company amended its articles of incorporation to change its name to Saleen Automotive, Inc.
On December 19, 2017, the Company effected a 1-for-2,000 reverse stock split of its common stock (“reverse stock split”) following approval by the Company’s Board of Directors and stockholders. All common stock share and per-share amounts for all periods presented in these condensed consolidated financial statements have been adjusted retroactively to reflect the reverse stock split.
The Company’s common stock is not currently quoted or traded on any market. Prior to deregistration on October 13, 2017, the Company’s common stock traded on the OTC Pink Sheets under the symbol “SLNN.” We intend to apply for quotation of our common stock on the OTCQB, although there is no assurance that our application will be accepted.
F-5 |
Saleen OEM
The Company manufacturers the Saleen S7 supercar (“S7”), a limited production supercar with a 1,500-horsepower engine, in the Company’s production facility in Corona, California. The S7 was previously produced under a joint venture agreement with S7 Supercars, LLC (“S7 Supercars”), a related party owned by a significant shareholder, which owned the “S7” name and related intellectual property and assets. Under the agreement, S7 Supercars provided the chassis and all other costs to build the vehicle, and the Company was entitled to a fee for engineering and manufacturing services, plus an additional markup for these services. Separately, upon the sale of the vehicle to the end-users, the Company became entitled to a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars. On May 31, 2019, the Company entered into an asset purchase agreement with S7 Supercars, LLC pursuant to which S7 Supercars sold all of its assets, chassis and other automotive parts relating to the manufacture of the S7 supercar, and related intellectual property, to the Company for an initial purchase price of $1,165,000 comprised of a cash payment of $800,000, and the elimination of an accounts receivable balance of $365,000 owed to us by S7 Supercars. Furthermore, the amount of accounts receivable balance eliminated increased by $317,304 to $682,304 increasing the final purchase price to $1,482,304. Given that the purchase assets did not qualify as a business under the definition of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 805 Business Combinations, the Company recognized this transaction as the purchase of an intangible asset consisting of the “S7” tradename. In the previous quarter, the Company had classified the purchased assets as fixed assets and subsequently reclassified these assets as an intangible asset on the accompanying condensed consolidated balance sheet. In addition, the Company is required to pay S7 Supercars, LLC up to four additional payments of $50,000 each, upon sales by the Company of S7 supercars within the two-year period following the closing, subject to the conditions provided for in the purchase agreement. Pursuant to the purchase agreement, the joint venture agreement between the Company and S7 Supercars was terminated, except for indemnification obligations of the Company thereunder. However, the Company does not intend to sell S7s to customers but instead will manufacture S7s for promotional purposes to build its brand. See Note 7 for more details.
The Company is also in the process of completing the engineering, design, and certification of a new high-performance sports car, the Saleen 1 (or “S1”), under an engineering development and design contract with Jiangsu Saleen Automotive Technology Co. (“JSAT”), an unaffiliated corporation located in China which holds the intellectual property rights related to the S1 developed under the agreement and licenses the Saleen name from Saleen Motors International, an un-related third-party.
Saleen Signature Cars
The Company’s Saleen Signature Cars are built from base chassis of major American automobile manufacturers, including Ford Mustangs, Tesla Model S vehicles, and Ford trucks. The Company is a specialist in vehicle design, engineering and manufacturing focusing on the mass customization (the process of customizing automobiles that are mass produced by manufacturers) of 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.
Liquidity
The Company cannot give assurance that it can maintain its cash balances or limit its cash consumption and maintain sufficient cash balances for its planned operations. Also, future business demands may lead to cash utilization at levels greater than recently experienced or anticipated. While we believe that our existing cash balances will be sufficient to fund our currently planned level of operations and investment activity, we may require additional financing to fund our planned future operations if we encounter unanticipated difficulties, or if our estimates of the amount of cash necessary to operate our business prove to be wrong, and we use our available financial resources faster than we currently expect. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Subject to the foregoing, management and the Board of Directors have adopted a budget that we believe will allow the Company sufficient capital and liquidity to fund its operations for at least one year from the date these condensed consolidated financial statements are issued.
In response to the COVID-19 pandemic which impacted operations in early 2020, we have reduced manufacturing schedules to balance production with our demand and our supply chain constraints. We have also taken actions to reduce overhead to mitigate the negative impacts of a reduced manufacturing schedule. While we currently expect any negative impact on sales to be temporary during the COVID-19 pandemic, the actions to contain the pandemic and treat its impacts, and the effects on our operations are highly uncertain and cannot be predicted at this time.
F-6 |
Consolidation Policy
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Saleen Signature Cars, a California corporation, and Saleen Sales Corporation, a California corporation. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated 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, warranty reserves, and the valuation of deferred tax assets. Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenue using ASC 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes
(1) identifying the contracts or agreements with a customer,
(2) identifying performance obligations in the contract or agreement,
(3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and
(5) recognizing revenue as each performance obligation is satisfied.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company’s revenue consists of primarily from the sale of its Signature Cars and services provided under its engineering and design, and development consulting services contracts. See Note 2 for further discussion of Revenues.
Cash
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. As of September 30, 2019 and March 31, 2019, the Company did not have cash equivalents. From time to time, including as of September 30,2019, the Company’s cash account balances exceed the balances as covered by federally insured limits. The Company uses high quality financial institutions and believes the risk of loss due to exceeding federally insured limits to be low.
Accounts Receivable
The Company evaluates the collectability of its accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The Company recognizes an allowance for doubtful accounts to ensure trade receivables are not overstated due to collectability. For the most part, the Company generally requires advance payments for its Signature Cars and credit card payments for parts and merchandise. As of September 30, 2019 and March 31, 2019, the Company deemed an allowance for doubtful accounts was not required against its receivables.
F-7 |
Inventory
Inventory are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis for automobile parts. Inventory consists of parts for the Company’s Signature Car models. Management has determined that no inventory reserve is required because automobile parts are utilized consistently through the manufacturing process and has a high turnover.
September 30, 2019 | March 31, 2019 | |||||||
Automobile parts | $ | 147,623 | $ | 108,498 | ||||
Finished goods | 116,461 | - | ||||||
Total inventory | $ | 264,084 | $ | 108,498 |
Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. The cost of property and equipment is depreciated or amortized on a straight-line basis over the following estimated useful lives:
Computer equipment and software | 3-7 years | |
Tooling | 3-7 years | |
Furniture and fixtures | 5-7 years | |
Automobiles and trailer | 5-7 years | |
Machinery and equipment | 3-7 years | |
Leasehold improvement | Shorter of the lease term or useful life |
Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The Company did not record an impairment loss for the three and six months ended September 30, 2019 and September 30, 2018.
The Company’s museum collection of automobiles held for exhibition purposes is not depreciated, as the estimated useful life of the museum collection is so long so that depreciation would not be necessary, and the residual value of such vehicles may exceed their acquisition cost. The Company’s museum collection is currently being exhibited in automobile museums around the country to further market the Company’s brand.
F-8 |
Customer Deposits
Sales orders received from customers of Signature Cars generally require customers to make deposits at the time of signing the related sales order. The Company receives either partial or full deposits related to Signature Car sales orders in advance of shipment and is generally paid in full prior to the shipment of the finished Signature Cars. Customer deposits as of September 30, 2019 and March 31, 2019 comprised of funds received in advance of shipment and amounted to $99,692 and $511,081, respectively, which will be recorded as revenue upon shipment of finished Signature Cars and satisfaction of the revenue recognition requirements discussed above.
Warranty Policy
The Company provides a three-year or 36,000 miles New Vehicle Limited Warranty for its Signature Cars. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen high performance cars. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles.
Advertising, Sales, and Marketing Costs
Advertising, sales, and marketing costs are expensed as incurred and are included in sales and marketing expenses on the accompanying condensed consolidated statement of operations. During the six-months ended September 30, 2019 and 2018, advertising, sales and marketing expenses were $682,488 and $294,951, respectively. During the three-months ended September 30, 2019 and 2018, advertising, sales and marketing expenses were $251,058 and $167,805, respectively.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits or that future deductibility is uncertain.
Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in accordance with the FASB ASC topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). 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.
F-9 |
The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued liabilities, and customer deposits. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. The carrying values of notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
Net Income per Share
Basic income per common share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common stock for all potential dilutive common shares outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants and the conversion of convertible notes payable.
The following table sets forth the computation of basic and diluted net income per common share for the three-months and six months ended:
Three
Months Ended September 30, | Six
Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to common stockholders | $ | 791,055 | $ | 585,526 | $ | 1,580,279 | $ | 33,437 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding, basic | 24,536,963 | 24,536,963 | 24,536,963 | 24,536,963 | ||||||||||||
Adjustment for dilutive effects of warrants | 1,666,663 | 1,666,663 | 1,666,663 | 1,666,663 | ||||||||||||
Adjustment for Series B convertible preferred shares | 666,660 | 666,660 | 666,660 | 666,660 | ||||||||||||
Adjustment for dilutive effects of convertible note payable | 166,667 | 166,667 | 166,667 | 166,667 | ||||||||||||
Weighted average number of common shares outstanding, fully diluted | 27,036,953 | 27,036,953 | 27,036,953 | 27,036,953 | ||||||||||||
Net income per common share, basic | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.00 | ||||||||
Net income per common share, fully diluted | $ | 0.03 | $ | 0.02 | $ | 0.06 | $ | 0.00 |
The following table sets forth the number of potential common shares excluded from the calculations of net loss per diluted share because their inclusion would be anti-dilutive:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Outstanding options to purchase common stock | 2,602 | 2,602 | 2,602 | 2,602 | ||||||||||||
Total | 2,602 | 2,602 | 2,602 | 2,602 |
Significant Concentrations
Sales to China-based customer, JSAT (see Note 2) comprised 68% and 76% of revenues for the three-months ended September 30, 2019 and 2018, respectively. Sales to China-based customer, JSAT comprised 78% and 71% of revenues for the six-months ended September 30, 2019 and 2018, respectively.
F-10 |
Two customers comprised 88% of accounts receivable as of September 30, 2019. One customer, a related party, comprised 98% of accounts receivable as of March 31, 2019.
The Company utilizes automobile platform vehicles for its Signature Cars from major manufacturers including Ford and Tesla and generally receives the base vehicle platforms directly from dealers. The Company enters into sourcing agreements with individual car dealerships but does not have supply agreements with the major manufacturers. Accordingly, the Company’s supply of base vehicle platforms may be limited to the allocation allotted from its source dealerships.
Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11, and ASU 2018-20 (collectively, Topic 842). Topic 842 will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. Topic 842 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods. The Company adopted Topic 842 using the modified retrospective approach, using a date of initial application of April 1, 2019. The adoption of this standard on April 1, 2019 resulted in the Company recording right-of-use assets and operating lease liabilities on its condensed consolidated balance sheets as of that date in the amounts of $4,059,492 each. The adoption of this standard did not have a significant effect on the amount of lease expense recognized by the Company.
Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are on our condensed consolidated balance sheet as of September 30, 2019.
We have elected not to present short-term leases on the condensed consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because our leases do not provide an implicit rate of return, we used our incremental borrowing rate of 10% based on the information available at adoption date in determining the present value of lease payments.
The cumulative effect of the changes made to our condensed consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows:
Balances at March 31, 2019 | Adjustments from Adoption of New Lease Standard | Balances at April 1, 2019 | ||||||||||
Assets | ||||||||||||
Right-of-use assets | - | 4,059,492 | 4,059,492 | |||||||||
Liabilities | ||||||||||||
Deferred rent liability | 263,955 | (263,955 | ) | - | ||||||||
Operating lease liability – current | - | 246,473 | 246,473 | |||||||||
Operating lease liability – non-current | - | 3,813,019 | 3,813,019 | |||||||||
Equity | ||||||||||||
Accumulated deficit | $ | (36,489,917 | ) | 263,955 | $ | (36,225,962 | ) |
See Note 11 for details regarding the Company’s operating leases.
F-11 |
Recent accounting pronouncements are not believed by management to have a material impact on the Company’s present or future condensed consolidated financial statements. During the three-months ended September 30, 2019, there have been no other changes to the Company’s significant accounting policies as described in the Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue from the following sources:
Revenue from services
The Company recognizes revenue from its engineering and design contracts and consulting services contracts as the services are provided and accepted by the customer over time. Contract liabilities are recorded for any payments received for services yet to be completed. Under the terms of its engineering design and development contract, costs are invoiced as incurred plus a markup.
Revenue from Saleen S1
The Company provides engineering, design, and development services to Jiangsu Saleen Automotive Technology Co., Ltd (“JSAT”) an unaffiliated corporation located in China, under a consulting agreement entered into in September 2016, and an engineering services contract entered into in April 2018. Under the engineering services contract, the Company agreed to provide engineering, design, and development services for the S1 and an SUV to be distributed in the United States and China. The Company entered into two addendums on the engineering services contract, one dated September 29, 2019 (the “September Addendum”) and the other dated December 20, 2019 (the “December Addendum”). Management evaluates contract modifications based on the terms of the modification and determined the appropriate accounting under ASC 606 which results in one of three outcomes: 1) a modification of the original contract with cumulative catch-up adjustment; 2) a modification of the original contract with the change being accounted for prospectively; or 3) a separate and new contract. The September Addendum increased the scope of the contract, price and added distinct deliverables and performance obligations. Based on the terms of September Addendum, management has determined to account for this contract as a completely separate and distinct contract. The December Addendum increased the price but did not add any distinct deliverables, and thus based on management’s evaluation has been accounted for as a modification of the original contract with the change being accounted for prospectively. The Company expects to complete the engineering, designing and developing of the S1 in the calendar year 2020. Under the terms of the engineering services contract, as amended, the total contract amount is approximately $31,605,000. An early termination fee based on a percentage of the remaining unbilled contract amount will apply in the event the contract is cancelled by JSAT.
The Company also entered into a Saleen S1 Cup Vehicle Development and Production Agreement (“Cup Agreement”) with JSAT in November 2018, as amended in May 2019. Based on management’s evaluation of the amendment, the amendment clarified the terms of the original Cup Agreement and was accounted for as a modification of the original contract. Under the Cup Agreement, the Company agreed to provide engineering, design, and development services for the Saleen S1 racing vehicle, including prototype development and assembly of racing vehicles to be used in the S1 Cup Racing Series in the United States and China. The Cup Agreement provides for aggregate revenues to the Company of approximately $15,631,000.
F-12 |
In addition to these two agreements, the Company provides ad hoc consulting related to JSAT. Furthermore, for logistical expediency, JSAT sometimes requests that the Company pay for some of JSAT’s expenses, and subsequently JSAT reimburses the Company. These reimbursement of expenses to the Company have no mark-up and totaled $2,309,503 and $0 for the three-months ended September 30, 2019 and 2018, respectively, and $4,309,503 and $0 for the six-months ended September 30, 2019 and 2018, respectively.
During the three-months ended September 30, 2019 and 2018, the Company recognized revenue of $2,403,666 and $3,848,927, respectively, related to its completed performance under the engineering services contract. During the three-months ended September 30, 2019 and 2018, the Company recognized revenue of $7,456,024 and $0, respectively, related to its completed performance under the Cup Agreement. During the three-months ended September 30, 2019 and 2018, the Company recognized revenue of $0 and $162,048, respectively, of consulting fees related to JSAT.
During the six-months ended September 30, 2019 and 2018, the Company recognized revenue of $2,977,666 and $3,130,611, respectively, related to its completed performance under the engineering services contract. During the six-month periods ended September 30, 2019 and 2018, the Company recognized revenue of $17,295,719 and $0, respectively, related to its completed performance under the Cup Agreement. During the three-months ended September 30, 2019 and 2018, the Company recognized revenue of $0 and $162,048, respectively, of consulting fees related to JSAT.
Revenue from Saleen S7
Prior to the May 31, 2019 purchase of the S7 Supercars assets, the Company recognized revenue for engineering and manufacturing services as these services were performed. Separately, upon the sale by S7 Supercars of an S7 to the end user, the Company recognized a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars when such sale was completed, the title transferred to the buyer, and the buyer has accepted the vehicle. Prior to May 31, 2019 and the purchase of the S7 Supercars assets, the Company recognized revenue from S7 Supercars of $410,535 during the first fiscal quarter ending June 30, 2019. See Note 7 for more details.
Revenue from Products
Revenue from sale of Signature Cars
The Company recognizes revenue from the sale of its Signature Cars when control is transferred which generally occurs upon shipment or delivery of the Signature Cars from its manufacturing facility to the destination specified by the customer. Signature Cars revenue represents the amount of consideration which the Company expects to be entitled in exchange for the delivery of the modified vehicle. The Company determines whether delivery has occurred based on when title transfers and the risks of ownership have transferred to the buyer, which usually occurs when the Company places the cars on the carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured and generally collects deposits before work is started and final payments are received prior to shipment. Except for warranties, the Company has no post-sales obligations nor does the Company accept returns. During the three-months ended September 30, 2019 and 2018, the Company recognized revenue of $1,388,018 and $645,986, respectively, from the sale of Signature cars. During the six-months ended September 30, 2019 and 2018, the Company recognized revenue of $1,872,123 and $1,164,673, respectively, from sale of Signature cars.
Revenue from Saleen S7 Product Sales
Subsequent to the S7 supercars asset purchase agreement, the Company records the sale of S7 cars upon shipment and delivery of the completed S7 car to the buyer. During the three-months ended September 30, 2019, the Company recognized revenue of $556,300, from the sale of S7 vehicle. During the six-months ended September 30, 2019, the Company recognized revenue of $764,433, from the sale of S7 vehicle.
F-13 |
Contract Liabilities
As of September 30, 2019 and March 31, 2019, the Company’s contract liabilities balances included advances received prior to revenue being recognized of $1,323,696 and $1,068,150, respectively related to the engineering services agreement for JSAT. For service contracts where the performance obligation is not completed, contract liabilities is recorded for any payments received in advance of the performance obligation being completed.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following as of September 30, 2019 and March 31, 2019:
September 30, 2019 | March 31, 2019 | |||||||
Tooling | $ | 1,023,092 | $ | 937,554 | ||||
Automobiles and trailers | 223,030 | 167,063 | ||||||
Museum collection automobiles | 422,466 | - | ||||||
Machinery and equipment | 264,001 | 100,233 | ||||||
Furniture and fixtures | 156,711 | 147,960 | ||||||
Computer equipment and software | 90,729 | 89,246 | ||||||
Leasehold improvements | 142,091 | 79,691 | ||||||
2,322,120 | 1,521,747 | |||||||
Accumulated depreciation and amortization | (969,117 | ) | (871,394 | ) | ||||
Total Property and Equipment | $ | 1,353,003 | $ | 650,353 |
Depreciation and amortization expense were $37,168 and $10,843 for the three-months ended September 30, 2019 and 2018, respectively. Depreciation and amortization expense were $97,724 and $38,530 for the six-month periods ended September 30, 2019 and 2018, respectively.
NOTE 4 – NOTES PAYABLE
Notes payable consisted of the following as of September 30, 2019 and March 31, 2019:
September 30, 2019 | March 31, 2019 | ||||||||
(1) | Settlement agreement for senior secured note | $ | - | $ | 40,000 | ||||
(2) | Unsecured note payable, interest at 5% per annum, due on demand | 63,753 | 67,753 | ||||||
(3) | Unsecured note payable, interest at 10% per annum, due July 27, 2017, past due | - | 83,980 | ||||||
(4) | Payment plan with credit card issuer | 23,426 | 32,426 | ||||||
Total notes payable | $ | 87,179 | $ | 224,159 |
(1) | In December 2016, the Company entered into a settlement agreement with Citizens Business Bank for a $400,000 loan, was initially issued in 2009, and secured by all assets of the Company. On May 17, 2019, the balance of the loan was paid off. |
(2) | In June 2016, the Company entered into an unsecured note payable with its landlord for past due rent of $389,922, covering the period from September 2013 to June 2016. The note bears interest at 5% per annum and is due on demand. As of September 30, 2019, the landlord has waived interest charges and has not sent any request for interest to be paid on the debt. |
(3) | The note bears interest at 10% per annum, and for the three-month period ended September 30, 2019, the lender waived interest charges. As of September 30, 2019, the Company has paid this balance in full. |
(4) | Per a settlement reached with the credit card issuer, the Company makes monthly payments of $1,500 against prior balances due. |
F-14 |
NOTE 5 – CONVERTIBLE NOTES PAYABLE, PAST DUE
As of September 30, 2019 and March 31, 2019, the Company had one unsecured convertible note outstanding for $100,000. The note bears interest at 7% per annum, was due in March 2017 and is currently in default. The note is convertible into 166,667 shares of common stock.
NOTE 6 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of September 30, 2019 and March 31, 2019:
September 30, 2019 | March 31, 2019 | |||||||
Accrued expenses related to JSAT contracts | $ | 2,215,608 | $ | - | ||||
Deferred vendor consideration | - | $ | 150,000 | |||||
Other current payables | 529,526 | 17,544 | ||||||
$ | 2,745,134 | $ | 167,544 |
NOTE 7 – RELATED PARTY TRANSACTIONS
Jeffrey Kraws, Top Hat Capital, and Crystal Research
As of September 30, 2019 and March 31, 2019, the Company owed Top Hat Capital and Crystal Research, whose co-founder and Managing Partner, Jeffrey Kraws, is a director of the Company, $61,672 for investment advisor and research services provided to the Company.
S7 Supercars, LLC
The Company served as the OEM for the Saleen S7, a limited production supercar. Prior to May 31, 2019, the S7 was produced under a joint venture with S7 Supercars, LLC, an entity that is controlled by affiliates of two of the Company’s principal shareholders. Under the agreement, S7 Supercars provided the chassis and all other costs to build the vehicle, and the Company was entitled to a fee for engineering and manufacturing services, plus an additional markup for these services. The agreement did not meet the scope for joint venture or equity method accounting under ASC 323-30-15, as neither party could make decisions for the other party and a formal entity was not created. The Company recognized revenue as these engineering and manufacturing services were performed. The cars produced under this agreement were owned by S7 Supercars until title passed to the ultimate buyer. Separately, upon the sale of the vehicle to the end users, the Company became entitled to a fee of approximately 33% of the net profit from the sale of the vehicle by S7 Supercars when such sale was completed, the title transferred to the buyer, and the buyer accepted the vehicle.
During the three and six month periods ended September 31, 2018, the Company recognized revenue from S7 Supercars of $379,969 and $288,597, respectively, for engineering and manufacturing services provided to S7 Supercars, LLC. Prior to May 31, 2019 and the purchase of the S7 Supercars assets, the Company recognized revenue from S7 Supercars of $410,535 during the first fiscal quarter ending June 30, 2019. As of September 30, 2019 and March 31, 2019, the Company had accounts receivable due from S7 Supercars of $0 and $133,742, respectively. As of September 30, 2019 and March 31, 2019, deposits of $0 and $100,000 from S7 Supercars were included in customer deposits, respectively.
On May 31, 2019, the Company entered into an asset purchase agreement with S7 Supercars, LLC pursuant to which S7 Supercars sold all of its assets, consisting of chassis and other automotive parts relating to the manufacture of the S7 supercar, and related intellectual property, to the Company for an initial purchase price of $1,482,304 comprised of a cash payment of $800,000, and the elimination of an accounts receivable balance of $682,304 owed to us by S7 Supercars. Based on management’s analysis, the S7 purchase did not meet the definition of a “business” under ASC 805-10-55, the entire purchase price of $1,482,304 was allocated to the intellectual property purchased, which is a reclassification of the prior fixed assets balance. In addition, the Company is required to pay S7 Supercars, LLC up to four additional payments of $50,000 each, upon sales by the Company of S7 supercars within the two-year period following the closing, subject to the conditions provided for in the purchase agreement. However, the Company does not intend to sell S7s to customers but instead will manufacture S7s for promotional purposes to build its brand. Pursuant to the purchase agreement, the joint venture agreement between the Company and S7 Supercars was terminated, except for indemnification obligations of the Company thereunder.
F-15 |
NOTE 8 – INCOME TAXES
For the three and six months-months ended September 30, 2019 and 2018, a reconciliation of the effective income tax rate to the U.S. statutory rate was as follows:
Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Tax expense at the U.S. statutory income tax | 21 | % | 21 | % | 21 | % | 21 | % | ||||||||
State tax net of federal tax benefit | 7 | 7 | 7 | 7 | ||||||||||||
Other | (1 | ) | - | - | - | |||||||||||
Increase (decrease) in the valuation allowance | - | (28 | ) | - | (28 | ) | ||||||||||
Effective tax rate | 27 | % | - | % | 28 | % | - | % |
In assessing the realizability of the net deferred tax assets, the Company considered all relevant positive and negative evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The realization of the gross deferred tax assets was dependent on several factors, including the generation of sufficient taxable income prior to the expiration of the net operating loss carryforwards. As of September 30, 2019 and March 31, 2019, the Company believed that it is more likely than not that the Company’s deferred income tax assets will not be realized. As such, there is a full valuation allowance against the net deferred tax assets as of September 30, 2019 and March 31, 2019.
F-16 |
As of September 30, 2019, the Company generated regular tax federal net operating losses (“NOLs”) of approximately $19.2 million. The Company’s ability to realize tax benefit from the NOLs is subject to Internal Revenue Code Section 382 (“Section 382”), which generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. It was previously estimated that the Company could not use the NOLs. For the three and six month period ended September 30, 2019, the Company did not benefit from or use any NOLs. However, management will be undergoing a study in order to determine if the NOLs are usable for future use which could result in a change to the valuation allowance in future periods.
The Company’s operations are based in California and it is subject to Federal and California state income tax. Tax years after 2014 are open to examination by Federal and state tax authorities.
NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)
Series B Preferred Stock
In August 2018, the Company filed a Certificate of Designation designating the rights and restrictions of its Series B Preferred Stock. Of the 1,000,000 preferred shares authorized at a par value of $0.001, 1,000 were designated as Series B Preferred Stock. The Series B Preferred Stock is convertible at the option of the holder into 1,000 common shares per one share of Series B Preferred Stock. The Series B Preferred Stock provides for liquidation and dividend rights on an as-if-converted basis into equivalent common shares. The Series B Preferred Stockholders have voting rights with the common shareholders on an as-if-converted basis. The holders of Series B Preferred Stock have the right, voting as a separate class, following a “Change of Control” (as defined), to elect a majority of the members of the Company’s Board of Directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors.
In September 2018, the Company issued 666.66 units of Series B Preferred Stock and warrants for $600 per unit, for total cash proceeds of $400,000 to a related party. Each unit consisted of one share of Series B Preferred Stock that is convertible into 1,000 shares of the Company’s common stock, and a three-year warrant to purchase 500 shares of the Company’s common stock at an exercise price of $.70 per share. A total of 666.66 shares of Series B Preferred Stock convertible into 666,666 shares of common stock and warrants exercisable into 333,330 shares of common stock were issued. The warrants have a term of three years and vested immediately. The aggregate value of the warrants issued was $92,000 and were valued using the Black-Scholes-Merton option valuation model with the following assumptions: risk-free interest rate of 2.83%; dividend yield of 0%; and volatility of 100. The Company also determined that the Series B Preferred Stock contained a beneficial conversion feature of $92,000 which was recorded as a deemed dividend.
A portion of the proceeds from the sale of the Series B Preferred Stock was allocated to the warrants based on their relative fair value, which amounted to $92,000, using the Black Scholes option pricing model. The assumptions used in the Black Scholes model were as follows: risk-free interest rate of 2.83%; dividend yield of 0%; and volatility rate of 100%. The $92,000 has been recorded as a deemed dividend to the preferred shareholders and as a charge to additional paid-in capital (as there is a deficit in the Company’s retained earnings).
Issuance of Common Stock
During the three and six months ended September 30, 2019 and 2018, there were no shares of common stock issued.
F-17 |
Options
Omnibus Incentive Plan
In December 2013, the Company’s board of directors approved the 2013 Omnibus Incentive Plan (the “Plan”), which is administered by the Company’s board of directors or a committee thereof (the “Administrator”) as set forth in the Plan. The Plan provides for the granting of stock options, stock appreciation rights, restricted share awards, and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an option, other than with respect to substitute awards, shall not be less than 100% of the fair market value of the Company’s Common Stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). A total of 14,153 shares of common stock have been authorized for issuance and reserved under the Plan. The Plan was approved by the Company’s stockholders on December 11, 2013.
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 | Average Intrinsic Value | Weighted Average Remaining Contractual Term (in years) | |||||||||||||
Outstanding at April 1, 2018 | 2,602 | $ | 108 | $ | — | 6.50 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Cancelled | — | — | — | — | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Outstanding at September 30, 2018 | 2,602 | 108 | — | 6.50 | ||||||||||||
Outstanding at April 1, 2019 | 2,602 | 108 | — | 5.50 | ||||||||||||
Granted | — | — | — | — | ||||||||||||
Cancelled | — | — | — | — | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Outstanding at September 30, 2019 | 2,602 | $ | 108 | $ | — | 5.0 |
The aggregate intrinsic value shown in the table above represents the difference between the fair market value of the Company’s Common Stock per share on September 30, 2019 and the exercise price of each option.
During the six-months ended September 30, 2019 and 2018, the Company recorded no stock-based compensation expense related to stock options.
F-18 |
Warrants
Warrant activity is set forth below:
Number of Shares | Weighted Average Exercise Price per Share | Average Intrinsic Value | Weighted Average Remaining Contractual Term (in years) | |||||||||||||
Outstanding at April 1, 2018 | 1,333,333 | $ | 0.60 | - | 3.75 | |||||||||||
Granted | 333,330 | 0.70 | 3.00 | |||||||||||||
Cancelled | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Outstanding at September 30, 2018 | 1,666,663 | $ | 0.62 | - | 3.25 | |||||||||||
Outstanding at April 1, 2019 | 1,666,663 | $ | 0.62 | - | 2.67 | |||||||||||
Granted | - | - | - | - | ||||||||||||
Cancelled | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Outstanding at September 30, 2019 | 1,666,663 | $ | 0.62 | - | 2.17 |
In January 2018, warrants exercisable into 1,333,333 shares of common stock were issued by the Company in conjunction with the issuance of 1,333,333 shares of common stock. The warrants have a term of two years and an exercise price of $0.60 per share. In September 2018, warrants exercisable into 333,330 shares of common stock were issued by the Company in conjunction with the issuance of Series B Preferred Stock. The warrants have a term of three years and an exercise price of $.70 per share. The intrinsic value of the Company’s warrants was nil at September 30, 2019, March 31, 2019, and March 31, 2018.
NOTE 10 –ROYALTY REVENUE FROM INTELLECTUAL PROPERTY LICENSE
In June 2015, the Company entered into an Intellectual Property License Agreement with Saleen Motors International, LLC (“SMI”), an unrelated party and wholly owned subsidiary of GreenTech Automotive, Inc. The license agreement had an initial term of 10 years. As part of the license agreement, SMI advanced the Company $500,000. In March 2018, SMI filed for bankruptcy and the Company provided notice to SMI of immediate termination of the license agreement. Pursuant to the termination provisions provided in the license agreement, the Company recorded $478,000 as royalty revenue during the year ended March 31, 2018. The Company was later informed that SMI had in fact not filed for bankruptcy. In October 2019, the Company retracted the termination notice.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Facilities Leases
In January 2015, the Company entered into lease agreements for the lease of two buildings totaling approximately 76,000 square feet under non-cancellable operating leases (the “Leases”). The Leases were on a triple net basis and required aggregate monthly payments of approximately $45,000 with annual rent escalations as negotiated. The Leases covered the period from February 2015 through January 2018. In September 2017, the Company entered into amendments to the Leases to renew the lease terms for the period from February 1, 2018, through January 31, 2028 (the “New Leases”). The New Leases require monthly payments beginning at approximately $57,000 with annual rent escalations at a negotiated rate plus the usual additional triple net costs. The Company has also entered into a sublease agreement that requires monthly payments of $17,700 from the sub-lessee on a month-to-month basis which terminated in November 2018.
Since our leases do not provide an implicit rate of return, we used our incremental borrowing rate of 10% based on the information available at adoption date in determining the present value of lease payments.
F-19 |
The following table sets forth the recorded assets and liabilities related to the Company’s operating leases:
Balances at March 31, 2019 | Adjustments from Adoption of New Lease Standard | Balances at April 1, 2019 | ||||||||||
Assets | ||||||||||||
Right-of-use assets | - | 4,059,492 | 4,059,492 | |||||||||
Liabilities | ||||||||||||
Deferred rent liability | 263,955 | (263,955 | ) | - | ||||||||
Operating lease liability – current | - | 246,473 | 246,473 | |||||||||
Operating lease liability – non-current | - | 3,813,019 | 3,813,019 | |||||||||
Stockholders’ Equity (Deficit) | ||||||||||||
Accumulated deficit | $ | (36,489,917 | ) | 263,955 | $ | (36,225,962 | ) |
September 30, 2019 | March 31, 2019 | |||||||
Right-of-use asset | $ | 4,001,449 | $ | - | ||||
Deferred rent liability – current | $ | - | $ | 263,955 | ||||
Operating lease liabilities | 246,473 | $ | - | |||||
Operating lease liabilities – non-current | 3,755,622 | - | ||||||
Lease liabilities – total | $ | 4,002,095 | $ | 263,955 |
The contractual future maturities of the Company’s operating lease liabilities are as follows:
Fiscal Year | Lease
Commitment |
|||
2020 | $ | 428,153 | ||
2021 | 655,910 | |||
2022 | 675,587 | |||
2023 | 695,855 | |||
2024 | 716,731 | |||
Thereafter | 2,943,233 | |||
Total lease payments | 6,115,469 | |||
Less: Future interest expense | 2,113,374 | |||
Total | $ | 4,002,095 |
F-20 |
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 condensed consolidated financial statements as other current liabilities or accounts payable. The Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amount of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. The Company is not currently involved in any legal proceedings that could potentially have a material impact on its statement of operations.
NOTE 12 – SEGMENT REPORTING
Our Chief Executive Officer, as the chief operating decision maker (“CODM”), organizes the Company, manages resource allocations, and measures performance among two operating and reportable segments: (i) products and (ii) services. The products segment includes our signature cars, sales of S7 supercars and merchandises. The services segment includes engineering, development, design, and consulting services for JSAT, S7, and other customers.
The following table provides information about disaggregated revenue based on revenue by service lines and revenue by area:
Three-Months Ended September 30, | Six-Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue by service lines: | ||||||||||||||||
Services provided to JSAT | $ | 9,859,690 | $ | 2,923,151 | $ | 20,486,518 | $ | 3,848,927 | ||||||||
S7 agreement (related party) | - | 238,985 | 410,535 | 330,084 | ||||||||||||
Other | 10,000 | - | 205,000 | - | ||||||||||||
Services – total | 9,869,690 | 3,162,136 | 21,102,053 | 4,179,011 | ||||||||||||
Products | ||||||||||||||||
S7 Sales (non-related party) | 556,300 | - | 764,433 | - | ||||||||||||
Signature cars | 1,388,018 | 645,986 | 1,872,123 | 1,164,673 | ||||||||||||
Merchandise | 11,631 | 12,311 | 15,613 | 36,953 | ||||||||||||
Products – total | 1,955,949 | 658,297 | 2,652,169 | 1,201,626 | ||||||||||||
Royalties | 32,656 | - | 39,623 | 4,043 | ||||||||||||
Total revenue | $ | 11,858,295 | $ | 3,820,433 | $ | 23,793,845 | $ | 5,384,680 |
Three-Months Ended September 30, | Six-Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross profit | ||||||||||||||||
Services | $ | 2,403,903 | $ | 2,217,804 | $ | 4,479,515 | $ | 2,739,393 | ||||||||
Products | 318,166 | (84,531 | ) | 616,240 | 52,494 | |||||||||||
Total | $ | 2,722,069 | $ | 2,133,273 | $ | 5,095,755 | $ | 2,791,887 |
F-21 |
NOTE 13 – SUBSEQUENT EVENTS
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. Although the Company is not currently required to suspend all of its business under local or federal laws, the Company has allowed certain non-essential employees to work remotely. Nonetheless, the Company s faces certain risks caused by COVID-19, including, without limitation:
● | Interruptions of production due to supply chain disruptions; | |
● | Reduced customer demand due to the overall state of the economy; and | |
● | Delayed cash collections (most notably, from JSAT and automobile dealerships). |
All of the above will have a material adverse impact on the Company. While the disruption is currently expected to be temporary, there is uncertainty around the duration. Therefore, while we expect this matter to negatively impact our business, results of operations, and financial position, the extent of this impact cannot be reasonably estimated at this time. In the interim, the Company has furloughed some employees in expectation of reduced business and may consider other mitigating actions in the short-term.
In April 2020, the Company received a loan in the amount of approximately $894,000 (the “PPP Loan”) under the new Paycheck Protection Program legislation administered by the U.S. Small Business Administration. The proceeds of the PPP Loan must be used for payroll costs, lease payments on agreements before February 15, 2020 and utility payments under agreements before February 1, 2020. At least 60% of the proceeds must be used for payroll costs and certain other expenses, and no more than 40% on non-payroll expenses. Proceeds from the PPP Loan used by the Company for the approved expense categories will generally be fully forgiven by the lender if the Company satisfies applicable employee headcount and compensation requirements. The Company currently believes that a majority of the PPP Loan proceeds will qualify for debt forgiveness; however, there can be no assurance that we will qualify for forgiveness from the Small Business Administration until it occurs.
F-22 |
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 the Company for the three and six-months ended September 30, 2019 and 2018. You should read this discussion together with the condensed consolidated financial statements, related notes and other financial information included in this 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 the 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, 2019 as filed on October 4, 2019. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
The Company provides engineering, development, and design consulting services on a project basis for automotive manufacturers worldwide. The Company’s engineering, development and design consulting service portfolio includes projects for major American automobile manufacturers and international start-up. The Company is also an OEM of high-performance vehicles that are built from the ground up. The Company also designs, develops, manufactures, and sells high-performance vehicles built from base chassis of major American automobile manufacturers. The Company currently has customers worldwide, including muscle and high-performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture productions, and consumers in the luxury supercar and motorsports markets.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
For a description of the Company, the basis of presentation, and the Company’s critical accounting policies and estimates, refer to Note 1, Nature of Business and Basis of Presentation, to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
3 |
Results of Operations
Comparison of the Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018
Our revenue, operating expenses, and net income from operations for the three-month period ended September 30, 2019, as compared to the three-month period ended September 30, 2018, were as follows:
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | Percentage Change | ||||||||||||||||||||||
$ | % of Sales | $ | % of Sales | Change | Inc. (Dec.) | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Services | 9,869,690 | 83 | % | 3,162,136 | 83 | % | 6,707,554 | 212 | % | |||||||||||||||
Products, net | 1,955,949 | 16 | % | 658,297 | 17 | % | 1,297,652 | 197 | % | |||||||||||||||
Royalties | 32,656 | 0 | % | - | 0 | % | 32,656 | 100 | % | |||||||||||||||
Total revenues, net | 11,858,295 | 100 | % | 3,820,433 | 100 | % | 8,037,862 | 210 | % | |||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Services | 7,465,787 | 63 | % | 944,332 | 25 | % | 6,521,455 | 691 | % | |||||||||||||||
Products | 1,637,783 | 14 | % | 742,828 | 19 | % | 894,955 | 120 | % | |||||||||||||||
Total cost of revenues | 9,103,570 | 77 | % | 1,687,160 | 44 | % | 7,416,410 | 440 | % | |||||||||||||||
Gross profit | 2,754,725 | 23 | % | 2,133,273 | 56 | % | 621,452 | 29 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Advertising, sales, and marketing | 251,058 | 2 | % | 167,805 | 4 | % | 83,253 | 50 | % | |||||||||||||||
General and administrative | 1,276,530 | 11 | % | 1,344,326 | 35 | % | (67,796 | ) | -5 | % | ||||||||||||||
Research and development | - | 0 | % | 16,964 | 0 | % | (16,964 | ) | -100 | % | ||||||||||||||
Depreciation and amortization | 37,168 | 0 | % | 10,843 | 0 | % | 26,325 | 243 | % | |||||||||||||||
Total operating expenses | 1,564,756 | 13 | % | 1,539,938 | 40 | % | 24,818 | 2 | % | |||||||||||||||
Income from operations | 1,189,969 | 10 | % | 593,335 | 16 | % | 596,634 | 101 | % | |||||||||||||||
Other expense | ||||||||||||||||||||||||
Interest and financing costs | 101,011 | 1 | % | 7,809 | 0 | % | 93,202 | 1194 | % | |||||||||||||||
Total other expense | 101,011 | 1 | % | 7,809 | 0 | % | 93,202 | 1194 | % | |||||||||||||||
Net income before income tax expense | 1,088,958 | 9 | % | 585,526 | 15 | % | 503,432 | 86 | % | |||||||||||||||
Income tax expense | 297,903 | - | 0 | % | 297,903 | 100 | % | |||||||||||||||||
Net income | 791,055 | 7 | % | 585,526 | 15 | % | 205,529 | 35 | % | |||||||||||||||
Net income attributable to common shareholders | 791,055 | 7 | % | 585,526 | 15 | % | 205,529 | 35 | % |
4 |
Revenue
Revenue, net increased by approximately $8,037,000 (210%) to approximately $11,858,000 for the three-months ended September 30, 2019, compared to approximately $3,820,000 for the three-months ended September 30, 2018. The majority of the increase in revenue was attributable to increased revenue from the Cup Vehicle Development and Production Agreement (“Cup Agreement”) with JSAT. Revenue from JSAT increased by $6,941,539 (237%) to $9,864,690 for the three-months ended September 30, 2019, compared to $2,9213,151 for the three-months ended September 30, 2018. The increase relates to the Cup Agreement. Revenue from the Cup Agreement was $7,456,024 and $0 for the three-months ended September 30, 2019 and September 30, 2018, respectively.
Revenue for products increased mainly due to increased revenue from our Signature Cars and S7. Revenue from Signature Cars increased by 732,989 (113%) to $1,383,018 for the three-month period ended September 30, 2019, compared to $650,029 for the three-month period ended September 30, 2018. Revenue from S7 increased by $556,300 (100%) to $556,300 for the three-month period ended September 30, 2019, compared to $0 for the three-month period ended September 30, 2018.
Cost of Revenue
Cost of revenue for our Signature Cars, and S7 supercar consists primarily of parts, labor and manufacturing overhead related to shop and warehouse supplies and expenses. Cost of revenue for our S1 supercars consists primarily of labor and outside service costs related to the engineering and design of the S1, and overhead related to our facilities costs and administration. Lifestyle accessories and other Saleen-branded products are purchased directly from third-party vendors. Cost of revenue increased by approximately $7,416,410 (440%) to $9,103,570 for the three-month period ended September 30, 2019, compared to $1,687,160 for the three-month period ended September 30, 2018. The increase in the cost of revenue was primarily attributable to increased costs related to JSAT.
Gross Profit
Gross profit as a percentage of net revenue decreased by 33% to 23% for the three-month period ended September 30, 2019, compared to 56% for the three-month period ended September 30, 2018. The decrease in gross profit percentage related to the increased revenue from JSAT which had a lower gross profit percentage as to compared to our product revenue.
Operating Expenses
Operating costs include research and design, sales and marketing, general and administrative, non-cash stock-based compensation and depreciation.
Advertising, sales, and marketing expenses increased $83,253 (50%) to $251,058 during the three-month period ended September 30, 2019, compared to $167,805 during the three-month period ended September 30, 2018. The increase relates to new advertising efforts that were not in place in 2018 and increased sales salaries and marketing costs related to promotional events and car shows.
General and administrative expenses decreased $67,796 (5%) to $1,276,530 during the three-month period ended September 30, 2019, compared to $1,344,326 during the three-month period ended September 30, 2018. The decrease in general and administrative expenses was due primarily to decreased officer salaries, accounting, and legal fees during the quarter.
We had no research and development costs during the three-month period ended September 30, 2019, compared to $16,964 during the three-month period ended September 30, 2018.
Depreciation and amortization expense increased by $26,325 (243%) to $37,168 for the three-month period ended September 30, 2019, compared to $10,843 for the three-month period ended September 30, 2018.
5 |
Income from Operations
During the three-month period ended September 30, 2019, we generated income from operations of $1,189,969, compared to income from operations of $593,335 we generated during the three-month period ended September 30, 2018. Income from operations for the three-month period ended September 30, 2019, was due primarily to increased revenue and gross profit, offset in part by increased operating expenses.
Other Expense
Other expenses include interest and financing costs. Interest and financing costs increase $93,202 (1194%) to $101,011 during the three-month period ended September 30, 2019, compared to $7,809 during the three-month period ended September 30, 2018. The increase in interest and financing costs during the three-month period ended September 30, 2019, was due primarily to changes related to adoption of the new lease standard offset by an overall reduction in debt and two debtors that have waived interest.
Income Tax Expense
During the three-month period ended September 30, 2019, we reported income tax expense of $297,903. We had no income tax expense during the three-month period ended September 30, 2018.
Comparison of the Six Months Ended September 30, 2019 to the Six Months Ended September 30, 2018
Our revenue, operating expenses, and net income from operations for the six-months ended September 30, 2019, as compared to the six-months ended September 30, 2018, were as follows:
Six Months Ended September 30, 2019 | Six Months Ended September 30, 2018 | Percentage Change | ||||||||||||||||||||||
$ | % of Sales | $ | % of Sales | Change | Inc. (Dec.) | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Services | 21,102,053 | 89 | % | 4,179,011 | 78 | % | 16,923,042 | 405 | % | |||||||||||||||
Products, net | 2,652,169 | 11 | % | 1,201,626 | 22 | % | 1,450,543 | 121 | % | |||||||||||||||
Royalties | 39,623 | 0 | % | 4,043 | 0 | % | 35,580 | 880 | % | |||||||||||||||
Total revenues, net | 23,793,845 | 100 | % | 5,384,680 | 100 | % | 18,409,165 | 342 | % | |||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Services | 16,622,538 | 70 | % | 1,439,618 | 27 | % | 15,182,920 | 1055 | % | |||||||||||||||
Products | 2,035,929 | 9 | % | 1,149,132 | 21 | % | 886,797 | 77 | % | |||||||||||||||
Total cost of revenues | 18,658,467 | 78 | % | 2,588,750 | 48 | % | 16,069,717 | 621 | % | |||||||||||||||
Gross profit | 5,135,378 | 22 | % | 2,795,930 | 52 | % | 2,339,448 | 84 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Advertising, sales, and marketing | 682,488 | 3 | % | 294,951 | 5 | % | 387,537 | 131 | % | |||||||||||||||
General and administrative | 2,051,785 | 9 | % | 2,294,811 | 43 | % | (243,026 | ) | -11 | % | ||||||||||||||
Research and development | - | - | % | 24,321 | 0 | % | (24,321 | ) | -100 | % | ||||||||||||||
Depreciation and amortization | 97,724 | 0 | % | 38,530 | 1 | % | 59,194 | 154 | % | |||||||||||||||
Total operating expenses | 2,831,997 | 12 | % | 2,652,613 | 49 | % | 179,384 | 7 | % | |||||||||||||||
Income from operations | 2,303,381 | 10 | % | 143,317 | 3 | % | 2,160,064 | 1507 | % | |||||||||||||||
Other expense | ||||||||||||||||||||||||
Interest and financing costs | 102,109 | 0 | % | 17,880 | 0 | % | 84,229 | 471 | % | |||||||||||||||
Total other expense | 102,109 | 0 | % | 17,880 | 0 | % | 84,229 | 471 | % | |||||||||||||||
Net income before income tax expense | 2,201,272 | 9 | % | 125,437 | 2 | % | 2,075,835 | 1655 | % | |||||||||||||||
Income tax expense | 620,993 | 3 | % | - | - | % | 620,993 | 100 | % | |||||||||||||||
Net income | 1,580,279 | 7 | % | 125,437 | 2 | % | 1,454,842 | 1160 | % | |||||||||||||||
Net income attributable to common shareholders | 1,580,279 | 7 | % | 33,437 | 1 | % | 1,546,842 | 4626 | % |
6 |
Revenue
Revenue, net increased by $16,923,042 (405%) to $21,102,053 for the six-months ended September 30, 2019, compared to $4,179,011 for the three-months ended September 30, 2018. The majority of the increase in revenue was attributable to increased revenue from JSAT under the Cup Agreement. Revenue from JSAT increased by $16,637,591 (432%) to $20,483,518 for the six-months ended September 30, 2019, compared to $3,848,927 for the six-months ended September 30, 2018. Revenue from the Cup Agreement was $17,295,719 and $0 for the three-months ended September 30, 2019 and September 30, 2018, respectively.
Revenue for products increased mainly due to increased revenue from our Signature Cars and S7. Revenue from Signature Cars increased by $703,407 (60%) to $1,872,123 for the six-months ended September 30, 2019, compared to $1,168,716 for the six-months ended September 30, 2018. Product revenue from S7 increased by $764,433 (100%) to $764,433 for the six-months ended September 30, 2019, compared to $0 for the six-months ended September 30, 2018.
Cost of Revenue
Cost of Revenue for our Signature Cars, and S7 supercar consists primarily of parts, labor and manufacturing overhead related to shop and warehouse supplies and expenses. Cost of revenue for our S1 supercars consists primarily of labor and outside service costs related to the engineering and design of the S1, and overhead related to our facilities costs and administration. Lifestyle accessories and other Saleen-branded products are purchased directly from third-party vendors. Cost of revenue increased by approximately $16,069,717 (621%) to $18,658,467 for the six-months ended September 30, 2019, compared to $2,588,750 for the six-months ended September 30, 2018. The increase in the cost of revenue was primarily attributable to increased costs related to JSAT.
Gross Profit
Gross profit as a percentage of net revenue decreased by 30% to 43% for the six-months ended September 30, 2019, compared to 73% for the six-months ended September 30, 2018. The decrease in gross profit percentage related to the increased revenue to JSAT which had a lower gross profit percentage as to compared to our product revenue.
7 |
Operating Expenses
Operating costs include research and design, sales and marketing, general and administrative, non-cash stock-based compensation and depreciation.
Advertising, sales, and marketing expense increased $387,537 (131%) to $682,488 during the six-months ended September 30, 2019, compared to $294,951 during the six-months ended September 30, 2018. The increase relates to new advertising efforts that were not in place in 2018.
General and administrative expenses decreased $243,026 (11%) to $2,051,785 during the six-months ended September 30, 2019, compared to $2,294,811 during the six-months ended September 30, 2018. The decrease in general and administrative expenses was due primarily to decreased officer and general and administrative employee salaries and headcount and a decrease in accounting fees for the period.
We had no research and development costs during the six-months ended September 30, 2019, compared to $24,321 during the six-months ended September 30, 2018.
Depreciation and amortization expense increased by $59,194 (154%) to $97,724 for the six-months ended September 30, 2019, compared to $38,530 for the six-months ended September 30, 2018.
Income from Operations
During the six-months ended September 30, 2019, we generated income from operations of $2,303,381, compared to income from operations of $143,317 incurred during the six-months ended September 30, 2018. Income from operations for the six-months ended September 30, 2019, was due primarily to increased revenue and gross profit, offset in part by increased sales and marketing efforts.
Other Expense
Other expenses include interest and financing costs. Interest and financing costs increased $84,229 (471%) to $102,109 during the six-months ended September 30, 2019, compared to $17,880 during the six-months ended September 30, 2018. The increase in interest and financing costs during the six-months ended September 30, 2019, was due primarily to changes related to adoption of the new lease standard offset by an overall reduction in debt and two debtors that have waived interest.
Income Tax Expense
During the six-months ended September 30, 2019, we reported income tax expense of $620,993. We had no income tax expense during the six-months ended September 30, 2018.
Liquidity and Capital Resources
Our working capital deficiency as of September 30, 2019, and March 31, 2018, was as follows:
As of | As of | |||||||
September 30, 2019 | March 31, 2019 | |||||||
Current assets | $ | 5,065,235 | $ | 3,619,119 | ||||
Current liabilities | 6,431,452 | 4,398,809 | ||||||
Net working capital deficiency | $ | (1,366,217 | ) | $ | (779,690 | ) |
8 |
The following summarizes our cash flow activity for the six-months ended September 30, 2019, and 2018:
Cash Flows
Six-Months | Six-Months | |||||||
Ended | Ended | |||||||
September 30, 2019 | September 30, 2018 | |||||||
Net cash provided by (used in) Operating Activities | $ | 3,654,921 | $ | (308,786 | ) | |||
Net cash used in Investing Activities | (2,282,678 | ) | (52,812 | ) | ||||
Net cash (used in) provided by Financing Activities | (594,672 | ) | 47,044 | |||||
Change in Cash during the period | 777,571 | (314,554 | ) | |||||
Cash, Beginning of Period | 3,374,234 | 523,120 | ||||||
Cash, End of Period | $ | 4,151,805 | $ | 208,566 |
The Company has incurred significant net losses since inception. However, during the six-months ended September 30, 2019, the Company’s financial performance significantly improved, and we recorded net income of $1,878,181 and generated cash flows from operations of $3,197,229, primarily due to revenues from JSAT. Our ability to continue to generate net income and positive cash flows from operations is primarily dependent on our ability to continue to generate revenue from our contracts with JSAT and to generate revenue from the sale of our Signature Cars.
The Company cannot give assurance that it can maintain its cash balances or limit its cash consumption and maintain sufficient cash balances for its planned operations. Also, future business demands may lead to cash utilization at levels greater than recently experienced or anticipated. While we believe that our existing cash balances will be sufficient to fund our currently planned level of operations and investment activity, we may require additional financing to fund our planned future operations if we encounter unanticipated difficulties, or if our estimates of the amount of cash necessary to operate our business prove to be wrong, and we use our available financial resources faster than we currently expect. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Subject to the foregoing, we believe the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of filing of this Quarterly Report on Form 10-Q.
New Accounting Standards
See Note 1 of the condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
A smaller reporting company is not required to provide any information in response to Item 305 of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of September 30, 2019, 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, as a result in the delay in filing this Quarterly Report on 10-Q, 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.
9 |
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
Effective June 21, 2019, Amy Boylan resigned as the President and Chief Operating Officer of the Company.
Effective October 31, 2019, Lawrence Balingit was appointed the Chief Financial Officer and Chief Operating Officer of the Company. On March 6, 2020, Lawrence Balingit resigned as the Company’s Chief Financial Officer.
Effective April 30, 2020, Michael Roe was appointed the Chief Financial Officer of the Company.
Other than the items discussed above, during the three and six-months ended September 30, 2019, 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.
None.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
Effective June 21, 2019, Amy Boylan resigned as the President and Chief Operating Officer of the Company.
Effective October 31, 2019, Lawrence Balingit was appointed the Chief Financial Officer and Chief Operating Officer of the Company. On March 6, 2020, Lawrence Balingit resigned as the Company’s Chief Financial Officer.
Effective April 30, 2020, Michael Roe was appointed the Chief Financial Officer of the Company.
10 |
11 |
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.
Date: July 8, 2020
SALEEN AUTOMOTIVE, INC. | ||
By: | /s/ Steve Saleen | |
Name: | Steve Saleen | |
Title: | Chief Executive and Chief Financial Officer |
12 |