ITEM 1. BUSINESS
Overview
We design, develop, manufacture and sell high performance enhancements to vehicles built from base chassis’ of Ford Mustangs, Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by manufacturers (Ford, Chevrolet, Dodge and Tesla)) of OEM American sports and electric vehicles and the production of high performance USA-engineered sports cars. Saleen-branded products include a line of high performance and upgraded muscle and electric cars, automotive aftermarket specialty parts and lifestyle accessories. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it. Muscle cars are any of a group of American-made 2-door sports coupes with powerful engines designed for high performance driving. We are also planning to develop an American supercar. The term supercar describes an expensive (approximately $250,000 or more), limited production, fast or powerful (capable of reaching speeds in excess of 180 miles per hour) sports car with a centrally located engine.
Our customers worldwide include muscle and high performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture production, and consumers in the luxury supercar and motorsports market. We plan to develop a network of company-owned branded stores to complement our existing retail dealer locations.
We utilize automobile manufacturers Ford, Chevrolet, Dodge and Tesla platform vehicles for our high performance and electric vehicle production. All aftermarket parts and accessory products are engineered and manufactured exclusively by us. Our main retail outlets for our products are authorized Ford, Chevrolet, Dodge and exotic car dealers.
We plan to operate as a global high performance automotive brand and expand our production, sales and marketing operations extensively within the markets of the USA and into multiple international markets. We also have entered into an arrangement to distribute our full collection of Saleen branded automobiles in China. We also plan to open our own retail outlets, market our expertise in specialist engineering and design services to third party clients, and introduce our next generation American supercar.
History of the Company
Saleen Automotive, Inc. (formerly W270, Inc., “we,” “us,” “our” and “our company”) was incorporated under the laws of the State of Nevada on June 24, 2011. We issued 5,000,000 shares of our Common Stock to Mr. Wesley Fry (“Fry”) at inception in exchange for organizational costs/services incurred upon our incorporation. Following our formation, we issued an additional 1,000,000 shares of our Common Stock to Fry, in exchange for a business plan along with a client/customer list related to his information technology consulting services.
On June 21, 2012, we issued 2,000,000 shares of our Common Stock for a total of $20,000.
On November 30, 2012, Fry and W-Net Fund I, L.P. (“W-Net”), entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Fry sold to W-Net, and W-Net purchased from Fry, an aggregate of 6,000,000 shares of our Common Stock (the “Shares”), which Shares represented 75.0% of the issued and outstanding shares of our Common Stock, (2) Fry released the Company from any and all existing claims, (3) Fry settled various liabilities of the Company and (4) Fry indemnified W-Net and our company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Fry. The closing occurred on November 30, 2012. W-Net paid for the Shares with personal funds. Simultaneous with the closing, W-Net sold to Verdad Telecom, Inc. one half of the Shares. There are no arrangements or understandings by and among members of both the former and new control groups and their associates with respect to election of directors or other matters of our company.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the then outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of our Common Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our Common Stock (on a fully-diluted basis) was owned, collectively, by Saleen (including 341,943 shares of our Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of our Common Stock, issued to Saleen pursuant to an Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors. On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January 2014, we effected an increase in the number of our common shares authorized to 500,000,000 and all the remaining shares of Super Voting Preferred Stock were converted into our Common Stock and the Super Voting Preferred Stock ceased to be a designated series of our preferred stock.
The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the historical operations of the Saleen Entities prior to the Merger and that of the consolidated company following the Merger.
Going Concern
Since inception, our principal sources of liquidity have been obtained from cash provided by financing, including through the private issuance of notes and sale of equity securities, along with customer deposits received in advance of shipment and gross margin achieved from the sales of high performance vehicles and aftermarket parts. Our principal uses of cash have been primarily to finance operations; expand our staff; develop new products and improve existing products; expand marketing efforts to promote our products and company; and capital expenditures primarily for tooling. We anticipate that significant additional expenditures will be necessary to develop and expand our automotive assets before sufficient and consistent positive operating cash flows will be achieved including sufficient cash flows to service existing debt. Additional funds will be needed in order to complete production, continue operations, obtain profitability and to achieve our objectives. As such, our cash resources are insufficient to meet our current operating expense and production requirements and planned business objectives beyond the filing date of this Form 10-K without additional financing.
As further presented in our consolidated financial statements and related notes, during the year ended March 31, 2015, we incurred a loss from operations of $5,321,929 and utilized $2,549,895 of cash in operations. We also had a stockholders’ deficit and working capital deficit of $9,669,225 and $7,050,664, respectively as of March 31, 2015, and as of that date, we owed $745,503 in past unpaid payroll and other taxes; $933,271 of outstanding notes payable were in default; $1,204,840 of accounts payable was greater than 90 days past due; and $288,900 is owed on past due rent. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of that indebtedness. In addition, we currently do not maintain workers’ compensation, product liability and other general insurance. These factors raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve revenues at a level that will achieve profitably and generate positive cash flows from operations. At March 31 and July 8, 2015, we had cash on hand in the amount of $143,803 and approximately $21,000, respectively, and we are not generating funds from operations to cover current production and operating expenses and will have to obtain additional financing. We have utilized funding to operate the business during the year ended March 31, 2015 with funds obtained from $1,702,656 of customer deposits received in advance of shipment from orders placed by customers; received $500,000 advance royalities from an Intellectual Property License Agreement; raised $1,289,409 through the issuance of convertible notes; received $295,000 through the issuance of notes payable of which $195,000 came from related parties; and obtained cash from sales of Common Stock through entering into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from us an aggregate of 1,183,334 of restricted common shares at a per share price of $0.15 for aggregate proceeds of $177,500. However, we will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for production and to operate our business through and beyond the date of this filing of Form 10-K. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions and covenants on our operations, in the case of debt financing or cause substantial dilution for our stockholders (including the issuance of securities sufficient to result in a change in control of our company), in the case of convertible debt and equity financing.
Business of Saleen Automotive
Immediately prior to the Closing, we were a public “shell” company with nominal assets. As a result of the Merger, we are solely engaged in the Saleen Entities’ business. With respect to this discussion, the terms “we,” “us,” “our” and “our company” refer to Saleen Automotive, Inc., a Nevada corporation and its wholly-owned subsidiaries Saleen Automotive and Saleen Signature Cars.
History and Background
The Saleen brand, started by former racing driver Steve Saleen, began in 1983. Saleen used his business degree from USC, coupled with experience in his father’s manufacturing business, to build the Saleen brand. Saleen began auto crossing, then rapidly moved into SCCA pro series (Formula Atlantic, Trans-Am Championship, Sport Truck racing) and then into Indy car racing.
On July 1, 2008, following his affiliation with several predecessor automotive companies bearing the “Saleen” brand, Saleen established SMS Signature Cars. SMS commenced operations in Corona, California, producing high performance automobiles and selling automotive aftermarket parts. SMS expanded the historical offering of mass customized Mustangs into a broader line of vehicles including Chevrolet Camaros and Dodge Challengers. SMS also was contracted to produce specialty vehicles for the movie “Bullet” and produced replica supercars for the movie “Need for Speed”. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.
On July 21, 2011, Saleen and a group of private investors established Saleen Electric Automotive, Inc., a Florida corporation (“SEA”). SEA had identified opportunities in the commercial electric vehicle market and was formed to develop a line of electric delivery vans, automobiles, and high capacity chargers. On April 26, 2012, Saleen Electric Automotive, Inc. changed its name to “Saleen Automotive, Inc.”
On April 2, 2012, Saleen announced that after several years of litigation with the former Saleen, Inc., he had successfully regained control of the Saleen brand and products that he had created. Pursuant to the Assignment and License Agreement, as amended, we own certain intellectual property that relates to the “Saleen” brand name and related rights as listed in the Assignment and License Agreement, as amended, including various design patents for superchargers and trademarks related to the “Saleen” brand, and we license from Saleen the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand.
Our Vehicles, Products and Services
We currently provide or intend to provide the following products and services:
High Performance Cars: We are an OEM of customized American sports cars, building them into Saleen-branded performance vehicles through a transformational process in which every part we incorporate into the vehicle is designed, engineered, tooled, tested, manufactured and certified by us or under our control for the entire vehicle. We are currently converting Ford Mustangs, Chevrolet Camaros and Dodge Challengers. The current product line of high performance vehicles includes the Saleen 570 Challenger, the Saleen 302 Mustang and the Saleen 620 Camaro, which are offered as three different models - White, Yellow and Black Labels. We also produce a line of Heritage Collection Cars which are modern Saleen High Performance vehicles designed as replicas of past iconic race cars from the SCAA Trans-Am Racing lineage. In early 2015, we released an update to our Saleen Mustang product line in response to the 2015 Ford Mustang new model.
Performance Parts: We manufacture and distribute specialty automotive aftermarket parts and accessories designed for and used in our current and past high performance vehicles to our base of loyal Saleen automotive enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to the owners of Ford Mustangs, Chevrolet Camaros and Dodge Challengers.
Saleen GTX: During our fiscal year ended March 31, 2015, we designed, engineered, tooled, tested, and manufactured performance improvement parts designed to incorporate and enhance the performance and design of an existing Tesla Model S car. The Saleen GTX design is our first effort in enhancing and modifying the design of an existing electric vehicle. Similar to our Saleen line of high performance vehicles, our design improved the level of performance of the Tesla Model S car primarily through aerodynamics, body and suspension changes incorporated into an existing Tesla Model S. We take existing customer owned Tesla Model S vehicles and enhance their vehicle with Saleen proprietary designed and manufactured product enhancements. We also sell our designed Saleen GTX parts as aftermarket parts.
American Supercars: We are currently designing an American supercar that we anticipate would be manufactured and sold through our Supercars division and our retail stores. The term supercar describes an expensive (approximately $250,000 or more), limited production, fast or powerful (capable of reaching speeds in excess of 180 miles per hour) sports car with a centrally located engine. There are supercar models built by foreign manufacturers including Lamborghini and Ferrari.
Retail Distribution Outlets: While we presently do not have any retail stores in operation, we intend to open a network of retail branded stores that will become a primary sales channel for our high performance vehicles, supercars and aftermarket parts and accessories. The concept of this store is based on a location inside a major retail mall whereby customers can see floor models of our vehicles and purchase parts and accessories. Customers interested in purchasing a vehicle may arrange to test drive vehicles that will be parked nearby. A buyer of our cars will meet with a sales representative to custom select the vehicle model, colors, upgrades, and place the order. Saleen apparel, presently sold online, is branded under the Saleen Lifestyle, Saleen Performance, Saleen Racing and Heritage marquees. We intend to operate these stores in high traffic malls in major cities where Saleen has a customer base, such as Orange County, Los Angeles, San Jose, Miami and other locations.
Motorsports & Engineering Services: We provide contract design, engineering and product development services, which have included working with major Hollywood movie producers where we developed and manufactured working replicas of high performance vehicles and racing “supercars” featured in such films as “Need for Speed” and “Bullet”. During the year ended March 31, 2015, we did not have any contracts for our design, engineering or product development services.
Battery Electric Vehicles: We plan to develop a line of electric battery electric vehicles (or BEVs) for commercial and consumer oriented applications, utilizing the same mass-customization process used with our high performance vehicles and existing facilities to overlay the BEV design on selected new OEM automobile chassis designed for internal combustion engines. Our business strategy in this BEV market is to utilize certain models of Ford, Chevrolet or Dodge vehicles that are mass produced as the base chassis’ of the vehicles that we will convert into BEV’s by installing electric drive systems. Due to our current funding constraints, we do not plan to start the development of this product until we are able to raise additional funding from debt or equity sources. The factors that we may consider in determining whether to pursue this product line are (1) commercial price point for the electric vehicle, (2) range of the vehicle, (3) market opportunity for the product line, (4) costs of developing a sales distribution network, (5) market size and growth potential and (6) profitability of the product line. Once we have completed our product development and testing process, we will further consider what steps we will take, budget we will require, and funding we will pursue to develop our battery electric vehicle business. There is no guarantee that we will have sufficient funds to develop our battery electric vehicle business line.
Technology, Design and Engineering Capabilities
We believe the core competencies of our company are high performance car design and vehicle engineering. Our core intellectual property is contained within our supercharger and related performance enhancing products.
Our engineering team is staffed with experienced and dedicated professionals with a wide range of expertise in providing design, analysis, and prototyping and validation capabilities to the global vehicle industry. We offer in-house expertise in areas ranging from chassis, body and power train, NVH (noise, vibration, harshness) engineering, electrical systems, thermal systems and CAE (computer aided engineering). We provide seamlessly integrated services in a broad range of engineering disciplines through a unique mix of automotive engineering expertise and motorsports carefully matched to their position specifications. Our engineering team utilizes the most technically advanced engineering tools available in a results-driven and highly stimulating environment.
Our product development methodology is designed to ensure a disciplined and quantifiable approach that emphasizes quality and progress accountability as follows:
● Market Definition and Potential
● Product Definition
● Realistic Revenue Targets
● Design and Engineering
● Prototyping
● Testing
● Volume Production Engineering
● Product Launch
● Success Reporting and Measurement
● Product Enhancement Plan
Over a 30-year history, our founder, Saleen, has developed his core competency in the design, engineering, manufacturing, marketing and sales of high performance vehicles as well as developed or acquired the technology to apply the same processes to the production of high performance vehicles. Specifically, we have expertise with respect to the following:
● Engineering Capabilities
● Suspension & Chassis
● Powertrain
● Certification
● Engineering Tools
● CAD Systems
● Data Acquisition Systems
● ETAS Calibration Tools
● Crash Simulation Software
● Suspension Simulation Software
● CFD, Fluid Simulation Software
● Design and Prototyping Capabilities
● Style & Design Center
● Full product development from the first sketch to final production
● Manufacturing, Assembly and Production
Our manufacturing and assembly teams collaborate regularly with the engineering development team to ensure that the appropriate processes, tooling, sourcing and timing is considered early in every program. Sharing of ideas throughout the business ensures that every aspect of a program is considered and understood by the entire enterprise.
We utilize the most current design, testing and prototyping systems in our manufacturing process, some of which include: Adams Kinematics - CAD (Computer Aided Design) - CFD (Computational Fluid Dynamics) - FEA (Finite Element Analysis) - CAM (Computer Aided Machining) - Rapid Prototyping - Machine Tools - Composites Manufacturing - Wind Tunnel - Pam Crash for crash simulation and design of occupant safety systems.
Vehicle Limited Warranty Policy
We provide a three-year or 36,000 miles New Vehicle Limited Warranty with every Saleen 302 Mustang, Saleen 570 Challenger, Saleen 620 Camaro, and Saleen GTX high performance vehicle. 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 (Ford, Chevrolet, Dodge and Tesla).
Supply Chain
We use over 1,000 purchased parts, which we source globally from over 100 suppliers, many of whom are currently our single source suppliers for these components. We have developed close relationships with several key suppliers particularly in the procurement of body components and certain other key system parts. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. We are currently expanding our supplier sources to reduce the risk of a single source supplier adversely affecting our operations. To date, we have expanded from one to two suppliers, the sources from which we obtain one of our automobile body components. We will continue our efforts to reduce our dependence on single source suppliers.
Research and development costs, which consist of expenditures for the research and development of new products and technology, were $747,837 and $766,996 during the years ended March 31, 2015 and 2014, respectively.
Marketing Strategy
Our principal marketing goals are to:
● generate demand for our vehicles and drive leads to our sales teams;
● build long-term brand awareness and manage corporate reputation;
● manage our existing customer base to create loyalty and customer referrals; and
● enable customer input into the product development process.
We operate similiar to Original Equipment Manufacturers (OEM) producing muscle and high performance cars.
We currently utilize Ford Mustangs, Chevrolet Camaros and Dodge Challengers base chassis and manufacture these vehicles into Saleen-branded high performance cars through a transformational process in which every part incorporated into the vehicle is designed, engineered, tooled and extensively tested before being manufactured and moved into the conversion production process. Our Saleen GTX conversions are based on customer provided Tesla Model S vehicles. It is our belief that this conversion process, while not unique, is an important differentiator from our competitors due to the reputation of the Saleen brand.
We also manufacture and distribute Saleen-branded specialty automotive aftermarket parts and accessories directly to an ever growing base of loyal automotive enthusiasts in both the U.S. and internationally. Additionally, many of these parts and accessories are marketed and sold to Mustang, Camaro, Challenger, Ford Truck and Tesla Model S owners.
Our Saleen-branded high performance cars are sold through Ford, Chevrolet and Dodge retail dealers and exotic automobile dealers. We currently have arrangements with approximately 40 dealers located throughout the United States and are growing our dealer distribution network. Our dealer agreements provide for an exclusive dealer marketing area in which the applicable dealer can promote our products based on our current product price list. The key terms of our dealer agreements include (a) target dealer product sales goals, (b) exclusive dealer marketing territories and (c) a one-year term, renewable annually. Our agreements may be terminated if our dealers fail to meet our target dealer product sales goals. Our dealer territories are generally based on the local dealers’ county geographical boundaries; however, we may have multiple dealers in densely populated counties such as Los Angeles or San Francisco. Our dealers earn a markup on the sale of our products at the time that the sale is completed upon delivery of the vehicle. We also have a strategic relationship with GreenTech Automotive to market and distribute our products in China.
While we presently do not have any retail stores in operation, we are planning to source store locations for a network of retail branded stores that will become a primary sales channel for our high performance vehicles, supercars, aftermarket parts and accessories. We intend to market and sell to end consumers not only through our existing dealer network but also through our company-owned stores. We will also be able to better service our dealer network by region as we open retail stores. Initially, we plan to open stores in southern California, northern California and south Florida. We will conduct a market assessment of cities within the regions listed above to determine the optimum locations for the stores. The estimated cost to open each store is $1 million, which we have yet to obtain the funding required to pursue the opening of retail stores. Given our current cash constraints, limited operating history and history of losses, we have planned for a three year roll out of these retail stores at the rate of one new store per year, however we have yet to determine the specific time frame in which we will commence the roll out. In addition, there is no guarantee that we will have the funding necessary to open any retail stores.
Our annual operating budget includes a commitment to effective marketing, advertising and promotional efforts in order to further strengthen awareness of our brand and expose our products to a larger audience. We will contract with marketing and advertising businesses with experience marketing and promoting specialty automotive brands to further promote our business. We utilize various performance-based advertising metrics to measure the effectiveness of our sales and marketing campaigns. These metrics will include CPM (“Cost per Thousand”), PPC (“Pay per click”), and “pay per call” for our Internet advertising. Other advertising metrics will include CPL (“Cost per Lead”), directory assistance call measurement, and print ad coupon responses. CPM is defined as a “cost per thousand” pricing model whereby the merchant is charged a fee per thousand impressions - the number of times people view an advertisement. PPC is defined as a “pay per click” pricing model in which the merchant pays the website owner when the ad is clicked. PPC is also defined as “pay per call” whereby the merchant pays the service provider a fee per call for connecting the consumer to the advertised number. CPL is defined as “cost per lead” whereby the merchant pays for an explicit sign-up from an interested consumer interested in the advertised offer.
Events Marketing: As a high performance specialty manufacturer, we take pride in attending events on the international auto show circuit such as in Chicago, Los Angeles, Detroit, New York, Pebble Beach, Shanghai and Beijing. The major car shows we participated in during the year ended March 31, 2015 included Detroit, Pebble Beach, Los Angeles, Shanghai and Beijing. The costs of these major shows are approximately $100,000 per show. We also participate in regional car shows that generally cost between $5,000 to $15,000 per show. Our participation in each event includes securing a trade booth to display our products, holding press events to announce new models, and networking with attendees and dealers at the shows.
Print Marketing: Our print marketing strategy includes purchasing of ad space targeted to our customer base as well as free press through press releases of newsworthy or entertainment-worthy information. The estimated costs of purchased ad space will vary by target market, but generally runs from $2,500 to $10,000 per ad. We generally purchase ad space at car show venues from time to time as we determine and in keeping with our marketing budget in cities where our dealers are actively engaged in promoting our vehicles.
International: In February, 2014, we entered into an exclusive agreement with GreenTech Automotive, Inc. (“GTA” or “GreenTech”), to distribute the full collection of Saleen automobiles in China. In June 2015, we expanded our relationship with GTA whereby we along with Steve Saleen entered into an Intellectual Property License Agreement (the “License Agreement”) with Saleen Motors International, LLC, a Delaware limited liability company (“SMI”), wholly owned subsidiary of GreenTech and nonaffiliated subsidiary of our company. Under the License Agreement, we granted to SMI an irrevocable, fully paid-up (subject to certain royalty fees), sublicensable license during the term of the License Agreement to use all of our intellectual property on an exclusive basis worldwide other than in North America, Europe, Middle East and Australia (as applicable, the “Territory”), to make, promote, sell and otherwise exploit our intellectual property in the Territory. Under our agreements, we provide GreenTech with the same collection of vehicles that are available in the North American marketplace.
We also plan on expanding our business model internationally by identifying other strategic partners in targeted countries throughout the world. Initial targeted areas are the Middle East and India. Once a strategic partner is identified in a particular country, we and our strategic partner will jointly develop a business plan for that country.
Given our limited cash resources, we will need to raise additional capital to continue and expand our marketing initiatives and to realize our plans regarding domestic and international expansion. There is no guarantee that we will be able to raise this additional capital for our expansion. In addition, we will encounter significant challenges expanding our business model internationally due to our limited business experience operating in these markets, the current general economic slowdown in China and India, and uncertainty about the amount of capital needed to successfully expand internationally.
Sales Strategy
We currently sell our high performance cars through a network of Ford, Chevrolet, Dodge and exotic automobile dealers. Our dealer sales team is continuing to increase our base of dealers. We currently have arrangements with 40 dealers located throughout the United States. We sell our Saleen GTX vehicles through our in-house sales team.
We sell our performance parts, aftermarket parts and accessories through our retail store in Corona, California and over the Internet.
We sell Saleen branded vehicles and parts and merchandise under a License Agreement with GTA pursuant to which we granted to SMI an irrevocable, fully paid-up (subject to certain royalty fees), sublicensable license to use all of our intellectual property on an exclusive basis worldwide other than in North America, Europe, Middle East and Australia, to make, promote, sell and otherwise exploit our intellectual property in the Territory.
Automotive Aftermarkets Parts Market
The specialty equipment and parts market includes products used to modify the performance and appearance, and/or handling of vehicles. There are no guarantees that we will be able to acquire a sufficient market share of the automotive aftermarkets parts market.
Supercars Market
Based on current sales of supercars, we believe that there is a solidly growing market globally for dependable, American-made supercars offering demonstrably superior performance with revolutionary styling and design characteristics.
Regulation-Vehicle Safety and Testing
Our Saleen branded vehicles are subject to, and we comply with, or are exempt from, numerous regulatory requirements established by the NHTSA, including all applicable United States federal motor vehicle safety standards (FMVSS). Our high performance Saleen branded muscle cars fully comply with all FMVSS without the need for any exemptions. As a manufacturer, we must self-certify that a vehicle meets, or otherwise obtain an exemption from, all applicable FMVSS before the vehicle can be sold in the United States.
We are also required to comply with other requirements of federal laws administered by the NHTSA, including the Corporate Average Fuel Economy standards, Theft Prevention Act requirements, consumer information labeling requirements, early warning reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls, and owner’s manual requirements.
The Automobile Information and Disclosure Act requires manufacturers of motor vehicles to disclose certain information regarding the manufacturer’s suggested retail price, optional equipment and pricing. In addition, the Act allows inclusion of city and highway fuel economy ratings, as determined by the EPA, as well as crash test ratings, as determined by the NHTSA, if such tests are conducted.
Regulation-EPA Emissions & Certificate of Conformity
The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by the California Air Resources Board (“CARB”) with respect to emissions for our vehicles. The Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and both the Certificate of Conformity and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by the CARB. States that have adopted the California standards as approved by the EPA also recognize the Executive Order for sales of vehicles.
Some states have laws providing that a manufacturer cannot deliver a vehicle to a resident of such state except through a dealer licensed to do business in that state. We will therefore be required to either obtain a dealer license in such states, partner with a licensed dealer or obtain an exemption from such requirements in connection with sales of our vehicles over the Internet. We have not commenced the process to obtain a dealer license in states requiring such licenses, and are currently determining our strategy with respect to sales of our vehicles in such states.
In addition, some states have requirements that service facilities be available with respect to vehicles sold in the state, which may be interpreted to also require that service facilities be available with respect to vehicles sold over the Internet to residents of the state. In the event that such regulations are applicable to vehicles sold over the Internet, we will be limited in our ability to sell vehicles in such states to the extent that we do not have qualifying service facilities.
The foregoing examples of state laws governing the sale of motor vehicles are just some of the regulations we face as we sell our vehicles. In many states, the application of state motor vehicle laws to Internet sales is largely without precedent, and would be determined by a fact specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, state legal prohibitions may prevent us from selling to consumers in such state.
Competition
Domestic United States auto sales are currently at their highest pace in over five years since the financial crisis hit. We believe that the boost in sales is poised to reverberate through the world’s largest economy with a spillover into production, profits and jobs for Americans.
Competition in this industry is in most cases based on reputation, prestige, quality, service and overall price. A strong combination of all these areas tends to attract repeat and loyal customers and enthusiast. Consumers tend to shop for name brand and expect high customer service levels. Promptness of service also matters because customers want and need their cars back as soon as possible.
In addition to customer service, name or brand recognition and reputation play an important role in determining how competitive an auto customization business is.
The location of retail outlets is another crucial competitive factor defining this industry. A location is best determined by a combination of population distribution, average income levels and the number of vehicle registrations and existing competitors. The optimum combination results in a location that often allows the company to achieve economies of scale in terms of advertising and distribution costs.
Our primary competition will come from other high-end cars, their manufacturing companies, and third-party companies that specialize in customization for these cars. These companies include Acura, Aston Martin, Audi, Ferrari, Ford GT, Lamborghini, Lexus, McLaren, and Porsche.
Intellectual Property
Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. Saleen Automotive owns trademarks registered with the U.S. Patent and Trademark Office. In addition, we own the Saleen “brand” registered trademarks as well as other unregistered common law trademarks.
We currently market our products using the Saleen name and logo, as well as the name and likeness of Steve Saleen, through a royalty free license from Steve Saleen.
We also have a license to use Steve Saleen’s image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand in connection with our business. The aforementioned license may only be terminated in the event we file a petition for relief under Chapter 7 of the U.S. Bankruptcy Code, or a petition for relief is converted to a Chapter 7 proceeding under the U.S. Bankruptcy Code.
Seasonality
Sales of our high performance cars have fluctuated on a seasonal basis with increased sales during the spring and summer months in our second and third fiscal quarters relative to our fourth and first fiscal quarters. We note that, in general, automotive sales tend to decline over the winter season and we anticipate that our sales of Saleen 302, 570 and 620 vehicles, and other vehicles we introduce in the future may have similar seasonality.
Employees
As of June 30, 2015, we had 22 employees all of whom were full-time employees. Since inception, we have never had a work stoppage, and our employees are not represented by labor unions. We consider our relationship with our employees to be positive.
Description of Property
Our principal executive office is located at 2735 Wardlow Road, Corona, California 92882. Our principal engineering office is located across from our executive office at 2755 Wardlow Road, Corona California 92882. We operate out of leased facilities comprised of a two building campus that constitutes approximately four acres of industrial and office space. We believe our facilities are adequate to meet our current and near-term needs.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our Common Stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing shares of our Common Stock. If any of the following risks occur, our business, financial condition and/or results of operations could be materially and adversely affected. In that case, the trading price of our Common Stock could decline, and you may lose some or all of your investment.
Risks Related to Our Business
We have a history of losses and negative cash from operations and our current cash resources and revenue levels are insufficient to meet our planned business objectives, production and operational needs and debt obligations without additional financing. In addition, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern. We may be unable to obtain additional capital required to implement our business plan, which could restrict our ability to grow and increase stockholder value.
We have a history of operating losses and may not achieve or sustain profitability. During the year ended March 31, 2015, we incurred a net loss of $8,508,758 and utilized $2,549,895 of cash in operations. We also had a stockholders’ and working capital deficit of $9,669,225 and $7,050,664 as of March 31, 2015 and as of that date, we owed $745,503 in unpaid payroll and other taxes, $933,271 of outstanding notes payable were in default, $1,204,840 of payables were greater than 90 days past due and we are $326,059 behind in rent payments as of the date of the filing of this Form 10-K. Our cash on hand as of March 31, 2015 and June 30, 2015 was $143,083 and approximately $21,000, respectively. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of that indebtedness. As such, our cash resources are insufficient to meet our planned business objectives, operational and production needs and debt obligations without additional financing.
These and other factors raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm issued a report on our March 31, 2015 financial statements that raised substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the receipt of customer deposits in advance of shipment; issuance of secured and unsecured notes payable and convertible notes payable and sale of equity securities. We will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate our business through and beyond the date of the filing of this Form 10-K and to continue planned product development. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case or equity financing. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate and obligations outstanding, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
We may be unable to sustain our current level of production or deliveries of our high performance cars both of which could harm our business and prospects.
High performance car production and deliveries will continue to require significant resources and we may experience unexpected delays or difficulties that could harm our ability to maintain full manufacturing capacity, or cause us to miss planned production targets, any of which could have a material adverse effect on our business, prospects, operating results and financial condition. Additionally, sustaining high volume production and doing so in a manner that avoids significant cost overruns, including as a result of factors beyond our control such as problems with suppliers and vendors, may be difficult.
Our ability to sustain volume production and deliveries is subject to certain risks and uncertainties, including:
● that our suppliers will be able to deliver components on a timely basis and in the necessary quantities, quality and at acceptable prices to produce our cars in volume and reach our financial targets;
● that we will be able to complete any necessary adjustments to the vehicle design or manufacturing processes of our cars in a timely manner that meets our production plan and allows for high quality vehicles;
● that we will not encounter parts quality issues before, during or after production of high performance cars;
● that we will be able to schedule and complete deliveries at our planned volume production;
● that the equipment or tooling which we have purchased or which we select will be able to accurately manufacture the vehicle within specified design tolerances and will not suffer from unexpected breakdowns or damage which could negatively affect the rate needed to produce vehicles in volume;
● that we will be able to comply with environmental, workplace safety and similar regulations to operate our manufacturing facilities and our business on our projected timeline;
● that we will be able to maintain high quality controls as we transition to a higher level of in-house manufacturing process; and
● that the information technology systems that we are currently expanding and improving upon will be effective to manage high volume production.
Finally, detailed long-term testing of systems integration, performance and safety as well as long-term quality, reliability and durability testing are ongoing and any negative results from such testing could cause production delays in high performance cars, cost increases or lower quality vehicles.
We are dependent on our suppliers, the vast majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our business, prospects and operating results.
We use over 1,000 purchased parts, which we source globally from over 100 suppliers, many of whom are currently our single source suppliers for these components. We have developed close relationships with several key suppliers particularly in the procurement of body components and certain other key system parts. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. We are currently expanding our supplier sources to reduce the risk of a single source supplier adversely affecting our operations.
While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term, or at all, at prices or costs that are favorable to us. In particular, while we believe that we will be able to secure alternate sources of supply for most of our single sourced components in a relatively short time frame, qualifying alternate suppliers or developing our own replacements for certain highly customized components of our vehicles may be time consuming, costly and may force us to make additional modifications to a vehicle’s design.
This supply chain exposes us to multiple potential sources of delivery failure or component shortages for our high performance cars. We may experience additional delays in the future with respect to high performance cars, supercars and any other future vehicle we may produce. In addition, because we do not have written agreements in place with all our suppliers, this may create uncertainty regarding certain suppliers’ obligations to us, including but not limited to, those regarding warranty and product liability. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significant increased demand, or need to replace certain existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. In the past, we have replaced certain suppliers because of their failure to provide components that met our quality control standards. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and also materially adversely affect our business, prospects and operating results.
Changes in our supply chain have resulted in the past, and may result in the future, in increased cost and delay. We have also experienced cost increases from certain of our suppliers in order to meet our quality targets and development timelines as well as due to design changes that we made, and we may experience similar cost increases in the future. Additionally, we are negotiating with existing suppliers for cost reductions, seeking new and less expensive suppliers for certain parts, and attempting to redesign certain parts to make them cheaper to produce. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer. Additionally, cost reduction efforts may interrupt or harm our normal production processes, thereby harming high performance car and supercar quality or reducing production output.
Furthermore, a failure by our suppliers to provide the components in a timely manner or at the level of quality necessary to manufacture our high performance vehicles could prevent us from fulfilling customer orders in a timely fashion which could result in negative publicity, damage our brand and have a material adverse effect on our business, prospects, financial condition and operating results.
We are dependent on Ford Mustang, Chevrolet Camaro and Dodge Challenger platform vehicles for our muscle and high performance vehicle products.
We utilize automobile manufacturers Ford, Chevrolet and Dodge platform vehicles for our Mustang, Camaro and Challenger muscle and high performance vehicles. Generally, we procure these vehicles directly from dealers. While we do enter into sourcing agreements with certain of our dealers, we do not have a supply agreement with Ford, Chevrolet or Dodge and we are limited to the allocation allotted to our source dealers. Further, all production parts are engineered and manufactured exclusively by us and are designed specifically for current and past models of these platform vehicles. Automotive manufactures generally make minor model changes each year and a major model change approximately every four years. Minor model changes are generally small in nature and normally consist of minor changes. Major model changes generally contain significant changes to the model line, which could include a complete re-design of the vehicle. Minor and major model changes by Ford, Chevrolet and Dodge require us to re-design, re-tool and change our production, which could result in us incurring significant costs and production interruptions. Further, during a major model year change, the availability of current models may become difficult to obtain the new major model due to the automotive manufacture production delays and high demand for the new model. For example, during the year ended March 31, 2015, Ford made a major model change to the Ford Mustang and discontinued the 2014 Mustang model in May 2014. As a result, it was difficult to obtain the 2014 chassis starting in September 2014, which was coupled with the shipment of 2015 Mustang models not starting until early December 2015 and the availability of such model was limited due to our sourcing dealers allotment. Any discontinuation of these vehicles, disruption in production or significant major model changes in these platform vehicles could have a material impact on our sales and ultimately on our business. Further, we may experience lower sales volume and difficulties in obtaining current year platform vehicles during the period from when the current year model stops production by the manufacturer to when the new major model year vehicle is released.
If we are unable to adequately reduce the manufacturing costs of high performance cars and supercars or otherwise control the costs associated with operating our business, our business, financial condition, operating results and prospects will suffer.
Our production costs for high performance cars have been high due to start-up costs at our factory, manufacturing inefficiencies including low absorption of fixed manufacturing costs, limited ability to build high-quality production tooling used to manufacture parts due to cash constraints, higher logistics costs due to the immaturity of our supply chain, and higher initial prices for component parts during the initial period after the launch and ramp of the business. As we are now producing cars at our steady state production volume, manufacturing costs for certain components used in production have started to fall while others have increased. While we expect further cost reduction efforts undertaken by both us and our suppliers will result in reduction of costs during our fiscal year 2016, there is no guarantee that we will be able to achieve planned cost reductions from our various cost savings initiatives, and the failure to achieve such savings would negatively affect our ability to reach our gross margin and profitability goals. Our planned cost reductions include reducing our production costs by negotiating discounts from our suppliers as we increase our purchasing volume, reducing our engineering and production costs through more effective hiring practices, and reducing our general & administrative expenses by reducing reliance on outside services providers. There is no guarantee that our planned cost reductions will be achieved.
We incur significant costs related to procuring the raw materials required to manufacture our high performance cars, assembling vehicles and compensating our personnel. We may also incur substantial costs in increasing the production capability of our high performance cars manufacturing facilities, each of which could potentially face cost overruns. If high performance cars tooling, production equipment and parts are insufficient for use in supercars, perhaps as a result of a lower level of commonality between the two vehicles than we currently anticipate, our costs related to the production of supercars may exceed our expectations.
If we are unable to keep our operating costs aligned with the level of revenues we generate, our operating results, business and prospects will be harmed. Furthermore, many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components could increase due to shortages as global demand for these products increases.
Our long-term success will be dependent upon our ability to design and achieve market acceptance of new vehicle models, specifically our high-performance muscle cars and supercars.
Our long-term success is dependent on market acceptance of our high performance cars and supercars. There is no guarantee that the general public in the long-term will successfully accept these new vehicles. Additionally, there can be no assurance that we will be able to design future vehicles that will meet the expectations of our customers or that our future models will become commercially viable. To the extent that we are not able to build future high-performance muscle cars and supercars to the expectations created by the early prototype and our announced specifications, customers may cancel their reservations, our future sales could be harmed and investors may lose confidence in us. Furthermore, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we may in the future be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As technologies change in the future for automobiles in general and high performance vehicles specifically, we will be expected to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology and meet customer expectations. Notwithstanding Saleen’s prior experience in the automotive industry, our management team, as a whole, has limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our vehicles.
Our limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.
You must consider the risks and difficulties we face as an early stage company with a limited operating history. If we do not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. Saleen Automotive was formed in July 2011. While our volume of vehicles has increased since 2011, our volume of vehicles for fiscal year ended March 31, 2015 declined comparable to fiscal year ended March 31, 2014 with vehicle sales decreasing by $1,185,336 from prior fiscal year ended March 31, 2014. As such, it is difficult to predict our future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business and we are reliant on the trends and models related to Ford Mustangs, Chevrolet Camaro, Dodge Challengers and Tesla Model S. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected.
Increases in costs, disruption of supply or shortage of raw materials could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials. Any such increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various raw materials in our business including aluminum, steel, nickel and copper. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. Substantial increases in the prices for our raw materials or prices charged to us, such as those charged by our supercharger manufacturers, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. There can be no assurance that we will be able to recoup increasing costs of raw materials by increasing vehicle prices.
Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult.
Our distribution model is not common in the automobile industry today, particularly in the United States. We plan to sell our high performance vehicles in company-owned Saleen stores and over the Internet. This model of vehicle distribution is relatively new and unproven, especially in the United States, and subjects us to substantial risk as it requires, in the aggregate, a significant expenditure and provides for slower expansion of our distribution and sales systems than may be possible by utilizing a more traditional dealer franchise system. For example, we will not be able to utilize long-established sales channels developed through a franchise system to increase our sales volume, which may harm our business, prospects, financial condition and operating results. Moreover, we will be competing with companies with well-established distribution channels.
We plan to open Saleen stores in the United States initially, and expand internationally as opportunities arise. We have only limited experience distributing and selling our high performance vehicles through our Saleen stores. Our success will depend in large part on our ability to effectively develop our own sales channels and marketing strategies. Implementing our business model is subject to numerous significant challenges, including obtaining permits and approvals from local and state authorities, and we may not be successful in addressing these challenges. The concept and layout of these new stores, which are located in high profile retail centers, is different than what has previously been used in automotive sales. We do not know whether our new store strategy will be successful, if consumers will be willing to purchase vehicles in this manner or if these locations will be deemed to comply with applicable zoning restrictions as well as approval and acceptance from the specific high profile retail centers in which we seek to locate our stores. As a result, we may incur additional costs in order to improve or change our retail strategy.
You must consider our business and prospects in light of the risks, uncertainties and difficulties we encounter as we implement our business model. For instance, we will need to persuade customers, suppliers and regulators of the validity and sustainability of our business model. We cannot be certain that we will be able to do so, or to successfully address the risks, uncertainties and difficulties that our business strategy faces. Any failure to successfully address any of the risks, uncertainties and difficulties related to our business model would have a material adverse effect on our business and prospects.
We may face regulatory limitations on our ability to sell vehicles directly or over the Internet, which could materially and adversely affect our ability to sell our vehicles.
We plan to sell our vehicles from our Saleen stores as well as over the Internet. We may not be able to sell our vehicles through this sales model in each state in the United States as many states have laws that may be interpreted to prohibit Internet sales by manufacturers to residents of the state or to impose other limitations on this sales model, including laws that prohibit manufacturers from selling vehicles directly to consumers without the use of an independent dealership or without a physical presence in the state. For example, some states provide that a manufacturer cannot deliver a vehicle to a resident of their state except through a dealer licensed to do business in such state, which may be interpreted to require us to open a store in that state in order to sell vehicles to their residents. In some states where we have opened a gallery, which is a location where potential customers can view our vehicles but is not a full retail location, it is possible that a state regulator could take the position that activities at our gallery constitute an unlicensed motor vehicle dealership and thereby violates applicable manufacturer-dealer laws. In addition, some states have requirements that service facilities be available with respect to vehicles sold in the state, which may be interpreted to also require that service facilities be available with respect to vehicles sold over the Internet to residents of the state thereby limiting our ability to sell vehicles in states where we do not maintain service facilities.
The foregoing examples of state laws governing the sale of motor vehicles are just some of the regulations we will face as we sell our vehicles. In many states, the application of state motor vehicle laws to our specific sales model is largely untested under state motor vehicle industry laws, particularly with respect to sales over the Internet, and would be determined by a fact-specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact-specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, the manner in which the applicable authorities will apply their state laws to our distribution model is difficult to predict. Such laws, as well as other laws governing the motor vehicle industry, may subject us to potential inquiries and investigations from state motor vehicle regulators who may question whether our sales model complies with applicable state motor vehicle industry laws and who may require us to change our sales model or may prohibit our ability to sell our vehicles to residents in such states. In addition, decisions by regulators permitting us to sell vehicles may be subject to challenges as to whether such decisions comply with applicable state motor vehicle industry laws.
The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future.
The worldwide automotive market is highly competitive today and we expect it will become even more so in the future. With respect to high-performance muscle cars, we face competition from high-end Mustangs, Camaros and Challengers produced by Ford, Chevrolet and Dodge along with other Ford Mustangs, Chevrolet Camaros and Dodge Challengers variants such as Roush, Callaway and Shelby. With respect to our supercars, we face competition from existing and future automobile manufacturers in the extremely competitive premium sedan market, including Audi, BMW, Lexus and Mercedes.
Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. In addition, most of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.
Furthermore, certain large automobile manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company.
The electric vehicle market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future.
The worldwide electric vehicle automotive market is highly competitive today and we expect it will become even more so in the future. There are numerous obstacles for electric vehicle manufacturers, including the absence of a well-developed supply chain, capacity constraints, high initial fixed and variable costs, and dependence on large commercial customers who may exert substantial pricing pressures.
Tesla and many established and new automobile manufacturers have entered or have announced plans to enter the alternative fuel vehicle market. Major manufacturers, including General Motors, Toyota, Ford and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles. We do not have the significant financial and manufacturing resources of these major players in the electric vehicle industry.
Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.
Furthermore, certain large electric vehicle manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company.
Demand in the automobile industry is highly volatile, which may lead to lower vehicle unit sales and adversely affect our operating results.
Volatility of demand in the automobile industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we currently compete and plan to compete in the future have been subject to considerable volatility in demand in recent periods. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a new automobile manufacturer and low volume producer, we have less financial resources than more established automobile manufacturers to withstand changes in the market and disruptions in demand. As our business grows, economic conditions and trends in other countries and regions where we sell our high performance vehicles will impact our business, prospects and operating results as well. Demand for our high performance vehicles may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations, including tariffs, import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in further downward price pressure and adversely affect our business, prospects, financial condition and operating results. These effects may have a more pronounced impact on our business given our relatively smaller scale and financial resources as compared to many incumbent automobile manufacturers.
Difficult economic conditions may negatively affect consumer purchases of luxury items, such as our high performance vehicles.
In the past, the deterioration in the global financial markets and continued challenging condition of the macroeconomic environment has negatively impacted consumer spending and we believe has adversely affected the sales of high performance vehicles. The automobile industry in particular was severely impacted by the poor economic conditions and several vehicle manufacturing companies, including General Motors and Chrysler, were forced to file for bankruptcy. Sales of new automobiles generally have dropped during this recessionary period. Sales of high-end and luxury consumer products, such as our high performance vehicles, depend in part on discretionary consumer spending and are even more exposed to adverse changes in general economic conditions. Difficult economic conditions could therefore temporarily reduce the market for vehicles in our price range. Discretionary consumer spending also is affected by other factors, including changes in tax rates and tax credits, interest rates and the availability and terms of consumer credit. Accordingly, any events that have a negative effect on the United States economy or on foreign economies or that negatively affect consumer confidence in the economy, including disruptions in credit and stock markets, and actual or perceived economic slowdowns, may harm our business, prospects, financial condition and operating results.
Our financial results may vary significantly from period-to-period due to the seasonality of our business and fluctuations in our operating costs.
Our operating results may vary significantly from period-to-period due to many factors, including seasonal factors that may have an effect on the demand for our high performance vehicles. Generally, sales of our high performance cars have fluctuated on a seasonal basis with increased sales during the spring and summer months in our second and third fiscal quarters relative to our fourth and first fiscal quarters. In addition, traditionally from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shutdown of plants and shipping for several weeks causing delivery of cars to be interrupted which has had an effect on our sales. We note that, in general, automotive sales tend to decline over the winter season, especially in snow driven states, and we anticipate that our sales of high performance vehicles and other models we introduce may have similar seasonality. Also, any unusually severe weather conditions in some markets may impact demand for our vehicles. Our operating results could also suffer if we do not achieve revenue consistent with our expectations for this seasonal demand because many of our expenses are based on anticipated levels of annual revenue.
In addition, we expect our period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future periods as we, among other things, design, develop and manufacture our supercars, increase the production capacity at our manufacturing facilities to produce our supercars, incur costs for warranty repairs or product recalls, if any, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations. As a result of these factors, we believe that quarter-to-quarter comparisons of our operating results, especially in the short-term, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our operating results may not meet expectations of equity research analysts or investors. If any of this occurs, the trading price of our Common Stock could fall substantially, either suddenly or over time.
If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industry, then our financial condition, operating results, business prospects and stock price may suffer materially.
Our vehicles are highly technical products that require maintenance and support. If we were to cease or cut back operations, even years from now, buyers of our vehicles from years earlier might have much more difficulty in maintaining their vehicles and obtaining satisfactory support. As a result, consumers may be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed.
Accordingly, in order to build and maintain our business, we must maintain confidence among customers, suppliers, analysts and other parties in our liquidity and long-term business prospects. In contrast to some more established automakers, we believe that, in our case, the task of maintaining such confidence may be particularly complicated by factors such as the following:
● our limited operating history;
● our limited revenues and lack of profitability to date;
● unfamiliarity with or uncertainty about the our high performance vehicles and supercars;
● uncertainty about the long-term marketplace acceptance of alternative fuel vehicles generally, or electric vehicles specifically;
● the prospect that we will need ongoing infusions of external capital to fund our planned operations;
● the size of our expansion plans in comparison to our existing capital base and scope and history of operations; and
● the prospect or actual emergence of direct, sustained competitive pressure from more established automakers, which may be more likely if our initial efforts are perceived to be commercially successful.
Many of these factors are largely outside our control, and any negative perceptions about our long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds when needed.
We may not succeed in maintaining and strengthening the Saleen brand, which would materially and adversely affect customer acceptance of our vehicles and our business, revenues and prospects including our ability to raise capital.
Our business and prospects are heavily dependent on our ability to develop, maintain and strengthen the Saleen brand. Any failure to develop, maintain and strengthen our brand may materially and adversely affect our ability to sell our high performance vehicles and future planned supercars. If we do not continue to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will likely depend significantly on our ability to provide high quality high performance vehicles and we have very limited experience in these areas.
In addition, we expect that our ability to develop, maintain and strengthen the Saleen brand will also depend heavily on the success of our marketing efforts. To date, we have limited experience with marketing activities as we have relied primarily on the Internet, word of mouth and attendance at industry trade shows to promote our brand. To further promote our brand, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening our brand. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand, our business, prospects, financial condition and operating results will be materially and adversely impacted.
Our plan to develop our network of Saleen stores will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our high performance vehicles. In addition, we may not be able to open stores in certain states.
Our plan to develop our network of Saleen stores will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our vehicles. This planned U.S. expansion of Saleen stores may not have the desired effect of increasing sales and expanding our brand presence to the degree we are anticipating. Furthermore there can be no assurances that we will be able to construct additional storefronts on the budget or timeline we have established. We will also need to ensure we are in compliance with any regulatory requirements applicable to the sale of our vehicles in those jurisdictions, which could take considerable time and expense. If we experience any delays in expanding our network of Saleen stores, this could lead to a decrease in sales of our vehicles and could negatively impact our business, prospects, financial condition and operating results. We plan to open Saleen stores with a goal of establishing approximately 12 U.S. stores within the next several years. However, we may not be able to expand our network at such rate and our planned expansion of our network of Saleen stores will require significant cash investment and management resources, as well as efficiency in the execution of establishing these storefronts and in hiring and training the necessary employees to effectively sell our vehicles. Such additional investments may not be available to us or may not be available on terms reasonably acceptable to us.
Furthermore, certain states and foreign jurisdictions may have permit requirements, franchise dealer laws or similar laws or regulations that may preclude or restrict our ability to open stores or sell vehicles out of such states and jurisdictions. Any such prohibition or restriction may lead to decreased sales in such jurisdictions, which could harm our business, prospects and operating results. See Risk Factor “We may face regulatory limitations on our ability to sell vehicles directly or over the Internet which could materially and adversely affect our ability to sell our vehicles.”
If we fail to manage future growth effectively as we rapidly grow our company, we may not be able to produce, market, sell and service our vehicles successfully.
Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We continue to expand our operations significantly, and additional significant expansion will be required, especially in connection with the expansion of our network of Saleen stores. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this expansion include:
● finding and training new personnel;
● forecasting production and revenue;
● controlling expenses and investments in anticipation of expanded operations;
● establishing or expanding design, manufacturing, sales and service facilities;
● implementing and enhancing manufacturing and administrative infrastructure, systems and processes;
● addressing new markets; and
● expanding international operations.
We intend to continue to hire a significant number of additional personnel, including manufacturing personnel, design personnel, engineers and service technicians for our high performance vehicles. Because our high performance vehicles are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in high performance vehicles may not be available to hire, and we will need to expend significant time and expense training the employees we do hire. Competition for individuals with experience designing, manufacturing and servicing high performance vehicles are intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm our business and prospects.
If we are unable to attract and/or retain key employees and hire qualified management, technical vehicle engineering, and manufacturing personnel, our ability to compete could be harmed and our stock price may decline.
The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our vehicles and services, and negatively impact our business, prospects and operating results as well as cause our stock price to decline. In particular, we are highly dependent on the services of Steve Saleen, our Chief Executive Officer and Chairman of our Board of Directors. There can be no assurance that we will be able to successfully attract and retain senior leadership necessary to grow our business. Our future success depends upon our ability to attract and retain our executive officers and other key technology, sales, marketing, engineering, manufacturing and support personnel and any failure to do so could adversely impact our business, prospects, financial condition and operating results. We have in the past and may in the future experience difficulty in retaining members of our senior management team as well as technical, vehicle engineering and manufacturing personnel due to various factors, such as a very competitive labor market for talented individuals with automotive experience. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees. Currently in Southern California, there is increasing competition for talented individuals with the specialized knowledge of high performance vehicles, software engineers and other skilled employees and this competition affects both our ability to retain key employees and hire new ones. Our continued success depends upon our continued ability to hire and retain employees. Additionally, we compete with many mature and prosperous companies in Southern California that have far greater financial resources than we do and thus can offer current or perspective employees more lucrative incentive packages than we can. Any difficulties in retaining current employees or recruiting new ones would have an adverse effect on our performance.
Many members of our management team are new to the Company or to the automobile industry, and execution of our business plan and development strategy could be seriously harmed if integration of our management team into our company is not successful.
Our business could be seriously harmed if integration of our management team into our company is not successful. We expect that it will take time for our new management team to integrate into our company and it is too early to predict whether this integration will be successful. We have recently experienced significant changes in our management team and expect to continue to experience significant growth in our management team. Our senior management team has only limited experience working together as a group. This lack of long-term experience working together may impact the team’s ability to collectively quickly and efficiently respond to problems and effectively manage our business. Although we are taking steps to add senior management personnel that have significant automotive experience, some members of our current senior management team have limited experience in the automobile industry.
We are subject to various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities.
As an automobile manufacturer, we and our operations, both in the United States and abroad, are subject to national, state, provincial and/or local environmental, health and safety laws and regulations, including laws relating to the use, handling, storage, disposal and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we expect that our business and operations will be affected by future amendments to such laws or other new environmental and health and safety laws which may require us to change our operations, potentially resulting in a material adverse effect on our business. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury and fines and penalties. Capital and operating expenses needed to comply with environmental, health and safety laws and regulations can be significant, and violations may result in substantial fines and penalties, third party damages, suspension of production or a cessation of our operations.
Contamination at properties formerly owned or operated by us, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations, including, but not limited to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or operating results. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental laws in connection with our manufacturing facilities that could require significant time and financial resources and negatively impact our ability to operate these facilities, which would adversely impact our business prospects and operating results.
Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Additionally, disgruntled ex-employees may actively encourage unionization of our employees. We are also directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our high performance vehicles and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors and thereby negatively affect our stock price. Additionally, the unionization of our labor force could increase our employee costs and decrease our profitability, both of which could adversely affect our business, prospects, financial condition and results of operations.
Changes in employment laws or regulation could harm our performance.
Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, healthcare reform and the implementation of the Patient Protection and Affordable Care Act, and unemployment tax rates. A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, mandated training for employees, increased tax reporting and tax payment requirements, changing regulations from the National Labor Relations Board and increased employee litigation including claims relating to the Fair Labor Standards Act.
We currently do not maintain workers’ compensation or general liability insurance.
Due to our cash constraints, we currently do no maintain insurance ordinarily customary for businesses our size and type such as workers’ compensation, garage and general liability insurance. As such, we may incur losses against us such as employee worker accidents, losses due to natural disasters or other business risks for which we currently are not insured. Such damages could have a material adverse effect on our business and results of operations. While we do anticipate in the future purchasing adequate insurance against our potential risks, there can be no assurance that we will be able to obtain, afford or qualify for insurance to address such potential risks or if such insurance will adequately cover any potential matters encountered.
We are subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.
Our high performance vehicles, and the sale of motor vehicles in general, are subject to substantial regulation under international, federal, state and local laws. We have incurred, and expect to incur in the future, significant costs in complying with these regulations. Regulations related to the automobile industry are currently evolving and we face risks associated with changes to these regulations such as:
● the amendment or rescission of the federal law and regulations mandating increased fuel economy in the United States, referred to as the Corporate Average Fuel Economy (CAFE) standards, could reduce new business opportunities for our development activities;
● the amendment or rescission of federal greenhouse gas tailpipe emission regulations administered by the EPA under the authority of the Clean Air Act could reduce new business opportunities for our development activities;
● increased sensitivity by regulators to the needs of established automobile manufacturers with large employment bases, high fixed costs and business models based on the internal combustion engine could lead them to pass regulations that could reduce the compliance costs of such established manufacturers or mitigate the effects of government efforts to promote alternative fuel vehicles; and
● changes to regulations governing the export of our products could increase our costs incurred to deliver products outside the United States or force us to charge a higher price for our vehicles in such jurisdictions.
To the extent the laws change, some or all of our vehicles may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition and operating results will be adversely affected.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given the limited number of vehicles delivered to date and limited field experience of those vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates, which would have a material adverse effect on our brand, business, prospects and operating results. We currently do not maintain product liability or other related insurance and as such, any lawsuit seeking significant monetary damages may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under our policy.
We may be compelled to undertake product recalls, which could adversely affect our brand image and financial performance.
Any product recall in the future may result in adverse publicity, damage our brand and adversely affect our business, prospects, operating results and financial condition. In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Such recalls, voluntary or involuntary, involve significant expense and diversion of management attention and other resources, which could adversely affect our brand image in our target markets and could adversely affect our business, prospects, financial condition and results of operations.
Our current and future warranty reserves may be insufficient to cover future warranty claims, which could adversely affect our financial performance.
If our warranty reserves are inadequate to cover future warranty claims on our vehicles, our business, prospects, financial condition and operating results could be materially and adversely affected. We provide a three-year or 36,000 miles New Vehicle Limited Warranty with every Saleen 302 Mustang, Saleen 570 Challenger, Saleen 620 Camaro and Saleen GTX high performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new high performance vehicles. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, Dodge, and Tesla). Although unaltered parts are covered by the original full warranty of the OEM manufacturer, such OEM manufacturers could deny any warranty claims due to our work, which could adversely impact us if we cannot successfully overturn such claims.
We have limited operating experience with our vehicles, and therefore little experience with warranty claims for these vehicles or with estimating warranty reserves. Our warranty claims to date have been negligible and we currently do not have reserves recorded for warranty claims.
We could in the future become subject to a significant and unexpected warranty expense. There can be no assurances that our currently existing or future warranty reserves will be sufficient to cover all claims or that our limited experience with warranty claims will adequately address the needs of our customers to their satisfaction.
We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop or sell our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks inquiring whether we infringe their proprietary rights. Companies holding patents or other intellectual property rights relating to our base vehicles may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:
● cease selling, incorporating or using vehicles that incorporate the challenged intellectual property;
● pay substantial damages;
● obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or
● redesign our vehicles.
In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.
We also license patents and other intellectual property from third parties, and we may face claims that our use of this in-licensed technology infringes the rights of others. In that case, we may seek indemnification from our licensors under our license contracts with them. However, our rights to indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.
Our business will be adversely affected if we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties.
Any failure to protect our proprietary rights adequately could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue, which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. We have also received from third parties patent licenses related to manufacturing our vehicles.
The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:
● our pending patent applications may not result in the issuance of patents;
● our patents, if issued, may not be broad enough to protect our proprietary rights;
● the patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;
● the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement impracticable;
● current and future competitors may independently develop similar technology, duplicate our vehicles or design new vehicles in a way that circumvents our patents; and
● our in-licensed patents may be invalidated or the holders of these patents may seek to breach our license arrangements.
Existing trademark and trade secret laws and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.
Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions, nor can we be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will result in issued foreign patents. Furthermore, even if these patent applications do result in issued patents, some foreign countries provide significantly less effective patent enforcement than in the United States.
The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.
Intellectual property litigation would be costly and could adversely impact our business operations, and our current cash constraints may prevent us from taking action.
We may have to take legal action in the future to protect our technology, trade name or to assert our intellectual property rights against others. Any legal action could be costly and time consuming and could require significant funds that may not be available to us, and no assurances can be made that any action will be successful. The invalidation of any intellectual property rights that we may own, or an unsuccessful outcome in lawsuits to protect our technology, could have a material adverse affect on our business, financial position, or results of operations.
Intellectual property litigation can be expensive, complex, and protracted. Because of such complexity, and the vagaries of the jury system, intellectual property litigation may result in significant damage awards and/or injunctions that could prevent the manufacture, use, distribution, importation, exportation, and sale of products or require us to pay significant royalties in order to continue to manufacture, use, distribute, import, export, or sell products. Furthermore, in the event that our right to license or to market our technology is successfully challenged, and if we fail to obtain a required license or are unable to design around a patent held by a third party, our business, financial condition, or results of operations could be materially adversely affected.
Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
Our corporate headquarters and factory in Corona are located in southern California, a region known for seismic activity. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. In addition, our lease for our Corona facility permits the landlord to terminate the lease following a casualty event if the needed repairs are in excess of certain thresholds and we do not agree to pay for any uninsured amounts. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.
If our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.
Our core values, which include developing quality high performance vehicles while operating with integrity, are an important component of our brand image, which makes our reputation particularly sensitive to allegations of unethical business practices. We do not control our independent suppliers or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental responsibility, fair wage practices, appropriate sourcing of raw materials, and compliance with child labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.
Violation of labor or other laws by our suppliers or the divergence of an independent supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our high performance vehicles if, as a result of such violation, we were to attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, business, prospects, financial condition and operating results.
We may not be able to effectively manage our growth.
Our strategy envisions growing our business. We plan to expand our technology, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
● expand our systems effectively or efficiently or in a timely manner;
● allocate our human resources optimally;
● meet our capital needs;
● identify and hire qualified employees or retain valued employees; or
● incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our abilities to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and services and launch new product and service offerings.
Our forecasts are highly speculative in nature and we cannot predict results in a development stage company with a high degree of accuracy.
Any financial projections, especially those based on ventures with minimal operating history, are inherently subject to a high degree of uncertainty, and their ultimate achievement depends on the timing and occurrence of a complex series of future events, both internal and external to the enterprise. There can be no assurance that potential revenues or expenses we project will, in fact, be received or incurred.
We will be subject to evolving and expensive corporate governance regulations and requirements. Our failure to adequately adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business.
As a publicly traded company, we are subject to various federal, state and other rules and regulations, including applicable requirements of the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Our internal controls and procedures may not be able to prevent errors or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures, may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.
We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. As a result of developing, improving and expanding our core information technology systems as well as implementing new systems to support our sales, engineering, supply chain and manufacturing activities, all of which require significant management time and support, we may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our stock.
Our limited senior management team size may hamper our ability to effectively manage a publicly traded company while developing our products and harm our business.
Our management team has experience in the management of publicly traded companies and complying with federal securities laws, including compliance with recently adopted disclosure requirements on a timely basis. They realize it will take significant resources to meet these requirements while simultaneously working on licensing, developing and protecting our products and intellectual property. Our management will be required to design and implement appropriate programs and policies in responding to increased legal, regulatory compliance and reporting requirements, and any failure to do so could lead to the imposition of fines and penalties and harm our business.
The global economy may continue to experience soft growth over the next several years, reducing demand for our products.
The global economy continues to experience difficulty in its recovery from the 2008 global recession. In light of the current global economic environment, there can be no guarantees that the United States, or its trading partners abroad, with whom it is largely interdependent, will experience a return to pre-recessionary growth and economic performance. Continued lackluster growth and economic figures would serve to further quell economic demand, and subsequently, growth of the automotive market, reducing demand for our products.
Risks Related to our Common Stock
We currently have secured and unsecured convertible notes payable with conversion rates that vary depending on the market price of our stock, which have and may continue to have a significant dilutive impact to stockholders. The conversion of debt has adversely impacted the market price of our stock, which may continue.
As of March 31, 2015, we had outstanding 3% secured and 7% unsecured convertible notes in the amount of $2,617,160 and $2,346,295, respectively, including accrued interest, with conversion prices that are based on a discount to the market price of our stock, but in no case lower than $0.02 and $0.03, respectively. As of March 31, 2015, these notes were convertible into 209,069,936 shares of our Common Stock.
As of March 31, 2015, we had outstanding unsecured convertible notes in the amount of $641,435, including accrued interest, convertible into our Common Stock at prices per share ranging from discounts between 42% to 38% of our Common Stock trading market price during a certain time period, subject to conversion floor prices ranging from $0.001 to $0.00005 per share. As of March 31, 2015, the notes were convertible into approximately 106,214,457 shares of our Common Stock. From March 31, 2015 to the filing of date of this Form 10-K, $285,920 of principal and $16,594 of accrued and unpaid interest had been converted into 355,303,951 shares of our Common Stock. Based on the closing price of our stock as of July 13, 2015, the notes were convertible into approximately 314,000,000 shares of our Common Stock.
The note agreements related to convertible notes issued during September 2014 to December 2014 require us to maintain a reserve of Common Stock, as determined based on a formula stated in the note agreements, which, upon request by the note holder, can be adjusted based on the formula and the then share price of our Common Stock as of the date of request. The note holder can convert up to the number of the shares then reserved for conversion of their related note. As of March 31, 2015, we were in compliance with the Common Stock reserve provisions; however, as of the date of this filing of Form 10-K, we are in default of such reserve requirements due to insufficient availability of authorized shares to fulfill the note holders’ reserve requests. Under the provisions of default, the holders of such notes could demand that the amount we owe be increased by amounts ranging from 135% to 150% depending on the event of default and may demand that we pay such amount in cash. In addition, the interest rates could increase to between 20% and 25% per annum from the date due until cured or paid.
Our Common Stock is currently quoted on the OTC Bulletin Board (OTCBB). As such, our securities may be less liquid, be thinly traded, receive less coverage by security analysts, market makers and news media, and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange. Our stock price is likely to be highly volatile.
Although prices for shares of our Common Stock are quoted on the OTCBB, no assurance can be given that an active public trading market will develop or, if developed, that it will be sustained. The OTCBB is generally regarded as a less efficient and less prestigious trading market than other national markets. There is no assurance if or when our Common Stock will be quoted on another more prestigious exchange or market. The market price of our Common Stock is likely to be highly volatile because for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on the stock price.
Because our Common Stock is a “penny stock,” trading therein will be subject to regulatory restrictions.
Our Common Stock is currently, and in the near future will likely continue to be, considered a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure and other requirements may adversely affect the trading activity in the secondary market for our Common Stock.
We have not paid dividends in the past and, except for the dividend paid to our existing stockholders at the closing of the Merger, do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our Common Stock.
While we declared a dividend to holders of record of our Common Stock as of May 23, 2013, we do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, the our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent the stock price appreciates, which may never occur. In addition, stockholders must generally rely on sales of the shares they own after price appreciation as the only way to realize their investment, and if the price of our Common Stock does not appreciate, then there will be no return on investment.
Our officers, directors and principal stockholders can exert significant influence over our business and may make decisions that are not in the best interests of all stockholders.
As of March 31, 2015, our officers, directors and principal stockholders (greater than 5% stockholders) collectively owned approximately 47% of our fully-diluted Common Stock. In addition, Saleen owns approximately 47% of our fully-diluted Common Stock. Our directors will be determined pursuant to the Voting Agreement entered into by Saleen and the purchasers of our 3% Senior Secured Convertible Notes. Pursuant to the Voting Agreement, the parties signatory thereto are obligated to vote to set the number of directors at five, and to vote for three directors designated by Saleen (currently Steve Saleen and Jeffrey Kraws, with one vacancy), one director designated by the holders of a majority of the outstanding shares held by purchasers of our 3% Senior Secured Convertible Notes (currently vacant) and one director designated jointly by the holders of a majority of the outstanding shares held by Saleen and by the holders of a majority of the outstanding shares held by purchasers of our 3% Senior Secured Convertible Notes (currently Joe Amato).
As a result of the Voting Agreement, these stockholders will be able to affect the outcome of, or exert significant influence over, all matters requiring stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration of ownership of our Common Stock could have the effect of delaying or preventing a change of control of our company or otherwise discouraging or preventing a potential acquirer from attempting to obtain control of our company. This, in turn, could have a negative effect on the market price of our Common Stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of our Common Stock. Moreover, the interests of this concentration of ownership may not always coincide with the combined company’s interests or the interests of other stockholders, and accordingly, they could cause the combined company to enter into transactions or agreements that it would not otherwise consider.
Anti-takeover provisions may limit the ability of another party to acquire our company, which could cause our stock price to decline.
Our articles of incorporation, as amended, bylaws and Nevada law contain provisions that could discourage, delay or prevent a third party from acquiring our company, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our Common Stock.
The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, and the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we need to comply with laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC, and requirements of the principal trading market upon which our Common Stock may trade, with which we are not required to comply as a private company. As a result, we will incur significant legal, accounting and other expenses that a private company would not incur. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management, will require us to have additional finance and accounting staff, may make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on the audit committee, and may make some activities more difficult, time consuming and costly. We will need to:
● institute a more comprehensive compliance function;
● establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
● design, establish, evaluate and maintain a system of internal control over financial reporting in compliance with the requirements of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
● prepare and distribute periodic reports in compliance with its obligations under the federal securities laws including the Securities Exchange Act of 1934, as amended (the “Exchange Act”);
● involve and retain to a greater degree outside counsel and accountants in the above activities; and
● establish an investor relations function.
If we are unable to accomplish these objectives in a timely and effective fashion for our business, our ability to comply with financial reporting requirements and other rules that apply to reporting companies could be impaired. If our finance and accounting personnel insufficiently support our business in fulfilling these public-company compliance obligations, or if we are unable to hire adequate finance and accounting personnel, we could face significant legal liability, which could have a material adverse effect on our financial condition and results of operations. Furthermore, if we identify any issues in complying with those requirements (for example, if our company or the independent registered public accountants identified a material weakness or significant deficiency in our company’s internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect, our reputation or investor perceptions of our company.
We are an emerging growth company within the meaning of the Securities Act, and as a consequence of taking advantage of certain exemptions from reporting requirements that are available to emerging growth companies, our financial statements may not be comparable to companies that comply with public company effective dates.
We are an emerging growth company as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to Section 107 of the Jumpstart Our Business Startups Act, we may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, meaning that we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to take advantage of the extended transition period for complying with new or revised accounting standards applicable to public companies to delay adoption of such standards until such standards are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our principal corporate office and production facility is located at 2735 Wardlow Road, Corona, California 92882 and our design, engineering and paint facility is located at 2755 Wardlow Road, Corona, California 92882. We operate out of leased facilities comprised of a two building campus that constitutes approximately four acres of industrial and office space. Our telephone number is (714) 400-2121. We believe our facilities are adequate to meet our current and near-term needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. We are currently a party to several legal proceedings related to claims for payment that are currently accrued for in our financial statements as accounts or notes payable. Except for income tax contingencies, we record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. Material legal proceedings that are currently pending are as follows:
SSC is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County, that claimed breach of contract related to an engine installed by a third party vendor. The suit claimed $200,000 in damages plus interest, legal fees and costs of litigation. We filed a cross complaint against MSY Trading, Inc. for breach of warranty, negligence, and indemnification. On January 10, 2014, we settled this claim by agreeing to pay $112,500 over a period of 18 months of which we paid $45,500 through August 2014. Subsequent to this date we have defaulted on payments. On October 30, 2014, a judgment was entered against SSC in the amount of $68,950, which we have accrued for in accounts payable.
In December 2014, Saleen Automotive, Inc. (formerly Saleen Electric Automotive, Inc.), our wholly-owned subsidiary, received a complaint from Green Global Automotive B.V. (“GGA”) alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing, related to a European Distribution Agreement entered into in December 2011 between GGA and Saleen Automotive. The suit seeks contract and economic damages of $50,000 along with compensatory damages, restoration, lost profits and attorneys’ fees. We are currently evaluating the merits of this case, if any, and are working to ascertain the impact on our financial statements, if any.
In December 2014, we received a complaint from Ford of Escondido for 1) claim and delivery of personal property, 2) money due on a contract, and 3) common count. Home Heller Ford, which was merged into Ford of Escondido, is a party to a supply agreement with us entered into in May 2013. Specifically, Ford of Escondido seeks payment of seven (7) Ford Mustangs for a total of $222,871 plus interest and attorneys’ fees, less any amounts to be credited to us pursuant to proceeds of sale. As of March 31, 2015, we have included in accounts payable the amount owed for vehicles, which we believe are owed to Ford of Escondido. As such, we believe Ford of Escondido’s claims are without merit and have responded to the Complaint including claims that Ford of Escondido breached its supply agreement with us. There has been no response received from Ford of Escondido to our position and the outcome is uncertain; however, we believe this matter will not have a material impact, if any, on our financial statements.
In February 2014, SSC received a Complaint from Citizens Business Bank (the “Bank”) alleging, among other matters, breach of contract due to non-timely payment of November and December 2013 principal amounts owed, which we paid in December 31, 2013, and the occurrence of a change in control as a result of the Merger. In April 2014, the Bank agreed to dismiss the suit in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest for May, June and July 2014, and the agreement to pay the remaining recorded balance due of $443,000 to the Bank in August 2014. From August 2014 to March 31, 2015, in exchange for payments totaling $90,000, the Bank agreed to extend this arrangement through various dates with the last date being March 2015. We did not pay the then outstanding principal and interest in March 2015 and the Bank has not agreed to an additional extension in connection with the default due to the Bank’s belief that a change in control occurred. On May 14, 2015, we were notified of a lawsuit filed by the Bank in the Superior Court of the State of California, County of Riverside, alleging breach of the Loan Agreement with the Bank (“Loan Agreement”), breach of a commercial guaranty by Steve Saleen and indebtedness for principal and interest of at least $369,302, and seeking appointment, which has not been granted by the court as of the date of this filing, of a limited purpose receiver and a temporary restraining order enjoining us from transferring the SSC collateral securing loan. The main complaint by the Bank stems from our reverse merger that occurred in June 2013 whereby the Bank deemed this event to constitute a change in control, as defined in the loan agreement. Although we currently believe that resolving claims against us, individually or in aggregate, will not have a material adverse impact on the our financial statements, these matters are subject to inherent uncertainties and our views of these matters may change in the future.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our Common Stock is currently quoted on the OTCBB. Our Common Stock has been quoted on the OTCBB since August 9, 2012 under the symbol “WSTY.” On July 5, 2013, the trading symbol for our Common Stock changed to “SLNN.” Historical closing prices for shares of our Common Stock are as follows:
Stockholders of Record
As of July 13, 2015, an aggregate of 460,556,796 shares of our Common Stock were issued and outstanding and were owned by 264 stockholders of record.
Dividends
On May 23, 2013, our board of directors declared, for stockholders of record of our Common Stock as of May 23, 2013, a per share dividend of $0.035 in cash, subject to (a) the closing of the Merger, (b) our compliance with the applicable requirements of the Nevada Revised Statutes and (c) our notification to the Financial Industry Regulatory Authority (“FINRA”) of the dividend and FINRA’s confirmation that it has received the necessary documentation to process the dividend. On June 26, 2013, we satisfied all of the conditions to payment of the dividend and paid the dividend on June 27, 2013.
Other than the aforementioned dividend, we do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under Nevada statutes. The timing, amount and form of dividends, if any, will depend upon, among other things, our results of operation, financial condition, cash requirements, and other factors deemed relevant by our board of directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENTS’ 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 our company for the years ended March 31, 2015 and 2014. You should read this discussion together with the consolidated financial statements, related notes and other financial information included in this Annual Report. 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, including those discussed under Part I, Item 1A - “Risk Factors” and elsewhere in this Annual Report, and are based upon judgments concerning various factors that are beyond our control. These risks could cause our actual results to differ materially from any future performance suggested below.
We are an emerging growth company as defined in Section 2(a)(19) of the Securities Act. Pursuant to Section 107 of the Jumpstart Our Business Startups Act, we may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, meaning that we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen to take advantage of the extended transition period for complying with new or revised accounting standards applicable to public companies to delay adoption of such standards until such standards are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
General Overview
We design, develop, manufacture and sell high performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by manufacturers (Ford, Chevrolet, Dodge and Tesla)) of OEM American sports and electric vehicles and the production of high performance USA-engineered sports cars. Saleen-branded products include a line of high performance and upgraded muscle and electric cars, automotive aftermarket specialty parts and lifestyle accessories. A high performance car is an automobile that is designed and constructed specifically for speed. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling and braking systems to support it. Muscle cars are any of a group of American-made 2-door sports coupes with powerful engines designed for high performance driving. We are also planning to develop an American supercar. The term supercar describes an expensive (approximately $250,000 or more), limited production, fast or powerful (capable of reaching speeds in excess of 180 miles per hour) sports car with a centrally located engine.
Our customers worldwide include muscle and high performance car enthusiasts, collectors, automotive dealers, exotic car retail dealers, television and motion picture production, and consumers in the luxury supercar and motorsports market. We plan to develop a network of company-owned branded stores to complement our existing retail dealer locations.
We utilize automobile manufacturers Ford, Chevrolet, Dodge and Tesla platform vehicles for our high performance and electric vehicle production. All aftermarket parts and accessory products are engineered and manufactured exclusively by us. Our main retail outlets for our products are authorized Ford, Chevrolet, Dodge and exotic car dealers.
We plan to operate as a global high performance automotive brand and expand our production, sales and marketing operations extensively within the markets of the USA and into multiple international markets. In March 2014, we entered into an agreement to distribute the full collection of Saleen automobiles in China. We also plan to open our own retail outlets, market our expertise in specialist engineering and design services to third party clients, and introduce our next generation American supercar.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the then outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of our Common Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of our Common Stock (on a fully-diluted basis) was owned, collectively, by Saleen (including 341,943 shares of our Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of our Common Stock, issued to Saleen pursuant to an Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s three directors became members of our five-member board of directors. On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January 2014, we effected an increase in the number of our common shares authorized to 500,000,000 and all the remaining shares of Super Voting Preferred Stock were converted into our Common Stock and the Super Voting Preferred Stock ceased to be a designated series of our preferred stock.
The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the historical operations of the Saleen Entities prior to the Merger and that of the consolidated company following the Merger. The accompanying consolidated financial statements are prepared as if we will continue as a going concern. Accordingly, the consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.
Critical Accounting Policies
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance, fair value derivatives, and reserve for warranty claims. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions. We apply the following critical accounting policies in the preparation of our consolidated financial statements:
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist primarily of parts for both resale and production of high performance vehicles. We will typically buy the base automobile chassis from dealers and then modify the vehicle as ordered, using our developed parts. Other than parts for resale, we typically have no finished goods inventory, as we build to order.
Intangible and Long-Lived Assets
In accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. We had no such asset impairments at March 31, 2015 or 2014. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Revenue Recognition
We generate revenues primarily from the sale of high performance vehicles and parts. We recognize revenue from the sale of completed high performance vehicles and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment or delivery of our product to the destination specified by the customer. In cases where we are the primary obligor related to the purchase of base Ford Mustang, Chevrolet Camaro and Dodge Challenger vehicles, we recognize revenue related to the cost of the chassis plus markup, if any.
We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when our high performance vehicles and retail parts leave our dock. Except for warranties related to our high performance vehicles, we have no post-sales obligations.
Warranty Reserves
We provide a three-year or 36,000 miles New Vehicle Limited Warranty with every Saleen 302 Mustang, Saleen 570 Challenger, Saleen 620 Camaro high performance vehicle and Saleen GTX. The vehicle limited warranty applies to our 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 (Ford, Chevrolet, Dodge and Tesla). We provide a warranty reserve for estimated product warranty costs at the time the revenues are recognized. While we engage in quality programs and processes, up to and including the final product, our warranty obligation is affected by product failure rates, the cost of the failed product and the inbound and outbound freight costs incurred and the OEM manufacturer’s honoring of their warranty. We continuously monitor and analyze product returns for warranty and maintain a reserve for the related warranty costs based on historical experience and assumptions. If actual failure rates and the resulting cost of replacement vary from our historically based estimates, revisions to the estimated warranty reserve would be required.
Derivative Financial instruments
We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is re-valued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock-based derivative financial instruments, we use a weighted-average Black-Scholes-Merton pricing model to value the derivatives instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Share-Based Compensation
We use the fair value recognition provision of ASC 718, “Stock Compensation,” which requires us to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. We use the Black-Scholes option pricing model to calculate the fair value of any equity instruments on the grant date.
We also use the provisions of ASC 505-50, “Equity Based Payments to Non-Employees,” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
Litigation
We are involved in disputes, litigation and other legal proceedings. We prosecute and defend these matters aggressively. However, there are many uncertainties associated with any litigation, and we cannot provide assurance that these actions or other third party claims against us will be resolved without costly litigation and/or substantial settlement costs. Any litigation may require us to pay damages whereby our business, financial condition and results of operations could be materially and adversely affected. We continually evaluate the uncertainties associated with litigation and record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether a liability can be reasonably estimated. Accordingly, the outcomes of legal proceedings and/or our ability to settle disputes on terms acceptable to us are subject to significant uncertainty. Should we choose to pay significant sums in settling a dispute or should material legal matters be resolved against us, the operating results of a particular reporting period could be materially adversely affected.
See Note 1 of Notes to Consolidated Financial Statements for additional information regarding our critical and significant accounting policies.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We will apply the new revenue recognition standard in annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact, if any, on adopting ASU 2014-09 on our results of operations and financial condition.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on our operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. We are currently evaluating the impact, if any, of adopting ASU 2014-08 on our results of operations and financial condition.
In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact, if any, of adopting ASU 2014-16 on our results of operations and financial condition.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), as part of its initiative to reduce complexity in accounting standards. ASU No. 2015-01 eliminates from generally accepted accounting principles the concept of extraordinary items. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with earlier adoption permitted. A reporting entity may apply the provisions of ASU No. 2015-01 prospectively or retrospectively to all prior periods presented in the financial statements. We do not expect the adoption of ASU No. 2015-01 to have a material effect on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on our present or future consolidated financial statements.
Year Ended March 31, 2015 Compared to Year Ended March 31, 2014
Our revenue, operating expenses, and net loss from operations for the year ended March 31, 2015 as compared to the year ended March 31, 2014 were as follows - some balances on the prior period’s consolidated financial statements have been reclassified to conform to the current period presentation:
Revenues: Revenue consists of sales of high performance vehicles and aftermarket retail parts. Our revenue from high performance muscle car vehicles generally includes the base chassis (Mustang, Camaro or Challenger), on which we normally obtain a small margin, and production conversion of the base Mustang, Camaro, Challenger and Tesla Model S chassis into a Saleen high performance vehicle. Parts represent aftermarket retail sales of Saleen lifestyle accessories and Saleen-branded products and automotive aftermarket specialty parts sold to our base of Saleen automotive vehicle enthusiasts in the U.S. and overseas. Additionally, many of these parts and accessories are marketed and sold to the owners of Ford Mustangs, Chevrolet Camaros and Dodge Challengers.
Total revenues for the year ended March 31, 2015 were $3,800,390, a decrease of $1,306,836 or 26% from $5,107,226 for the year ended March 31, 2014. Vehicle and parts declined $1,185,336 or 24% to $3,800,390 from $4,985,726 for the same period in the prior year. The decrease in vehicle and parts was primarily driven by customer preference for the 2015 Mustang model along with the availability of 2014 Ford Mustang chassis, which negatively impacted revenues starting in May 2014, as Ford discontinued production of the 2014 Mustang model in order to switch to the new 2015 model. The 2015 Mustang model did not start shipping to us until late 2014 and starting in September 2014, the 2014 Mustang chassis was difficult to obtain. The new 2015 model represented a major model change requiring us to make significant design and tooling modifications to our Saleen Mustang. Further, due to the change in Mustang models, several customers opted to wait for the new 2015 model thereby delaying placing orders. During the same period in the prior year, Ford’s change from the 2013 to 2014 Mustang model year was minimal requiring little change and the supply of vehicles was not disruptive nor did customers opt to wait for the newer model. Based on current orders for the 2015 Saleen Mustang models, we anticipate an increase in volume for the Saleen Mustang, on a year over year basis. We recently started shipping our 2015 Saleen Mustang White Label models in February 2015 and the Yellow and Black Labels in late April 2015.
During the year ended March 31, 2014 revenues of $121,500 were realized from a contract with a major Hollywood movie producer to design and build replica supercar racing automobiles for the Need for Speed movie, which was released in March 2014. We did not have any other design contracts during the year ended March 31, 2015 and 2014.
Cost of Goods Sold: Cost of goods sold consists of five major categories: base chassis, material, overhead, labor and purchased process services. Chassis costs relate to the purchased Ford Mustang, Chevrolet Camaro or Dodge Challenger vehicles in which we are the primary obligor. Material cost relates to the purchase of conversion parts used in the production of our high performance vehicles, and procurement of aftermarket parts, which are manufactured by third party suppliers using our proprietary tools and molds developed by us. Overhead costs include costs associated with manufacturing support, shop and warehouse supplies and expenses, small tools and equipment and other related warehouse and production costs. Our labor costs include the cost of personnel related to the production of our high performance vehicles and logistics of warehousing and shipping our aftermarket parts. Purchased process services related to the subcontracting of specific manufacturing processes to outside contractors, such as paint.
Total costs of goods sold for the year ended March 31, 2015 were $3,366,437, a decrease of $910,602 or 22% from $4,227,039 of costs of goods sold for the year ended March 31, 2014. The decrease was primarily attributable to lower volume of sales during the year ended March 31, 2015 as compared to the same period in the prior year.
Gross Margin: Gross Margin from the sale of vehicles and parts decreased by $396,234 to $433,953, or 22%, for a gross margin of 11% for the year ended March 31, 2015 from a gross margin of $830,187, or 16%, for the year ended March 31, 2014. The decrease in gross margin was primarily driven by lower volume of sales coupled with higher costs to obtain the 2014 Mustang chassis due to short supply of such vehicles, as Ford discontinued production of the 2014 Mustang in May 2014 to switch to the 2015 model.
Research and Development Expenses: Research and development expenses are expensed as incurred and represent engineering and design salaries and benefits and costs incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes.
Research and development expenses decreased slightly by $19,193, or 2%, to $747,833 during the year ended March 31, 2015 from $766,996 for the year ended March 31, 2014. Excluding non-cash stock based compensation of $66,068, research and development expenses decreased $85,231 or 11%. The decrease was primarily related to a decline in salaries along with a decline in materials used in R&D. There were no stock options granted during the year ended March 31, 2014.
Sales and Marketing Expense: Sales and marketing expenses relate to sales and marketing salaries and benefits, including our regional sales representatives, and costs incurred to promote our existing and new products, such as attending car shows and promotion through other media outlets, along with new car sales expenses such as commissions and incentives, and costs related to investor relations.
Sales and marketing expenses increased by $119,569, or 8%, to $1,656,797 for the year ended March 31, 2015 from $1,537,228 for the year ended March 31, 2014. Excluding non-cash stock based compensation of $268,609 incurred during the year ended March 31, 2015, sales and marketing expenses decreased by $149,040 or 10% driven primarily by $325,700 of stock compensation expense related to our issuance of Common Stock in exchange for investor relation services during the year ended March 31, 2014, which did not occur during the year ended March 31, 2015. This decrease was slightly offset by higher new car sales and marketing expenses related to expansion of our sales team and marketing efforts related to the launch of our 2015 Saleen Mustang. There were no employee stock options issued during the year ended March 31, 2014.
General and Administrative Expense: General and administrative expenses include expenses for administrative salaries, including executive, finance/accounting, information personnel and administrative support staff and benefits. Other general and administrative costs also include occupancy costs of our facilities, travel and entertainment, auto, insurance, stock compensation, other office support costs and professional fees, including outside accounting/audit, legal, and investor fund raising advisory services.
General and administrative expenses decreased by $1,080,070, or 25%, to $3,181,983 for the year ended March 31, 2015 from $4,261,612 for the year ended March 31, 2014. The decrease is primarily comprised of $873,701 of lower professional fees primarily related to merger activity during the year ended March 31, 2014 that was not incurred during the year ended March 31, 2015 as we did not have a comparable expense of this type; $136,882 of lower general and administrative salaries as a result of headcount reduction; and $69,487 decrease in other expenses primarily due to lower general and administrative expenses resulting from our efforts to reduce costs due to the decline in revenue. General and administrative expenses included non-cash stock based compensation of $650,354 for the year ended March 31, 2015 as compared to $504,481 for the year ended March 31, 2014.
Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense increased by $84,992, or 88%, to $181,983 for the year ended March 31, 2015 from $97,061 for the year ended March 31, 2014.
Interest Expense: Interest expense increased by $1,704,580 or 281% to $2,310,774 for the year ended March 31, 2015 from $606,194 for the year ended March 31, 2014. The increase is primarily attributable to an increase of $1,519,176 of non-cash interest expense during the year ended March 31, 2015 along with $185,404 of interest incurred on loans outstanding primarily due to our increase in notes issued along with interest incurred on flooring of chassis. Non-cash interest relates to the amortization of the convertible debt discount on our convertible notes.
Expenses of Reverse Merger Transaction: During the year ended March 31, 2014, we incurred $365,547 of expenses related to the reverse merger transaction. This includes $39,547 of liabilities assumed, $46,000 in legal fees, and dividends of $280,000 paid to our existing stockholders prior to the Merger. We did not have a comparable expense of this type during the year ended March 31, 2015.
Private Placement Costs: In conjunction with the issuance of convertible notes from September to December 2014, the conversion features of such notes was bifurcated from the notes and recorded as derivative liability. We recorded $1,306,456 as a derivative liability with an offsetting charge to valuation discount of $638,225 with the remainder of $668,231 recorded as private placement costs during the year ended March 31, 2015. In addition, as a result of our issuance of our Second Amendment to our 3% Senior Secured Convertible Notes in January 2015, we recorded $112,060 as private placement costs (see Note 5 to our consolidated financial statements). We incurred no similar expense during the year ended March 31, 2014.
Loss on extinguishment of convertible debt: On January 23, 2015, we entered into a Second Amendment to 3% Senior Secured Convertible Notes (“3% Notes”) whereby the conversion price of the 3% Notes were amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elects to convert all or part of the note. However, in no event shall the conversion price be less than $0.02. As a result of this amendment, we recognized a loss of $1,257,468, which was comprised of $684,975 of debt discount previously included as an offset to the 3% debt on our balance sheet and $572,493 related to the incremental change in the potential shares of common stock to be issued and the conversion price.
Gain on Extinguishment of Derivative Liability: Gain on the extinguishment of derivative liability related to gains of $50,314 and $236,158 during the year ended March 31, 2015 and 2014, respectively, as a result of the extinguishment of derivative liabilities resulting from certain note holders’ request to convert their convertible debt to stock in accordance with the terms of their convertible notes.
Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of certain convertible notes issued by us was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of these notes are characterized as a derivative liability, which is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the year ended March 31, 2015, we recorded $1,111,389 gain due to the change in the fair value of the derivative liability which was mainly driven by a gain recognized of $1,123,836 related to our extinguishment of a derivative in conjunction with the June 2014 First Amendment to our 3% Senior Convertible Notes as compared to an expense of $3,608,288 for the year ended March 31, 2014.
Net Loss: Net loss decreased by $2,613,224, or 24%, to a net loss of $8,508,758 for the year ended March 31, 2015 from a net loss of $11,121,982 for the year ended March 31, 2014. The decrease in net loss was primarily attributable to $1,456,182 decrease in loss from operations comprised of $1,852,416 decline in operating expenses offset by $396,234 decrease in gross profit; decrease of $4,719,677 in gain on extinguishment of derivative liability to a gain of $1,111,389 for the year ended March 31, 2015 compared to a loss of $3,608,288 during the same period in the prior year; and costs of $367,547 related to our reverse merger transaction that did not occur during the year ended March 31, 2015. This decrease was somewhat offset by the increase in interest expense of $1,704,580 primarily attributable to $1,519,176 increase in non-cash interest expense related to our convertible notes; $1,257,468 loss related to our amendment of our 3% Notes; $780,290 of private placement costs incurred related to convertible notes issued during the year ended March 31, 2015; and $185,844 decrease in gain on extinguishment of derivative liability.
Liquidity and Capital Resources
Our working capital deficiency as of March 31, 2015 and March 31, 2014 was as follows:
The following summarizes our cash flow activity for the fiscal years ended March 31, 2015 and March 31, 2014:
For the fiscal years ended March 31, 2015 and 2014, our principal sources of liquidity have been obtained from cash provided by financing, including through the private issuance of notes and sale of equity securities, along with customer deposits received in advance of shipment and gross margin achieved from the sales of high performance vehicles and aftermarket parts. Our principal uses of cash have been primarily to finance operations; expand our staff; develop new products and improve existing products; expand marketing efforts to promote our products and company; and capital expenditures primarily for tooling. We anticipate that significant additional expenditures will be necessary to develop and expand our automotive assets before sufficient and consistent positive operating cash flows will be achieved including sufficient cash flows to service existing debt. Additional funds will be needed in order to continue production and operations, obtain profitability and to achieve our objectives. As such, our cash resources are insufficient to meet our current operating expense and production requirements and planned business objectives beyond the date of this Form 10-K filing without additional financing.
As further presented in our consolidated financial statements and related notes, during the year ended March 31, 2015, we incurred a loss from operations of $5,321,929 and utilized $2,549,895 of cash in operations. We also had a stockholders’ deficit and working capital deficit of $9,669,225 and $7,050,664, respectively as of March 31, 2015, and as of that date, we owed $745,503 in past unpaid payroll and other taxes; $933,271 of outstanding notes payable were in default; $1,204,840 of accounts payable was greater than 90 days past due; and $288,900 is owed on past due rent. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of our indebtedness. In addition, we currently do not maintain workers’ compensation, product liability and other general insurance. These factors raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve revenues at a level that will achieve profitably and generate positive cash flows from operations. At March 31 and July 13, 2015, we had cash on hand in the amount of $143,803 and approximately $21,000, respectively, and we are not generating funds from operations to cover current production and operating expenses and we will have to obtain additional financing. We have utilized funding to operate the business during the year ended March 31, 2015 with funds obtained from $1,702,656 of customer deposits received in advance of shipment from orders placed by customers; received $500,000 in advance royalties from an Intellectual License Agreement; raised $1,289,409 through the issuance of convertible notes; received $295,000 through the issuance of notes payable of which $195,000 came from related parties; and obtained cash from sales of Common Stock through entering into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from us an aggregate of 1,183,334 of restricted common shares at a per share price of $0.15 for aggregate proceeds of $177,500. However, we will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for production and to operate our business through and beyond the date of this Form 10-K filing. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions and covenants on our operations, in the case of debt financing or cause substantial dilution for our stockholders (including the issuance of securities sufficient to result in a change in control of our Company), in the case of convertible debt and equity financing.
At March 31, 2015, we had a working capital deficit of $7,050,664 compared to a working capital deficit of $3,050,286 at March 31, 2014. The increase in working capital deficit primarily relates to the decrease in cash of $1,356,806 to $143,083 as of March 31, 2015 from $1,499,889 as of March 31, 2014. In addition, current liabilities increased by $2,680,878 to $7,961,458 as of March 31, 2015 from $5,280,580 as of March 31, 2014 primarily due to a derivative liability of $1,268,588, which we recorded in conjunction with convertible notes issued from September to December 2014; $1,702,656 increase in customer deposits received during the fiscal year ended March 31, 2015, primarily related to deposits received from signed orders for the 2015 Saleen Mustang; $275,000 in deferred vendor consideration related to purchase commitment advances received from BASF and FinishMaster; and $153,978 increase in due to related parities. The decrease in working capital was offset partially by the decrease in accounts payable of $347,421 primarily due to payments on account and $279,144 decrease in notes payable.
Net cash used in operating activities for the fiscal year ended March 31, 2015 totaled $2,549,895 after the net loss of $8,508,758 was decreased by $3,809,037 in non-cash charges and decreased by $2,149,826 in net changes to the working capital accounts. This compares to cash used in operating activities for the fiscal year ended March 31, 2014 of $4,316,576 after the net loss for the period of $11,121,982 was decreased by $5,344,019 in non-cash charges and by $1,461,387 in changes to the working capital accounts.
Net cash used in investing activities was $227,277 for fiscal year ended March 31, 2015 as compared to $303,666 of cash used in investing activities for fiscal year ended March 31, 2014.
Net cash provided by financing activities for the fiscal year ended March 31, 2015 was $1,420,366. Of this amount, $1,289,409 came through the issuance of our convertible notes, $177,500 came from the issuance of 1,183,344 shares of our Common Stock; $295,000 came from issuances of notes payable including $195,000 from related parties; and $7,500 came from the exercise of a warrant. Cash of $349,043 was used to pay principal on long-term notes. This compares to cash provided by financing activities for the fiscal year ended March 31, 2014 of $6,115,697. Of this amount, $5,250,000 came from the issuance of our senior secured and unsecured convertible notes; $575,000 came from the issuance of note payable to a stockholder; and $1,312,500 came from the issuance of 8,793,337 shares of Common Stock. Cash of $318,558 was used to pay principal on long term notes and cash of $703,245 was used to pay principal on notes payable to related parties.
Secured Convertible Notes
On January 23, 2015, we entered into a First Amendment to Securities Purchase Agreement dated June 26, 2013 by and among us and the related June 26, 2013 note holders (“June 2013 Notes”) whereby the note holders agreed to amend the Securities Purchase Agreement entered into on June 26, 2013 to provide for the issuance of up to $600,000 in additional Notes for a period up to June 26, 2015 under the same terms as the June 2013 Notes. In addition, we entered into a Second Amendment to 3% Senior Secured Convertible Notes whereby the conversion price of the June 2013 Notes was amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elects to convert all or part of the note. However, in no event shall the conversion price be less than $0.02.
In conjunction with these amendments, on January 26, 2015 we entered into two 3% Senior Secured Convertible Notes in the principal amount of $499,892 with two accredited investors who participated in the June 26, 2013 offering of which $98,708 was converted from a revolver entered into in November 2013.
Unsecured convertible notes
From September 2014 to December 2014, we issued Convertible Promissory Notes (“Notes”) in the aggregate principal amount of $638,225 to eight separate accredited investors. During the three months ended March 31, 2015 and through the date of our filing of this Form 10-K, note holders converted $20,000 and $285,920 of principal, respectively, and $828 and $16,594 of accrued and unpaid interest, respectively, into 1,785,714 and 355,303,951 shares of the our Common Stock, respectively. The Notes bear interest ranging from 8% to 12% per annum and mature on various dates from April 2015 to December 2016. We may not prepay the Notes. Further, the Notes contain provisions that under certain events of default, as defined in the agreements, the amount owed could increase by amounts ranging from 135% to 150% depending on the event of default. In addition, in the event of non-payment when due, the interest rates would increase to between 20% and 25% per annum from the date due until paid.
The Notes are convertible into shares of our Common Stock at the option of the holder commencing on the various dates following the date of the Notes and ending on the later of the maturity date or date of full payment of principal and interest. The principal amount of the Notes along with, at the holder’s option, any unpaid interest and penalties, are convertible at price per share discounts ranging from 42% to 38% our Common Stock trading market price during a certain time period, as defined in the agreement. Further, the conversion prices are subject to a floor such that the conversion prices will not be less than a certain price, as defined in the agreement, with such floor prices ranging from $0.001 to $0.00005 per share. In addition, the conversion prices are subject to adjustment in certain events, such as in conjunction with any sale, conveyance or disposition of all or substantially all of our assets or consummation of a transaction or series of related transactions in which we are not the surviving entity. As of the March 31, 2015, the notes were convertible into approximately 106,214,457 shares of our Common Stock. Per the terms of the notes, we reserved approximately 153,000,000 shares of our Common Stock for the conversion of these Notes. Based on the closing price of our stock as of the date of this Form 10-K filing and the current principal and accrued interest outstanding of $345,795, the notes were convertible into approximately 314,000,000 shares of our Common Stock.
Private Placement Stock Subscriptions
During the year ended March 31, 2015, we entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased an aggregate of 1,183,334 restricted shares of our Common Stock at a per share price of $0.15 for aggregate proceeds of $177,500, and also received Common Stock Purchase Warrants to purchase 1,183,334 shares of our Common Stock at an exercise price of $0.15 per share.
Off Balance Sheet Arrangements
As of March 31, 2015, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.
Commitments
The following summarizes our contractual obligations, excluding amounts already recorded on the Consolidated Balance Sheet at March 31, 2015, and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Lease Obligation
We rent two buildings totaling approximately 76,000 square feet on triple net leases through January, 2018. The current lease amendment provides for an annual escalation of 3% in the rent each February.
The future minimum rental payments required under the non-cancelable operating leases described above as of March 31, 2015 are as follows:
Purchase Obligations
In April 2014, we entered into an agreement with BASF to exclusively use BASF’s products for paint work. The agreement continues from May 2014 until the Company purchases in aggregate $4,131,000 of BASF products. If the aggregate purchases of BASF products are less than $1,697,000 over a period of 36 consecutive months, we are required to repay BASF 6.1% of the shortfall between $1,697,000 and the amount it actually purchased over this period. In consideration for our exclusive use of BASF’s products and fulfilling this purchase commitment, BASF paid us $250,000, which was recorded as deferred vendor consideration in our consolidated financial statements. This amount will be recorded as a reduction of cost of services based on a systematic and rational allocation of the cash consideration offered to the underlying transaction.
In May 2014, we entered into an agreement with FinishMaster, Inc. (“FinishMaster”) to exclusively use FinishMaster’s paint material supplies. The agreement continues from May 2014 until we purchase in aggregate $1,555,000 of FinishMaster products. In consideration of our exclusive use of FinishMaster’s products and fulfilling this purchase commitment, FinishMaster paid us $25,000, which was recorded as deferred vendor consideration, and FinishMaster will pay an additional $25,000 upon the achievement of purchase level milestones, as outlined in the agreement. Should we not complete a set purchase level milestone, we would be required to re-pay the $25,000 along with $11,475 compensation to FinishMaster. This initial amount paid will be recorded as a reduction of cost of services based on a systematic and rational allocation of the cash consideration offered to the underlying transaction.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Saleen Automotive, Inc.
We have audited the accompanying consolidated balance sheets of Saleen Automotive, Inc. and subsidiaries (the “Company”), as of March 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Saleen Automotive, Inc. and subsidiaries as of March 31, 2015 and 2014, and the results of their consolidated operations and cash flows the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has suffered recurring losses, utilized significant cash in operations, and has a stockholders’ deficit. In addition, as of March 31, 2015, the Company is delinquent in payment of its payroll taxes and a significant amount of the Company’s notes payable are in default. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Weinberg & Company, P.A.
Los Angeles, California
July 14, 2015
Saleen Automotive, Inc. and Subsidiaries
Consolidated Balance Sheets
See accompanying notes which are an integral part of these consolidated financial statements.
Saleen Automotive, Inc. and Subsidiaries
Consolidated Statements of Operations
See accompanying notes which are an integral part of these consolidated financial statements.
Saleen Automotive, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Deficit
For the fiscal years ended March 31, 2015 and 2014
See accompanying notes which are an integral part of these consolidated financial statements.
Saleen Automotive Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
Saleen Automotive Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
See accompanying notes which are an integral part of these consolidated financial statements.
Saleen Automotive Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal Years Ended March 31, 2015 and 2014
NOTE 1 - NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Saleen Automotive, Inc. (formerly W270, Inc.) (the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011. The Company designs, develops, manufactures and sells high performance vehicles built from base chassis’ of Ford Mustangs, Chevrolet Camaros, Dodge Challengers and Tesla Model S vehicles. The Company is a low volume vehicle design, engineering and manufacturing company focusing on the mass customization (the process of customizing automobiles that are mass produced by the manufacturers (Ford, Chevrolet, Dodge and Tesla) of OEM American sports and electric vehicles. A high performance car is an automobile that is designed and constructed specifically for speed and performance. The design and construction of a high performance car involves not only providing a capable power train but also providing the handling, aerodynamics and braking systems to support it. The Company’s Saleen-branded products include a complete line of upgraded high performance vehicles, automotive aftermarket specialty parts and lifestyle accessories.
Merger
On May 23, 2013, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, its wholly-owned subsidiary, Saleen Florida Merger Corporation, its wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of the Company’s wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of the Company’s wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of the Company’s Super Voting Preferred Stock, which was subsequently converted into 69,257,125 shares of the Company’s Common Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately 93% of the beneficial ownership of the Company’s Common Stock (on a fully-diluted basis) was owned, collectively, by Saleen (including 341,943 shares of the Company’s Super Voting Preferred Stock, which was subsequently converted into 42,742,875 shares of the Company’s Common Stock, issued to Saleen pursuant to the Assignment and License Agreement) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger the Company is solely engaged in the Saleen Entities’ business, Saleen Automotive’s then officers became the Company’s officers and Saleen Automotive’s then three directors became members of the Company’s five-member board of directors. On June 17, 2013, the Company consummated a merger with WSTY Subsidiary Corporation, its wholly-owned subsidiary, pursuant to which the Company amended its articles of incorporation to change its name to Saleen Automotive, Inc. In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars. In January 2014, the Company effected an increase in the number of its common shares authorized to 500,000,000 and all the remaining shares of Super Voting Preferred Stock were converted into Common Stock of the Company and the Super Voting Preferred Stock ceased to be a designated series of the Company’s preferred stock.
As the owners and management of Saleen Automotive had voting and operating control of the Company after the Merger, 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. Due to the change in control, the consolidated financial statements reflect the historical results of the Saleen Entities prior to the Merger and that of the consolidated company following the Merger. Common Stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as of the earliest periods presented as capital stock reflecting the exchange ratio in the Merger. The amount of debt assumed upon the Merger of $39,547, legal and closing costs of $46,000, and a dividend of an aggregate amount of $280,000 paid to our stockholders as of May 23, 2013 have been reflected as a cost of the reverse merger transaction in the accompanying Statement of Operations for the year ended March 31, 2014.
Consolidation Policy
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Saleen Automotive, Inc., a Florida corporation, Saleen Signature Cars, a California corporation and Saleen Sales Corporation, a California corporation. Intercompany transactions and balances have been eliminated in consolidation.
Reclassification of Certain Prior Year Information
The Company has reclassified certain prior year amounts to conform to the current year presentation. This included reclassification of promotional trade discount expenses of $172,661 for the twelve month period ended March 31, 2014 to revenue from sales and marketing expenses. The Company has also reclassified $23,580 of accounts payable owed to Molly Saleen Inc. as of March 31, 2014 from Accounts Payable to Due to Related Parties and has reclassified $139,300 of taxes payable as of March 31, 2014 from Other current liabilities to Payroll and other taxes payable. The reclassification of these amounts had no impact on consolidated net loss or cash flows.
Going Concern
The Company’s consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the year ended March 31, 2015, the Company incurred an operating loss of $5,321,929 and utilized $2,549,895 of cash in operations. The Company also had a stockholders’ deficit and working capital deficit of $9,669,225 and $7,050,644, respectively, as of March 31, 2015, and as of that date, the Company owed $745,503 in past unpaid payroll and other taxes; $933,271 of outstanding notes payable were in default; $1,204,840 of accounts payable was greater than 90 days past due; and $288,900 is owed on past due rent. In addition, in May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under the Company’s 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of the Company’s indebtedness. In addition, the Company does not currently maintain workers’ compensation, product liability and other general insurance.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profit from operations. At March 31, 2015 and July 13, 2015 the Company had cash on hand in the amount of $143,083 and approximately $21,000, respectively, and is not generating sufficient funds to cover current production and operations. The Company has utilized funding to operate the business during the year ended March 31, 2015 with funds obtained from customer deposits received in advance of shipment of $1,702,656; received $500,000 in advance royalties from an Intellectual Property Agreement (Note 11) raised $1,289,409 through the issuance of convertible notes; received $295,000 through the issuance of notes payable of which $195,000 came from related parties; and obtained cash from sales of Common Stock through entering into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of 1,183,334 restricted common shares at a per share price of $0.15 for aggregate proceeds of $177,500. The Company will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for production and to operate its business through and beyond the date of this Form 10-K filing. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders in the case of convertible debt and equity financing.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management estimates include the estimated collectability of its accounts receivable, the valuation of long lived assets, warranty reserves, the assumptions used to calculate derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.
Level 3 Unobservable inputs based on the Company’s assumptions.
The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued liabilities, customer deposits, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
As of March 31, 2015 and 2014, the Company’s consolidated balance sheets included the fair value of derivative liabilities of $1,268,588 and $5,032,786, respectively, which was based on Level 2 measurements. There were no other investments or liabilities of the Company measured and recorded at fair value as of March 31, 2015 and 2014.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine their classification is appropriate.
Allowance for Doubtful Accounts
The Company evaluates the collectability of its trade 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 uncollectability. For the most part, the Company generally requires advance payments for cars and credit card payments for parts. As of March 31, 2014 the Company had an allowance for doubtful accounts of $271,658. There was no such allowance at March 31, 2015.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist primarily of parts for both resale and conversion of automotive chassis. The Company will typically buy the automobile chassis of the vehicle to be converted from the Ford, Chevrolet and Dodge dealers and then modify the vehicle as ordered. The Company typically has no finished goods inventory, as the Company builds to order, other than parts held for resale.
Long-lived Assets
In accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
The Company had no such asset impairments at March 31, 2015 or March 31, 2014. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
Revenue Recognition
Sales of High Performance Cars and Parts
The Company generates revenues primarily from the sale of high performance automobiles and parts. The Company recognizes revenue from the sale of completed high performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer. In cases where the Company is the primary obligor related to the purchase of base Ford Mustang, Chevrolet Camaro and Dodge Challenger vehicles, the Company recognizes revenue related to the cost of the chassis plus markup, if any.
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when the Company places the cars or products on the carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured and generally collects before shipment. Except for warranties, the Company has no post-sales obligations nor does the Company accept returns.
Contract Revenue and Cost Recognition on Design Services
During the year ended March 31, 2014, the Company realized revenue from a contract with a major Hollywood movie producer of $121,500 for the design and replica production of supercar racing automobiles for the Need for Speed movie, which was released in March 2014. The Company did not have any design contracts during the year ended March 31, 2015.
Customer Deposits
The Company’s sales orders generally require customers to put deposits on vehicles at the time of signing a sales order. Typically, the Company receives either partial or full deposits related to such sales orders in advance of shipment and is generally paid in full prior to shipment of customers’ orders. Customer deposits as of March 31, 2015 and 2014 comprised of funds received in advance of shipment and were $1,896,568 and $193,912, respectively, which will be recorded as revenue upon shipment of related customers’ orders 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 with every Saleen 302 Mustang, Saleen 570 Challenger, Saleen 620 Camaro high performance vehicle and Saleen GTX. 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 (Ford, Chevrolet, and Dodge). Changes in the product warranty accrual for the fiscal years ended March 31, 2015 and 2014 were as follows:
Business Segments
The Company currently has one operating business segment that is converting automobiles into high performance vehicles and selling related parts.
Research and Development Costs
Research and development costs consist of expenditures for the research and development of new products and technology and are expensed as incurred. Research and development costs were $747,833 and $766,996 during the years ended March 31, 2015 and 2014, respectively.
Advertising, Sales and Marketing Costs
Advertising, sales and marketing costs are expensed as incurred and are included in sales and marketing expenses. During the year ended March 31, 2015, advertising, sales and marketing expenses were $3,679, $126,185, and $472,969, respectively. During the year ended March 31, 2014, advertising, sales and marketing expenses were $59,993, $110,275, and $414,555, respectively.
Income Taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry forward period under the Federal tax laws.
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.
Stock Compensation
The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes-Merton option pricing model to calculate the fair value of any equity instruments on the grant date.
The Company also uses the provisions of ASC 505-50, “Equity Based Payments to Non-Employees,” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
Loss per Share
The basic EPS is calculated by dividing the Company’s net loss available to Common Stockholders by the weighted average number of common shares during the period. The diluted EPS is calculated by dividing the Company’s net loss available to Common Stockholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity securities unless the effects thereof are anti-dilutive, that is inclusion of such shares would reduce the net loss or increase the net income. For the years ended March 31, 2015 and 2014, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive.
As of March 31, 2015, stock options and warrants exercisable for 13,459,000, and 13,313,099, shares of Common Stock, respectively, have been excluded from diluted loss per share because they are anti-dilutive.
As of March 31, 2014, warrants exercisable for 11,252,245 shares of Common Stock, and Notes convertible into 66,632,617 shares of Common Stock have been excluded from diluted loss per share because they are anti-dilutive.
Significant Concentrations
Sales to one customer comprised 11% of revenues for the year ended March 31, 2015. No customers comprised revenues in excess of 10% during the year ended March 31, 2014 and no customers comprised accounts receivable in excess of 10% at March 31, 2015 and 2014.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash, to the extent balances exceeded limits that were insured by the Federal Deposit Insurance Corporation and accounts receivable. The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically been immaterial and have been within management’s expectations.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:
Computer equipment and software
years
Furniture
years
Machinery
3-10 years
Tooling
years
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
Recently Issued Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We will apply the new revenue recognition standard in annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Management is currently evaluating the impact, if any, on adopting ASU 2014-09 on the Company’s results of operations or financial condition.
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. Management is currently evaluating the impact, if any, of adopting ASU 2014-08 on the Company’s results of operations or financial condition.
In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Management is currently evaluating the impact, if any, of adopting ASU 2014-16 on the Company’s results of operations or financial condition.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), as part of its initiative to reduce complexity in accounting standards. ASU No. 2015-01 eliminates from generally accepted accounting principles the concept of extraordinary items. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with earlier adoption permitted. A reporting entity may apply the provisions of ASU No. 2015-01 prospectively or retrospectively to all prior periods presented in the financial statements. The Company does not expect the adoption of ASU No. 2015-01 to have a material effect on it results of operations or financial condition.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2015 and March 31, 2014:
Depreciation and amortization expense for the years ended March 31, 2015 and 2014 was $181,983 and $97,061, respectively.
NOTE 3 - NOTES PAYABLE
Notes payable are comprised as follows:
(1) On February 6, 2014, Saleen Signature Cars received a Complaint from the bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non-timely payment of November and December 2013 principal amounts owed, which were paid as of March 31, 2014, and the occurrence of a change in control as a result of the Merger. The bank sought full payment of principal and interest owed. In April 2014, the Company entered into a settlement arrangement with the bank whereby the bank dismissed this case in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest through July 2014. From August 2014 to March 31, 2015, in exchange for payments totaling $90,000, the bank agreed to extend this arrangement through various dates with the last date being March 2015. The bank has not agreed to an additional extension in conjunction with the bank’s claim of default. On April 29, 2015, the bank filed a claim against the Company alleging breach of the loan agreement, breach of a commercial guaranty by Steve Saleen, Chairman and CEO, and the bank demanded full payment of principal and interest outstanding (see Note 10).
(2) Bonds and notes issued on March 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The Bonds accrue interest at 6% per annum and are secured by the personal property of Saleen Signature Cars. As of March 31, 2015 and 2014, respectively, the Bonds were in default due to non-payment.
(3) Note payable issued on March 16, 2010 due in full on March 16, 2011. The note accrued interest at 10% per annum and was secured by three vehicles held in inventory by Saleen Signature Cars. On June 7, 2013, the Company entered into a Settlement Agreement and Mutual General Release by canceling this note and issuing a new unsecured 6% note payable due on or before August 19, 2013. The note was in default as of March 31, 2015 and 2014 due to non-payment.
(4) Non-interest bearing note payable dated January 25, 2013 due in full on October 25, 2013 or earlier upon the occurrence of certain events. The note is secured by certain intellectual property of the Company. The note was in default as of March 31, 2014 due to non-payment. In February 2015, the Company entered into a Settlement Agreement and Mutual General Release with this note holder whereby the Company agreed to issue 2,272,727 shares of its Common Stock at a price of $0.022 per share, or $50,000, in exchange for cancellation of all amounts owed and a mutual general release. The Company recognized a loss on settlement of $7,235 that is reflected in the Statement of Operations during the year ended March 31, 2015 to account for the difference between the fair value of the common shares issued and the amount recorded owed as of the date of settlement.
(5) As of March 31, 2014, the Company was indebted on a $317,500 subordinated 6% bond and a $200,000 10% note payable. On May 7, 2014, the Company, along with its subsidiaries and Steve Saleen, Chairman and CEO, entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with Thomas Del Franco and Jason B. Cruz (the “Del Franco Parties”), pursuant to which the Del Franco Parties agreed to fully and finally settle a claim filed against the Company for outstanding Bond and note payables to Thomas Del Franco, which consisted of a Bond and note payable of $317,500 and $200,000, respectively, and unpaid interest of $187,535 in exchange for (1) the Company’s payment to Mr. Del Franco of $250,000 (the “Settlement Payment”) and (2) issuance of 2,250,000 shares of the Company’s Common Stock (the “Settlement Shares” and together with the Settlement Payment, the “Settlement Amount”). The Settlement Shares had a value of $382,500 based on the closing price of the Company’s Common Stock on May 7, 2014 of $0.17/share. The parties to the Settlement Agreement also agreed to release each other from all claims arising from their prior business dealings. The Del Franco Parties have agreed to a contractual restriction on the sale of the Settlement Shares whereby for a period of 12 months from and after the expiration of any applicable restricted periods imposed by applicable federal and state securities laws and regulations, including Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), the Del Franco Parties will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, more than 200,000 of the Settlement Shares in any given calendar month. The Company recognized a gain on settlement of $72,265 in the Statement of Operations during the year ended March 31, 2015 to account for the difference between the fair value of the common shares issued and the amount recorded as of the date of settlement.
(6) As of March 31, 2014, the Company had outstanding $100,000 and $20,000 unsecured 10% notes payable. In June 2014, the Company entered into a Settlement Agreement and Mutual Release agreement with Jim Marsh American Corporation (“Marsh”) for one of the notes that had an outstanding principal and interest of $100,000 and $53,374, respectively, in exchange for (1) issuance of 800,000 shares of its Common Stock and (2) cash payment of $35,000. The Company issued the common shares in June 2014 and determined the value to be $112,000, which was based on the value of the Common Stock of $0.14 as of the date of settlement. The remaining cash payment of $35,000 was unpaid and was included in notes payable as of March 31, 2015. In addition, another separate note for $20,000 remains outstanding as of March 31, 2015 and is in default due to non-payment.
(7) Note payable issued on March 25, 2015 bearing interest at a rate of 6% per annum. The note was secured by a vehicle provided to the borrower by the Company and was due on demand after 60 days following the date the secured vehicle was returned to the Company. In May 2015, the borrower agreed to cancel this note and convert the then principal and interest outstanding into a convertible note under the same terms as the 3% Senior secured convertible notes discussed in Note 5. In June 2015, the Company entered into an intellectual property agreement with the note holder. In connection with this agreement, the note was cancelled. See Note 11 for further discussion.
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
(1) Unsecured note payable to a related party issued on November 3, 2008 for original principal of $60,000 bearing interest at 10% per annum and due in full on February 10, 2009. In April 2014, the Company entered into a Settlement Agreement and Mutual General Release with this note holder whereby it issued 172,060 shares of its Common Stock with a fair value of $38,191 as settlement of the note payable of $32,452 and unpaid interest of $1,960. In addition, the Company also granted the note holder 355,460 shares of common stock with a fair value of along with a five-year warrant to purchase 527,520 shares of its Common Stock at an exercise price of $0.15 per share. The loss on the settlement of this note of $153,754 was provided for and accrued for as of March 31, 2014 as part of Accounts to be settled by issuance of equity securities in the accompanying balance sheet.
(2) In January 2015, the note holder and the Company agreed to cancel this revolver and role the then principal and interest outstanding of $98,708 into a convertible note under the same terms as the 3% Senior secured convertible notes discussed in Note 5.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
Convertible notes are comprised as follows:
3% Senior secured convertible notes
On June 26, 2013, pursuant to a Securities Purchase Agreement, as amended, the Company issued senior secured convertible notes, as amended, having a total principal amount of $3,000,000, to 12 accredited investors (“2013 Notes). The 3% Notes pay 3.0% interest per annum with a maturity of 4 years from the date of issuance (June 2017 and January 2019) and are secured by all assets and intellectual property of the Company. No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each 3% Note is convertible at any time into Common Stock at a specified conversion price, which initially was $0.075 per share. Prior to June 2014, the 2013 Note conversion price was subject to specified adjustments for certain changes in the numbers of outstanding shares of the Company’s Common Stock, including conversions or exchanges of such and the agreements included an anti-dilution provisions that allows for the automatic reset of the conversion or exercise price upon any future sale of Common Stock instruments at or below the current exercise price. If the Company’s shares are issued, except in specified exempt issuances, for consideration which is less than the then existing 2013 Note conversion price, then such conversion price would be reduced by full ratchet anti-dilution adjustments that would reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance.
Pursuant to FASB guidance on “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock, the Company determined that the conversion prices of the 2013 Notes were not a fixed amount because they were subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features were not considered indexed to the Company’s own stock and characterized the fair value of these conversion features as derivative liabilities upon issuance. See Note 6 for further discussion.
In June 2014, the Company entered into a First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note (“3% First Amendment”) and removed all specified adjustments to the conversion price except for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally. In addition, if a Fundamental Transaction, as defined in the 2013 Note agreement, were to occur the potential liquidated damage was set to a fixed amount. As an inducement for the amendment, the Company issued an aggregate of 389,923 shares of Common Stock with a fair value of $58,488. The Company recorded $58,488 as private placement costs determined based on the market value of the Company’s Common Stock of $0.15 as of the date of issuance.
The Company determined that the amendment of the Saleen Automotive, Inc. 3.0% Secured Convertible Note resulted in a modification for accounting purposes, and as such, the derivative liability recorded when the note was originally issued was deemed extinguished (see Note 6).
On January 23, 2015, the Company entered into a Second Amendment to 3% Senior Secured Convertible Notes whereby the conversion price of the 2013 Notes was amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elects to convert all or part of the note. However, in no event shall the conversion price be less than $0.02. As a result of this amendment, the Company considered this to be an extinguishment of debt for accounting purposes, and recognized a loss on the extinguishment of $1,257,468, which comprised of $684,975 of expensing the remaining debt discount and $572,493 related to the beneficial conversion feature that resulted from the incremental change in the potential shares of common stock to be issued and the conversion price.
On January 26, 2015 the Company entered into two additional 3% Senior Secured Convertible Notes in the principal amount of $499,892 with two accredited investors who participated in the June 26, 2013 offering (“2015 Notes” and collectively “3% Notes”) of which $98,708 was converted from note payable previously entered into with one investor in November 2013. The Company determined that the initial conversion price reflected a price discount below the fair market value of the Company’s Common Stock as of the issuance date of the 2015 Notes. As such, the Company determined that there was deemed a beneficial conversion feature of $77,483 at the issuance date of the 2015 Notes and recorded such amount as valuation discount and as additional paid-in capital. The value of the beneficial conversion feature is being amortized as additional interest expense over the term of the 2015 Notes.
In May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanded full payment of principal, interest and fees of $369,302 (see Note 3). A default under the loan agreement triggers a cross default under the 2013 Notes and 2015 Notes enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of the indebtedness under the 3% Notes requiring the Company to pay, upon such acceleration, the sum of (1) 120% of the outstanding principal plus (2) 100% of all accrued and unpaid interest plus (3) all other amounts due under the 3% Notes. Upon the occurrence of an event of default under the 3% Notes interest accrues at the rate of 12% per annum.
During the years ended March 31, 2015 and 2014, the Company amortized $517,524 and $411,675, respectively, of the valuation discount, and the remaining unamortized valuation discount of $74,021 and $1,248,984 as of March 31, 2015 and 2014, respectively, has been offset against the face amount of the notes for financial statement purposes.
During the year ended March 31, 2015, certain note holders converted $585,012 of principal and $11,942 of interest into 8,032,186 shares the Common Stock. As of March 31, 2015, the principal balance of the convertible Notes outstanding was $2,501,612.
7% Unsecured convertible notes
In March and April 2014, as amended in June 2014, the Company issued 7% Unsecured Convertible Notes (the “7% Notes”), having a total principal amount of $2,250,000 and $250,000, respectively, to 5 accredited investors of which $2,000,000 was received from 3 investors who participated in the June 26, 2013 offering above. The 7% Notes pay interest at 7% per annum with a maturity of 3 years (March and April, 2017). No cash payments are required, except that unconverted outstanding principal and accrued interest shall be due and payable on the maturity date. Each 7% Note is initially convertible at any time into the Company’s Common Stock at a conversion price, which is adjustable to the lower of $0.07 or the three lowest daily volume weighted average prices of the Company’s Common Stock during the twenty consecutive trading days immediately preceding any conversion date. However, in no event shall the conversion price be lower than $0.03 per share. In addition, the conversion price adjusts for standard anti-dilution provisions whereby if the Company consummates a reorganization transaction, pays dividends or enters into a stock split of its common shares the conversion price would adjust proportionally.
In June 2014, the Company entered into a First Amendment to Saleen Automotive, Inc. 7% Convertible Note whereby effective as of March 31, 2014 or the applicable issuance date for notes issued thereafter, the conversion price would in no event adjust below $0.03 per share. In addition, if a Fundamental Transaction, as defined, were to occur the potential liquidated damages was set to a fixed amount. As an inducement, the Company issued an aggregate of 357,143 shares of its Common Stock with a fair value of $53,571 based on the market value of the Company’s Common Stock of $0.15 as of the date of issuance and was recorded as part of private placement costs in the accompanying Statement of Operations.
As the initial conversion price of $0.07 reflected a price discount below the fair market value of the Company’s Common Stock as of the issuance date of the 7% Notes, the Company determined that there was deemed a beneficial conversion feature associated with these 7% Notes. As such, the Company recorded $2,250,000 and $250,000 in March 2014 and April 2014, respectively, representing the intrinsic value of the beneficial conversion feature at the issuance date of the 7% Notes in additional paid-in capital. The value of the beneficial conversion feature is being amortized as additional interest expense over the term of the 7% Notes, which totaled $1,050,700 for the year ended March 31, 2015. As of March 31, 2015 and 2014, the remaining unamortized valuation discount of $1,449,300 and $2,250,000, respectively, has been offset against the face amount of the notes for financial statement purposes.
In May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanded full payment of principal, interest and fees of $369,302 (see Note 3). If the bank is successful in their claim of default, such default would trigger a cross default under the 7.0% Notes enabling the holders thereof to, at their election, accelerate the maturity of the outstanding indebtedness under the 7% Notes requiring the Company to pay, upon such acceleration, the greater of (1) 120% of the outstanding principal (plus all accrued and unpaid interest) and (2) the product of (a) the highest closing price for the five trading immediately preceding the holder’s acceleration and (b) a fraction, of which the numerator is the entire outstanding principal, and of which the denominator is the then applicable conversion price. Upon the occurrence of an event of default under the 7% Notes interest accrues at the rate of 24% per annum.
During the year ended March 31, 2015, one note holder converted $300,000 of principal and $15,808 of accrued interest into 10,000,000 shares of the Company’s Common Stock. As of March 31, 2015, the principal balance of the convertible Notes outstanding was $2,200,000.
Unsecured convertible notes
From September 2014 to December 2014, the Company issued Convertible Promissory Notes (“Notes”) in the aggregate principal amount of $638,225 to eight separate accredited investors. The Notes bear interest ranging from 8% to 12% per annum and mature on various dates from April 2015 to December 2016. The Company is currently in default of payment for a Note that matured in April 2015 in the principal amount outstanding of $10,600. The Company may not prepay the Notes without the Note holder’s consent. Further, the Notes contain provisions that under certain events of default, as defined in the agreements, the amount owed could increase by amounts ranging from 135% to 150% depending on the event of default. In addition, in the event of non-payment when due, the interest rates would increase to between 20% and 25% per annum from the date due until paid.
The Notes are convertible into shares of Common Stock of the Company at the option of the holder commencing on various dates following the issuance date of the Notes and ending on the later of the maturity date or date of full payment of principal and interest. The principal amount of the Notes along with, at the holder’s option, any unpaid interest and penalties, are convertible at price per share discounts ranging from 42% to 38% of the Company’s Common Stock trading market price during a certain time period, as defined in the agreement. Further, the conversion prices are subject to a floor such that the conversion prices will not be less than a certain price, as defined in the agreement, with such floor prices ranging from $0.001 to $0.00005 per share. In addition, the conversion prices are subject to adjustment in certain events, such as in conjunction with any sale, conveyance or disposition of all or substantially all of the Company’s assets or consummation of a transaction or series of related transactions in which the Company is not the surviving entity. The note agreements also require the Company to maintain a reserve of Common Stock, as determined based on a formula stated in the note agreements, which, upon request by the note holder, can be adjusted based on the formula and the then share price of the Company’s Common Stock as of the date of request. The note holder can convert up to the number of the then shares reserved for conversion of their related note. As of March 31, 2015, the Company was in compliance with the Common Stock reserve provisions; however, as of the date of this filing, the Company is in default of such reserve requirements due to insufficient availability of authorized shares to fulfill the note holders’ reserve requests.
The Company considered the current FASB guidance of “Contracts in Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability of whether or not within the issuers’ control means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion prices of the Notes were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. In addition, the Company determined that instruments with floor prices ranging from $0.001 to $0.00001 were de minimis and in substance not indexed to the Company’s own stock. As a result, the Company determined that the conversion features of the Notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the Notes, the initial fair value of the embedded conversion feature was $1,306,455. As such, the Company recorded a $1,306,455 derivative liability, of which $638,225 was recorded as debt discount offsetting the fair value of the Notes and the remainder of $668,230 recorded as private placement costs in the Consolidated Statement of Operations for the year ended March 31, 2015. As of March 31, 2015, the Company amortized $374,661 of the valuation discount, and the remaining unamortized valuation discount of $313,507 as of March 31, 2015 has been offset against the face amount of the Notes for financial statement purposes. The remainder of the valuation discount will be amortized as interest expense over the remaining term of the Notes. The derivative liability is re-measured at the end of every reporting period with the change in value reported in the statement of operations (see Note 6).
During the year ended March 31, 2015, one Note holder converted $20,000 of principal and $161 of accrued interest into 1,785,714 shares of the Company’s Common Stock. As of March 31, 2015, the principal balance of the convertible Notes outstanding was $618,225.
The aggregate future obligations under the Convertible Notes Payable herein and notes payable described in Notes 3 and 4 are as follows:
NOTE 6 - DERIVATIVE LIABILITY
Pursuant to FASB authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments, which do not have fixed settlement provisions, are deemed to be derivative instruments. The conversion feature of the Company’s senior secured convertible notes and unsecured convertible notes (described in Note 5 above), did not have fixed settlement provisions because their conversion prices could be lowered if the Company issues securities at lower prices in the future or the ultimate determination of shares to be issued could exceed current available authorized shares. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes had been characterized as a derivative liability and was re-measured at the end of every reporting period with the change in value reported in the statement of operations.
The derivative liabilities were valued at the following dates using a probability weighted-average Black-Scholes-Merton model with the following assumptions:
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own stock’s volatility as the estimated volatility. The expected life of the conversion feature of the notes was based on the remaining terms of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of Common Stock in the past and does not expect to pay dividends to holders of its Common Stock in the future.
In June 2014, pursuant to the First Amendment to Saleen Automotive, Inc. 3.0% Secured Convertible Note as discussed in Note 5, the Company determined the conversion features of the note was no longer required to be accounted for as a derivative liability due to the elimination of the price-based anti-dilution provisions contained in the note. As a result, the Company recognized the fair value of the derivative liability at the date of extinguishment of $3,908,950 an addition to contributed paid in capital.
From September 2014 to December 2014, in conjunction with the issuance of the Company’s Unsecured Convertible Note as discussed in Note 5, the Company recognized derivative liability of $1,306,455.
During the year ended March 31, 2015, the Company recognized a gain of $1,111,389 to account for the change in fair value of the derivative liability and gain of $50,314 due to extinguishment of the derivative liability upon conversion of a note to equity. At March 31, 2015, the fair value of the derivative liability amounted to $1,268,588.
NOTE 7 - RELATED PARTY TRANSACTIONS
The amounts of accounts payable to related parties as of March 31, 2015 and 2014 are as follows:
(a) During the year ended March 31, 2015, the Company incurred $125,654 in officers’ salary expense that is due and payable to its Director, Chairman and CEO, Mr. Steve Saleen. As of March 31, 2015 and 2014 the Company owed $223,455 and $100,000, respectively, to Mr. Saleen for his unpaid officers’ salary. In March 2014, Mr. Saleen agreed to forgive $353,787 of amounts owed for loans given by Mr. Saleen to the Company and unpaid salary, which the Company recognized as a gain and offset to settlement expenses in the Statement of Operations. In June 2015, the Company issued 220,000 shares of Super Voting Preferred Stock for payment of $220,000 owed to Mr. Saleen (see Note 11).
(b) During the year ended March 31, 2015 and 2014, the Company incurred $69,418 and $365,251, respectively, in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by a former Director and General Counsel, Mr. Jonathan Michaels. In January 2015, the Company entered into a Fee Reduction Agreement with Michaels Law Group whereby Michaels Law Group reduced the amount owed to $75,000 and the Company issued 2,500,000 shares of Common Stock to Michaels Law Group as full payment. The value of the Common Stock issued of $75,000 was based on a fair value of $0.03 per share. During the year ended March 31, 2015 the Company paid $550 to Michaels Law Group.
In March 2014, the Company entered into a Retainer Agreement whereby the Company issued 1,447,500 shares of Common Stock and five year warrants to purchase 1,447,500 shares of Common Stock at an exercise price of $0.15 per share along with cash of $36,459 in exchange for amounts owed through February 2014. The value of the Common Stock issued was $405,300 based on a stock price of $0.28 on date of settlement. The Company valued the warrants at $332,491 using the Black-Scholes option pricing model using the following assumptions: (i) fair market value of stock of $0.28; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 1.75% and (v) expected term of 5 years. The Company recognized a loss of $521,558 included in settlement expenses in the Statement of Operations for the year ended March 31, 2014 based on the difference between the value of the common shares and stock warrants issued plus $36,459 cash paid and the amount owed of $252,692. During the year ended March 31, 2014, the Company paid $110,000 to Michaels Law Group. As of March 31, 2014, $23,954 was payable to Michaels Law Group services for rendered.
(c) During the year ended March 31, 2015 and 2014, the Company incurred $50,000 and $35,000, respectively, of which the Company paid $12,500 and $10,000, respectively, during the years ended March 31, 2015 and 2014, in investment advisor and research services from Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of March 31, 2015 and 2014, $62,500 and $25,000, respectively, was payable to TopHat Capital for these services.
(d) During the year ended March 31 2015, the Company incurred and paid $31,343 and $25,000, respectively, for research report services to Crystal Research Associates, whose co-founder and Chief Executive Officer, Jeffrey Kraws, is a Director of the Company. As of March 31, 2015, $6,343 was payable to Crystal Research Associates for these services.
(e) During the year ended March 31, 2015 and 2014, the Company purchased $12,650 and $43,325, respectively, of which the Company paid $2,016 and $12,650, respectively, during the years ended March 31, 2015 and 2014, in purchases of apparel and accessories from Molly Saleen, Inc. dba Mollypop. Molly Saleen, the Chief Executive Officer of Mollypop, is the daughter of Steve Saleen, the Company’s Chief Executive Officer and President. As of March 31, 2015 and 2014, $34,214 and $23,580, respectively, was outstanding. On June 22, 2015, the Company issued 19,077.777 shares of Super Voting Preferred Stock for payment of $34,214 outstanding (see Note 11).
Other Transactions
During the year ended March 31, 2014, the Company incurred and paid $259,534 and $252,663, respectively, in accounting advisory and CFO services with Miranda & Associates, a firm owned by its former Chief Financial Officer, Mr. Robert Miranda. In March 2014, the Company entered into a Separation Agreement and General Release whereby in settlement of all remaining amounts due him, the Company issued 1,061,408 shares of Common Stock and five year warrants to purchase 1,061,408 shares of Common Stock at an exercise price of $0.15 per share along with cash of $10,000 in exchange for amounts owed as of March 31, 2014. The value of the Common Stock issued was $212,282 based on a stock price of $0.20 on date of settlement. The Company valued the warrants at $169,825 using the Black-Scholes option pricing model using the following assumptions: (i) fair market value of stock of $0.20; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 1.75% and (v) expected term of 5 years. The Company recognized a loss of $218,014 in the Statement of Operations for the year ended March 31, 2014 based on the difference between the value of the common shares and stock warrants issued plus $10,000 cash paid and the amount owed of $174,093.
During the year ended March 31, 2014, the Company issued 5,277 shares of its Super Voting Preferred stock or the equivalent of 659,625 shares of its Common Stock, to Robert J. Miranda and Jonathan Michaels (329,811 common shares each). These shares were valued at $250,000, which was recorded as director’s fee expense. These shares were issued in consideration of Messrs. Miranda’s and Michaels’ service on the Company’s board of directors.
NOTE 8 - INCOME TAXES
As of March 31, 2015, the Company had net operating loss carry forwards for income tax reporting purposes of approximately $19,000,000 that may be offset against future taxable income. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs or a change in the nature of the business. The utilization of the losses is also limited by the fact that the combined companies prior to the reverse merger file on a separate basis and losses on one cannot offset profits on the other. Therefore, the amount available to offset future taxable income may be limited.
No tax benefit has been reported in the financial statements for the realization of loss carry forwards, as the Company believes based on the Company’s past operations that there is no evidence or assurance that the carry forwards will be utilized. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
The Company is primarily subject to U.S. federal and state income tax. As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109), the Company performed an analysis of its tax liabilities and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of March 31, 2015 and March 31, 2014, respectively.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of March 31, 2015 and March 31, 2014.
NOTE 9 - STOCKHOLDERS’ EQUITY
The Company is authorized under its articles of incorporation, as amended, to issue 500,000,000 shares of Common Stock, par value $0.001 per share, and 1,000,000 shares of preferred stock, par value $0.001 per share. Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for 554,057 shares of the Company’s Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, the Company issued to Saleen 341,943 shares of its Super Voting Preferred Stock. Each share of the Company’s Super Voting Preferred Stock was convertible into 125 shares of its Common Stock.
On July 9, 2013, holders of a majority of the outstanding shares of the Company’s Super Voting Preferred Stock voted to convert, 696,000 shares of its Super Voting Preferred Stock into 87,000,000 shares of its Common Stock. Such conversion became effective on July 18, 2013, upon the filing of the amendment to the Certificate of Designations.
On January 13, 2014, pursuant to an amendment to the Company’s articles of incorporation increasing the authorized shares of its Common Stock to 500,000,000, all of the remaining outstanding shares of its Super Voting Preferred Stock automatically converted into shares of its Common Stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
During the year ended March 31, 2014, the Company issued the equivalent of 12,178 shares of its Super Voting Preferred Stock or 1,522,250 shares of its Common Stock in exchange for the settlement of claims, conditions of employment, director’s fees, and payment of information technology services. These shares were valued at $576,981 based on management’s estimate of value of the shares issued and was recorded as general and administration expense.
Issuance of Common Stock
Shares Issued During Year Ended March 31, 2014
During the year ended March 31, 2014, we issued 5,277 shares of Super Voting Preferred Stock to Jonathan Michaels, a former board member and general counsel for the company, and Robert Miranda, a form board member and chief financial officer of the Company. The shares issued were valued at $250,000, which was based on the trading price at the date of agreement.
During the year ended March 31, 2014, we issued 5,899 shares of Super Voting Preferred Stock, of which 923 were issued to related parties, valued at $473,581 in exchange for services. The shares issued were valued based on the trading price at the date of agreement.
During the year ended March 31, 2014, we issued 481 and 521 shares of Super Voting Preferred Stock for shares issued as principal of $22,803 and interest of $24,697, respectively, related to notes payable. The shares issued were valued based on the trading price at the date of agreement.
During the year ended March 31, 2014, we issued 325,128 shares of Common Stock as payment of accounts payable. The shares issued were valued at $103,191, which was based on the trading price at the date of agreement.
During the year ended March 31, 2014, we issued 2,508,908 shares of Common Stock and warrants for payment of accounts payable owed to related parties. The shares and warrants issued were valued at $1,120,382, which was based on the trading price at the date of agreement for the shares, and using the fair market value for the warrants based on the Black-Scholes option pricing model (see Note 7).
During the year ended March 31, 2014, the Company entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased an aggregate of 8,793,337 restricted shares of the Company’s Common Stock at a per share price of $0.15 for aggregate proceeds of $1,312,500, and also received five year, fully vested Common Stock Purchase Warrants to purchase 8,793,337 shares of the Company’s Common Stock at an exercise price of $0.15 per share. The warrants were valued based on the Black-Scholes option pricing model noted below.
In conjunction with the Company’s increase in its common shares authorized in January 2014 to 500,000,000 shares, all then remaining shares of Super Voting Preferred Stock of 896,000 shares were converted into 112,000,000 shares of Common Stock of the Company and the Super Voting Preferred Stock ceased to be a designated series of the Company’s preferred stock.
During the year ended March 31, 2014, the Company issued an aggregate of 5,553,128 shares of common stock upon conversion of the Company’s convertible notes payable and accrued interest amounting to $416,486 (see Note 5).
Shares Issued During Year Ended March 31, 2015
During the year ended March 31, 2015, the Company issued 1,000,000 shares of Common Stock valued at $170,000 in in exchange for services. The shares issued were valued based on the trading price at the date of the agreement.
During the year ended March 31, 2015, the Company issued 1,285,460 shares of Common Stock and warrants to purchase 527,520 shares of common stock with an aggregate fair value of $470,534 to settle previously recorded “Accounts to be settled through issuance of equity securities”. As a result, the Company reclassified the $470,534 from a liability as of March 31, 2014 to equity during the year ended March 31, 2015.
During the year ended March 31, 2015, the Company entered into Subscription Agreements with individual accredited investors pursuant to which the Subscribers purchased an aggregate of 1,183,334 restricted shares of the Company’s Common Stock at a per share price of $0.15 for aggregate proceeds of $177,500, and also received five year, fully vested Common Stock Purchase Warrants to purchase 1,183,334 shares of the Company’s Common Stock at an exercise price of $0.15 per share. The warrants were valued based on the Black-Scholes option pricing model noted below.
During the year ended March 31, 2015, the Company issued 50,000 shares of common stock upon exercise of warrants which resulted in net proceeds of $7,500.
During the year ended March 31, 2015, the Company issued an aggregate of 747,066 shares of common stock with a fair value of $112,059 to induce amendments of the Company’s convertible notes (see Note 5). The shares issued were valued based on the trading price at the date of the agreement.
During the year ended March 31, 2015, the Company issued an aggregate of 19,817,900 shares of common stock upon conversion of the Company’s convertible notes payable and accrued interest amounting to $932,923 (see Note 5).
During the year ended March 31, 2015, the Company issued an aggregate of 5,494,787 shares of common stock with a fair value of $582,691 as settlement of notes payable and a note payable to a related party (see Note 3 and Note 4). The shares issued were valued based on the trading price at the date of the settlement.
During the year ended March 31, 2015, the Company entered into Settlement Agreement and Mutual Release agreements with three separate vendors whereby the Company issued and aggregate of 7,567,980 shares of Common Stock with a fair value of $223,678 in exchange for extinguishment of amount owed of $168,154. The value of the Common Stock was based on the market price of the Company’s Common Stock as of the date of agreements. As a result, the Company recorded a loss on settlement of $55,524 to account the fair value of the shares issued.
Omnibus Incentive Plan
In January 2014, the Company’s board of directors approved the 2014 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 28,905,763 shares of Common Stock have been authorized for issuance and reserved under the Plan. The Plan was approved by the Company’s stockholders on January 13, 2014.
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:
The aggregate intrinsic value shown in the table above represents the difference between the fair market value of the Company’s Common Stock of $0.01 on March 31, 2015 and the exercise price of each option.
During the year ended March 31, 2015, the Company granted options to purchase a total of 14,104,000 shares of common stock to employees and non-employees. The stock options are exercisable at $0.03/share up to $0.10/share, vest over a period of three years, expire in ten years and with a fair value of $1,028,417. As a result, the Company recorded stock compensation expense of $650,351 of which $66,067, $268,610, and $315,674 was included in research and development, sales and marketing, and general and administrative expenses, respectively based upon the vesting of these stock options.
Unearned compensation of approximately $345,000 at March 31, 2015, related to non-vested stock options, will be recognized into expense over a weighted average period of 1.02 years.
Warrants
The following summarizes warrant activity for the Company during the year ended March 31, 2015:
During the year ended March 31, 2015, the Company granted warrants to purchase total of 1,183,334 shares of common stock pursuant to the sale of the Company’s common stock for cash.
During the year ended March 31, 2015, the Company granted warrants to purchase 527,520 shares of common stock pursuant to settlement agreement with a fair value of $82,662 using the Black-Scholes-Merton option pricing model using the following assumptions: (i) fair market value of stock of $0.21; (ii) dividend yield of 0%; (iii) expected volatility of 100%; (iv) risk free rate of 1.75% and (v) expected term of 5 years. The fair value of the warrants was included as part of amounts payable settled through the issuance of equity securities in the accompanying Statement of Stockholders’ Deficit.
During the year ended March 31, 2015 warrants to purchase 50,000 shares of the Company’s Common Stock were exercised for total proceeds of $7,500.
As of March 31, 2015, 13,313,099 warrants were exercisable and the intrinsic value of the warrants was nil.
NOTE 10 - COMMITMENTS AND CONTINGINCIES
Facilities Leases
The Company rents two buildings totaling approximately 76,000 square feet on triple net leases through January, 2018. Rent expense during the year ended March 31, 2015 and 2014 was $524,339 and $508,802, respectively.
The current lease provides for an annual escalation of 3% in the rent each February and provides for one option to extend beyond January 2018 for periods from 36 to 60 months. Past rent will be made up with the payment of an additional $5,300 for 20 months starting in June, 2014, which expired in February 2015.
The future minimum rental payments required under the non-cancelable operating leases described above as of March 31, 2015 are as follows:
Purchase Commitments
In April 2014, the Company entered into an agreement with BASF to exclusively use BASF’s products for paint work. The agreement continues from May 2014 until the Company purchases in aggregate $4,131,000 of BASF products. If the aggregate purchases of BASF products are less than $1,697,000 over a period of 36 consecutive months, the Company is required to repay BASF 6.1% of the shortfall between $1,697,000 and the amount it actually purchased over this period. In consideration for the Company’s exclusive use of BASF’s products and fulfilling this purchase commitment, BASF paid the Company $250,000, which was recorded as deferred vendor consideration. This amount will be recorded as a reduction of cost of services based on a systematic and rational allocation of the cash consideration offered to the underlying transaction.
In May 2014, the Company entered into an agreement with FinishMaster, Inc. (“FinishMaster”) to exclusively use FinishMaster’s paint material supplies. The agreement continues from May 2014 until the Company purchases in aggregate $1,555,000 of FinishMaster products. In consideration for the Company’s exclusive use of FinishMaster’s products and fulfilling this purchase commitment, FinishMaster paid the Company $25,000, which was recorded as deferred vendor consideration, and FinishMaster will pay an additional $25,000 upon the achievement of purchase level milestones, as outlined in the agreement. Should the Company not complete a set purchase level milestone, the Company would be required to re-pay the $25,000 along with $11,475 compensation to FinishMaster. This initial amount paid will be recorded as a reduction of cost of services based on a systematic and rational allocation of the cash consideration offered to the underlying transaction.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. The Company is currently a party to several legal proceedings related to claims for payment that are currently accrued for in its financial statements as accrued liabilities, accounts or notes payable. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. Material legal proceedings that are currently pending are as follows:
The Company is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County, that claimed breach of contract related to an engine installed by a third party vendor. The suit claimed $200,000 in damages plus interest, legal fees and costs of litigation. SSC filed a cross complaint against MSY Trading, Inc. for breach of warranty, negligence, and indemnification. On January 10, 2014, the Company settled this claim by agreeing to pay of $112,500 over a period of 18 months of which we paid $45,500 through August 2014. Subsequent to this date the Company defaulted on payments. On October 30, 2014, a judgment was entered against SSC in the amount of $68,950, which the Company accrued for in accounts payable.
In December 2014, the Saleen Automotive, Inc. (formerly Saleen Electric Automotive, Inc.), our wholly-owned subsidiary, received a Complaint from Green Global Automotive B.V. (“GAA”) alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing, related to a European Distribution Agreement entered into in December 2011 between GAA and Saleen Automotive. The suit seeks contract and economic damages of $50,000 along with compensatory damages, restoration, lost profits and attorneys’ fees. The Company is currently evaluating the merits of this case, if any, and is working to ascertain the impact on its financial statements.
In December 2014, the Company received a Complaint from Ford of Escondido for 1) claim and delivery of personal property, 2) money due on a contract, and 3) common count. Home Heller Ford, which was merged into Ford of Escondido, is a party to a supply agreement with us entered into in May 2013. Specifically, Ford of Escondido seeks payment of seven (7) Ford Mustangs for a total of $222,871 plus interest and attorneys’ fees, less any amounts to be credited pursuant to proceeds of sale. As of March 31, 2015, the Company has included in accounts payable the amount owed for four (4) vehicles which the Company believes are owed to Ford of Escondido. As such, the Company believes that Ford of Escondido’s claims with respect to the remaining three (3) vehicles are without merit and have responded to the Complaint including claims that Ford of Escondido breached the supply agreement with the Company. There has been no response received from Ford of Escondido to the Company’s position and the outcome is uncertain; however, the Company believes this matter will not have a material impact, if any, on its financial statements.
In February 2014, SSC received a Complaint from a Citizens Business Bank (the “Bank”) alleging, among other matters, breach of contract due to non-timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and the occurrence of a change in control as a result of the Merger. In April 2014, the Bank agreed to dismiss the suit in exchange for payment of $124,000 that was applied towards principal and unpaid fees along with advance loan principal and interest for May, June and July 2014, and the agreement to pay the remaining recorded balance due of $443,000 to the Bank in August 2014. From August 2014 to March 31, 2015, in exchange for payments totaling $90,000, the Bank agreed to extend this arrangement through various dates with the last date being March 2015. The Company did not pay the then outstanding principal and interest in March 2015 and the Bank did not agree to an additional extension. In May 2015, the Company was notified of a lawsuit filed by the Bank in the Superior Court of the State of California, County of Riverside, alleging breach of the Loan Agreement with the Bank (“Loan Agreement”), breach of a commercial guaranty by Steve Saleen and indebtedness for principal and interest of at least $369,302, and seeking appointment, which has not been granted by the court as of the date of this filing, of a limited purpose receiver and a temporary restraining order enjoining the Company from transferring the collateral securing the loan, which related to SSC. The main complaint by the Bank stems from the Company’s reverse merger that occurred in June 2013 whereby the Bank deemed this event to constitute a change in control, as defined in the loan agreement. The Company disagrees with the Bank’s interpretation and believes the claims by the bank are without merit. Although the Company currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on the Company’s financial statements, these matters are subject to inherent uncertainties and management’s views of these matters may change in the future. See Note
Insurance
Due to the Company’s cash constraints, the Company currently does not maintain insurance ordinarily customary for businesses it’s size and type such as workers’ compensation, garage and general liability insurance. As such, the Company may incur losses against it such as employee worker accidents, losses due to natural disasters or other business risks for which the Company is not insured. Such damages could have a material adverse effect on its business and results of operations. There can be no assurance that the Company will be able to obtain, afford or qualify for insurance to address such potential risks or if such insurance will adequately cover any potential matters encountered.
NOTE 11 - SUBSEQUENT EVENTS
10% Senior Secured Convertible Notes
On May 13, 2015, the Company entered into a 10.0% First Lien Convertible Note (“10% Note”) and Securities Purchase Agreement (“SPA”) by and among the Company and GreenTech Automotive, Inc. (“GTA”), whereby GreenTech agreed to provide for the issuance of up to $500,000 under the 10% Note for a period up to August 17, 2015 under the same terms as the June 2013 Notes (see note 5). In conjunction with this 10% Note, $100,000 was converted from a note entered into in March 2015 with GreenTech (see Note 3). These Notes have subsequently been converted to a license agreement as described below.
Intellectual Property License Agreement
In June 2015, the Company entered into an Intellectual Property License Agreement (the “License Agreement”) with Saleen Motors International, LLC, a Delaware limited liability company (“SMI”) and a wholly owned subsidiary of GTA and non-affiliated subsidiary of the Company. Pursuant to the License Agreement, the Company granted to SMI an irrevocable, fully paid-up (subject to certain royalty fees), sublicensable license during the term of the License Agreement to use all of the Company’s intellectual property on an exclusive basis worldwide other than in North America, Europe, Middle East and Australia (as applicable, the “Territory”), to make, promote, sell and otherwise exploit the Company’s intellectual property in the Territory. The License Agreement has an initial term of 10 years, with automatic renewal for periods of five years at SMI’s election provided that the number of Saleen branded vehicles sold by SMI in the prior 12-month period is not less than the average number of Saleen-branded vehicles sold by the Company and subsidiaries in the most recently available three-year period. The License Agreement may be terminated by mutual written agreement, upon a material breach, which remains uncured (with SMI having the right to cure no more than 3 breaches of its obligation to pay royalties) for 15 days after written notice of such breach, or in the event of SMI’s bankruptcy.
In consideration of the license SMI shall pay royalties, within 15 days after the product shipment date and in all events at least quarterly, based on a fee per Saleen-branded vehicle sold by SMI depending on its sales volume as set forth in the License Agreement, and shall pay royalties based on a percentage of SMI’s gross revenues for parts and merchandise (in each case net of discounts, returns, taxes and similar amounts) received on Saleen-branded non-vehicle products.
The parties to the License Agreement, along with GTA, agreed that the $500,000 10% Notes made by GTA pursuant to the SPA and the 10.0% First Lien Convertible Note entered into in May 2015, was deemed satisfied upon the execution of the License Agreement.
Except for the transactions under the agreements described above and the Company’s Joint Branding, Marketing, and Distribution Agreement with WM Industries Corp. (an affiliate of SMI and GTA) dated March 2014, none of the Company or its subsidiaries had any material relationship with SMI, GTA and its affiliates.
Authorized Shares
In June 2015, the board of directors approved an increase in our authorized shares from 500,000,000 to 2,500,000,000. The increase in authorized shares is pending our filing and approval of an Information Statement.
Super Voting Preferred
On June 12, 2015, the Company filed a Certificate of Designation designating the rights and restrictions of 1,000,000 shares of Super Voting Preferred Stock, par value $0.001 per share, pursuant to resolutions approved by the Company’s Board of Directors on June 11, 2015.
The holders of Super Voting Preferred Stock are entitled to vote together with the holders of Common Stock, as a single class, upon all matters submitted to holders of Common Stock for a vote. Each share of Super Voting Preferred Stock is entitled to a number of votes equal to the number of shares of our Common Stock into which it is convertible at the applicable record date. Each share of our Super Voting Preferred Stock will immediately and automatically convert into 1,000 shares (subject to adjustment for splits, dividends and similar transaction) of Common Stock at such time that the Company files, at such time as determined by the Company’s board of directors, an amendment to its articles of incorporation effecting a reverse stock split of Common Stock or effecting an increase in the authorized shares of Common Stock, in each case so that the Company has a sufficient number of authorized and unissued shares of Common Stock to permit the conversion of all then outstanding shares of Super Voting Preferred Stock into Common Stock.
In the event of any liquidation, dissolution or winding up of the Company, the assets available for distribution to the stockholders will be distributed among the holders of the Super Voting Preferred Stock and the holders of Common Stock, pro rata, on an as-converted-to-common-stock basis. The holders of Super Voting Preferred Stock are entitled to dividends in the event that the Company pays cash or other dividends in property to holders of outstanding shares of Common Stock, which dividends would be made pro rata, on an as-converted-to-common-stock basis.
On June 16, 2015, in order to make available additional shares of Common Stock to facilitate the conversion of outstanding debt, the Company issued to Steve Saleen, the Company’s Chief Executive Officer and President, 82,133.875 shares of Super Voting Preferred Stock in exchange for 82,133,875 shares of Common Stock held by Mr. Saleen.
On June 16, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors.
On June 22, 2015, the Company issued to Molly Saleen, Inc., dba Mollypop, 19,007.777 shares of Super Voting Preferred Stock to reimburse Mollypop for $34,214 of merchandise purchased by Mollypop on the Company’s behalf. Molly Saleen, the Chief Executive Officer of Mollypop, is the daughter of Steve Saleen. On June 22, 2015, the Company also issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the Company’s Board of Directors and as our general counsel.
The per share price of Super Voting Preferred Stock issued to Mollypop and MLG was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors.
Common Stock Issued in Conjunction with Unsecured Convertible Notes
From April 1, 2015 to the date of this Form 10-K filing, unsecured convertible note holders (see note 5) converted $372,514 of principal and unpaid interest into 367,751,194 shares of Common Stock. As discussed in Note 5, the note agreements require the Company to maintain a reserve of Common Stock, as determined based on a formula stated in the note agreements, which, upon request by the note holder, can be adjusted based on the formula and the then share price of the Company’s Common Stock as of the date of request. The note holder can convert up to the number of the then shares reserved for conversion of their related note. As of the date of this filing of Form 10-K, the Company is in default of the Common Stock reserve requirements due to insufficient availability of authorized shares to fulfill the note holders’ reserve requests.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”) as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2015. In making this assessment, management used the criteria set forth in the 1992 framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled “Internal Control-Integrated Framework.” Based on the results of this assessment, management has concluded that our internal control over financial reporting was not effective as of March 31, 2015 primarily due to the limited size of our staff and budget.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the year ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2015, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, and notwithstanding that there were no accounting errors with respect to our financial statements, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of that date to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Our disclosure controls or internal controls over financial reporting were designed to provide only reasonable assurance that such disclosure controls or internal controls 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.
Limitations on the Effectiveness of Controls
Our management believes that a control system, no matter how well designed and operated can provide only reasonable assurance and cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Further, the design of an internal 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 in all internal control systems, no evaluation of controls can provide absolute assurance that all control issuers and instances of fraud, if any, within our company have been detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, positions and ages of our current executive officers and directors. All directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers are appointed by our board of directors and their terms of office are, except to the extent governed by an employment contract, at the discretion of our board of directors.
Name
Age
Title
Steve Saleen (1)
Chief Executive Officer, President and Director
David Fiene
Chief Financial Officer and Secretary
Jeffrey Kraws (2)
Director
Joe Amato (3)
Director
(1) Appointed effective June 26, 2013
(2) Appointed effective December 11, 2013
(3) Appointed effective May 9, 2014
Steve Saleen, our founder, Chief Executive Officer, President and one of our directors, has been president and CEO of SMS since its formation in July 2008. He has been board chairman and CEO of Saleen Automotive since its formation in July 2011. Mr. Saleen is considered one of the most successful and well known automotive icons in the country, making him a well-qualified candidate to serve as our CEO and director. Mr. Saleen’s entrepreneurial business plan laid the groundwork for an entire new industry of design, engineering, manufacturing and sales of high performance vehicles that were race proven and marketed for sales through new car dealership showrooms nationwide. This included very successful racing programs featuring himself as a lead driver in vehicles of his design that went on to win numerous national championships. Mr. Saleen is generally recognized for his expertise in small volume vehicle manufacturing, vehicle transformation processes and mass customization - creating customized products in an efficient mass - production manner. Mr. Saleen has a bachelor’s degree in business from the University of Southern California.
David Fiene joined us in June 2013 as Vice President of Finance and was later appointed Chief Financial Officer and Secretary in December 2013. Mr. Fiene has more than 18 years of experience in finance and accounting including with both public and private entities. He previously served as Managing Director for Advantage Sales and Marketing, as $1 billion consumer products company. Prior to Advantage Sales and Marketing, he served as Director of Accounting at Multi-Fineline Electronix, Inc., a $750 million manufacturer of flexible printed circuit boards. Mr. Fiene also spent ten years with PricewaterhouseCoopers LLP in a variety of roles, where he participated in numerous audits, corporate finance transactions, IPOs, merger and acquisition transactions, carve outs, spinoffs, and many different types of public filings for Fortune 100 companies. Mr. Fiene is a licensed Certified Public Accountant in California and has a bachelor’s degree in Business from Benedictine University.
Jeffrey Kraws was appointed as a director in December 2013. Since 2003, Mr. Kraws has served as Chief Executive Officer and co-founder of Crystal Research Associates, and since February 2012, he has served as partner and co-founder of TopHat Capital, LLC. Prior to founding Crystal Research Associates, Mr. Kraws served as co-president of The Investor Relations Group (IRG), a firm representing primarily under-followed, small-capitalization companies. Previously, Mr. Kraws served as a managing director of healthcare research for Ryan Beck & Co. and as director of research/senior pharmaceutical analyst and managing director at Gruntal & Co., LLC (prior to its merger with Ryan Beck & Company). Mr. Kraws served as managing director of the healthcare research group and senior pharmaceutical analyst at First Union Securities (formerly EVEREN Securities); as senior U.S. pharmaceutical analyst for the Swedish-Swiss conglomerate Asea Brown Boveri; and as managing director and president of the Brokerage/Investment Banking operation of ABB Aros Securities, Inc. He also served as senior pharmaceutical analyst at Nationsbanc Montgomery Securities, BT Alex Brown & Sons, and Buckingham Research. Mr. Kraws also serves on the board of directors of Synthetic Biologics, Inc. (NYSE: SYN). Mr. Kraws brings to our board of directors significant strategic, business and financial expertise. He holds an M.B.A. from Cornell University and a B.S. degree from State University of New York-Buffalo. Mr. Kraws is an independent board member and also serves on our audit and compensation committees.
Joe Amato was appointed as a director in May 2014. In 24 years of competition as an owner and driver in the National Hot Rod Association’s (NHRA) Top Fuel category, Mr. Amato has achieved immense success behind the wheel of a dragster. Mr. Amato began racing cars as a teenager, when he worked at his family’s auto parts store. He eventually built the business into Keystone Automotive, a large and successful automotive wholesaler and distributor. His racing career spans from 1983 to 2001 and in that time he set drag racing records that are so far unparalleled in the 54-year history of the NHRA. Between 1982 and 2000, he finished in the Top 10 every year. Eye surgery forced him to retire from competitive driving at the end of the 2000 season. He then participated as a team owner with Amato Racing until selling the business and retiring permanently in 2005. Since 2005, Mr. Amato currently owns and operates multiple commercial real estate properties through Joe Amato Properties, comprising over 400,000 square feet of rental space, vacant land destined for further commercial development and local housing developments. Mr. Amato’s experience in the automotive aftermarket parts and racing industry makes him a valuable addition to our board of directors. Mr. Amato is an independent board member.
Our directors will be determined pursuant to a Voting Agreement we entered into on June 26, 2013 by Saleen and the Purchasers in the Capital Raise. Together, such parties hold a majority of our outstanding shares of Common Stock and, under the Voting Agreement, are obligated to vote for the directors determined as described below. The authorized number of our directors is five. Those directors will consist of three directors-Messrs. Saleen, Kraws and one currently open-whose replacements will be determined under the terms of the Voting Agreement by Saleen, one director-currently open-whose replacement will be determined under the terms of the Voting Agreement by the holders of a majority of the outstanding shares held by purchasers of our June 2013 Notes, and one director-Mr. Amato-whose replacement will be determined under the terms of the Voting Agreement jointly by the holders of a majority of the outstanding shares held by Saleen and by the holders of a majority of the outstanding shares held by purchasers of our June 2013 Notes. The obligations of the parties signatory to the Voting Agreement to vote to set the number of directors constituting our board of directors at 5 and to vote to elect the directors as designated thereunder terminates on the 4th anniversary of the date of the Voting Agreement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended March 31, 2015, all of our executive officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements other than Messrs. Amato and Kraws, who each did not timely file a Form 3.
Director Independence
Our board of directors currently consists of three members - Messrs. Saleen, Kraws and Amato - with two vacancies. We are not a “listed issuer” under SEC rules and are therefore not required to have an audit committee comprised of independent directors. Currently, Messrs. Kraws and Amato are “independent” as that term is defined in the applicable rules for companies traded on the NASDAQ Stock Market. In addition, Messrs. Kraws and Amato serve on our audit and compensation committees.
Our board of directors is responsible for selecting and engaging our independent accountant, establishing procedures for the confidential, anonymous submission by our employees of, and receipt, retention and treatment of concerns regarding accounting, internal controls and auditing matters, reviewing the scope of the audit to be conducted by our independent public accountants, and periodically meeting with our independent public accountants and our chief financial officer to review matters relating to our financial statements, our accounting principles and our system of internal accounting controls. Our board of directors also approves our financial statements. Our board has established audit and compensation committees, whose duties are as follows:
● The Audit Committee has oversight responsibilities regarding risk related to our financial statements and auditing, accounting and related reporting processes, and systems of internal controls regarding finance, accounting, financial reporting, and business practices. In addition, the Audit Committee has oversight over any material financial risks as designated by management or the independent auditors. Our board of directors has determined that we do not have an audit committee financial expert serving on our audit committee as a result of the resignation from our board of directors of the former chairman of our audit committee. We will seek to nominate an audit committee financial expert when we select candidates to fill the vacancies on our board of directors.
● The Compensation Committee has oversight regarding the effect of compensation policies and structure on our risk profile. In addition, the Compensation Committee oversees and advises our board of directors on risks related to executive officer and director compensation as well as incentive, equity-based, and other compensatory plans.
We do not have a nominating committee for persons to be proposed as directors for election to our board of directors. The duties and functions performed by such committee are performed by our board of directors. We do not have any restrictions on stockholder nominations under our articles of incorporation, however, our bylaws do contain advance notice requirements for stockholder nominations for directors. Other restrictions are those applicable generally under the Nevada Revised Statutes and the federal proxy rules. Currently, our entire board of directors decides on nominees, on the recommendation of one or more members of our board of directors. We are not a “listed issuer” under SEC rules and are therefore not required to have a nominating committee comprised of independent directors.
Indemnification
We are a Nevada corporation. The Nevada Revised Statutes and certain provisions of our articles of incorporation, as amended, and bylaws under certain circumstances provide for indemnification of our officers, directors and controlling persons against liabilities which they may incur in such capacities. A summary of the circumstances in which such indemnification is provided for is contained herein, but this description is qualified in its entirety by reference to our bylaws and to the statutory provisions.
In general, any officer, director, employee or agent may be indemnified against expenses, fines, settlements or judgments arising in connection with a legal proceeding to which such person is a party, if that person is not liable due to conduct that constituted a breach of his or her fiduciary duties and such breach involved intentional misconduct, fraud or a knowing violation of law, and that person’s actions were in good faith, were believed to be in our best interest, and were not unlawful. Indemnification may not be made for any claim as to which the person seeking indemnity has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals, to be liable to our company unless the court in which the action or suit was brought or another court of competent jurisdiction determines that in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court deems proper. Unless such person is successful upon the merits in such an action, indemnification may be awarded only after a determination by independent decision of our board of directors, by legal counsel, or by a vote of our stockholders, that the person to be indemnified met the applicable standard of conduct. Under our articles of incorporation, as amended, and bylaws we will advance expenses incurred by officers, directors, employees or agents who are parties to or are threatened to made parties to any threatened, pending or completed action by reason of the fact that such person was serving in such capacity, prior to the disposition of such action and promptly following request therefor, upon receipt of an undertaking by or on behalf of such person to repay such advances if it should be determined ultimately that such person is not entitled to indemnification.
The circumstances under which indemnification is granted in connection with an action brought on our behalf is generally the same as those set forth above; however, with respect to such actions, indemnification is granted only with respect to expenses actually incurred in connection with the defense or settlement of the action. Indemnification may also be granted pursuant to the terms of agreements that may be entered in the future or pursuant to a vote of stockholders or directors. The Nevada Revised Statutes also grant us the power to purchase and maintain insurance which protects our officers and directors against any liabilities incurred in connection with their service in such a position, and we have obtained such a policy.
A stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, except for the legal proceedings described above to which Steve Saleen is a party, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification by us is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Code of Ethics
We have not adopted a formal written corporate code of ethics that applies throughout our Company and may consider adopting a Code of Ethics in the near future.
Meetings of the Board of Directors and Committees
Our board of directors held three general meetings during our fiscal year ended March 31, 2015. Each director attended all the meetings of our board of directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table and related footnotes show the compensation paid to our Chief Executive Officer and to each of our other two most highly compensated executive officers whose compensation exceeded $100,000 during the last fiscal year, and information concerning all compensation paid for services rendered to us in all capacities for our last two fiscal years.
(1) Of this amount, $123,455 was unpaid as of March 31, 2014. Mr. Saleen did not have any equity awards issued or outstanding during the fiscal years ended March 31, 2015 and 2014.
(2) The amount shown in the table above does not reflect dollar amounts actually received. Instead, this amount reflects the grant date fair value for the award granted, which was determined pursuant to Accounting Standards Codification Topic 718 and does not reflect the value actually realized or that could be realized from the award. See Note 9 to the Company’s consolidated financial statements in this Form 10-K for a description of the assumptions we used to determine the fair value of stock option awards.
(3) In August 2014, Mr. Fiene was granted a stock option exercisable for 1,500,000 shares of Common Stock at an exercise price of $0.10 per share of which one-third, or 500,000 shares, vested immediately and the remainder to vest one-third over the following two years with the award and expiring in August 2024. None of these shares were exercised during the year ended March 31, 2015.
Employee Contracts
On August 1, 2011, Saleen Automotive entered into an Employment Agreement with Saleen under which he is currently compensated at the rate of $20,000 per month, which shall not be reduced. The Employment Agreement provides for increased compensation of $27,500 per month, $32,500 per month and $37,500 per month if Saleen Automotive is successful in raising a cumulative gross amount of $5 million, $7.5 million and $10 million in capital, respectively. The Employment Agreement also provides that Saleen Automotive will establish and maintain on or before September 30, 2013, a bonus program for Saleen that will compensate Saleen in amounts up to his annual base salary, based on objective criteria. Saleen Automotive and Saleen are currently determining the parameters of that bonus plan. The Employment Agreement provides for Saleen’s service as Saleen Automotive’s Chief Executive Officer, and provides that Saleen Automotive is disallowed from changing the title of Saleen’s position or from diminishing his responsibilities of overseeing the operations of Saleen Automotive. The Employment Agreement has a term of eight years, and will automatically continue thereafter for successive 12 month periods unless and until either party gives the other party written notice of termination prior to the end of a term. In the event Saleen Automotive terminates the Employment Agreement without cause (as defined in the Employment Agreement), or otherwise materially breaches the Employment Agreement and such material breach remains uncured after 15 days’ written notice, Saleen will be entitled to a severance payment of 1.50 times his then-current annual salary plus $2 million, payable in cash or cash-equivalents within 30 days of the date of termination.
Outstanding Equity Awards at Fiscal Year End
The following table presents information regarding outstanding options held by our named executive officers as of the end of our fiscal year ended March 31, 2015.
(1) Mr. Fiene was granted options to purchase 1,500,000 shares on August 12, 2014, 1/3rd of which vested on the first anniversary of the effective date of grant and on each anniversary thereof until fully vested.
None of the executive officers listed above exercised options during the fiscal year ended March 31, 2015.
Compensation of Directors
The following table provides information with respect to all compensation awarded to, earned by or paid to each person who served as a director for some portion or all of our fiscal year ended March 31, 2015.
(1) In August 2014, we granted options to purchase 500,000 shares each of our Common Stock at an exercise price of $0.10 to our directors Jeffrey Kraws and Joe Amato of which 166,667 shares, each, are fully vested with the reminder to vest one-third equally over the following two years with the award expiring in August 2024.
(2) Except for the award issued to Mr. Michaels (see (3) below), amount represents the grant date fair value of the award calculated in accordance with ASC Topic 718. See Note 9 to our consolidated financial statements in this Form 10-K for details as to the assumptions used to determine the fair value of the awards.
(3) Mr. Michaels served as our board member from October 31, 2013 to February 28, 2015. During the fiscal year ended March 31, 2015, we incurred $69,418 in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by Mr. Michaels. In January 2015, the Company entered into a Fee Reduction Agreement with Michaels Law Group whereby Michaels Law Group reduced the amount owed to $75,000 and the Company agreed to issue 2,500,000 shares of Common Stock as full payment. The value of the Common Stock issued of $75,000 was based on a fair value of $0.03 per share.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our Common Stock beneficially owned as of July 13, 2015 for (i) each stockholder known to be the beneficial owner of more than 5% of our outstanding Common Stock, (ii) each executive officer and director and (iii) all executive officers and directors as a group.
In general, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days, through the exercise of a warrant or stock option, conversion of a convertible security or otherwise. Unless otherwise indicated, each person in the table will have sole voting and investment power with respect to the shares shown. For purposes of this table, shares not outstanding which are subject to issuance on exercises of stock options or conversion of a Note that are held by one or more person(s) are deemed to be outstanding for the purpose of computing the percentage(s) of outstanding shares beneficially owned by such person(s) but are not deemed to be outstanding for the purpose of computing the percentage for any other person. The table assumes a total of 460,556,796 shares of our Common Stock outstanding as of July 13, 2015. Unless otherwise indicated, the address of each of the executive officers and directors and greater than 5% stockholders named below is c/o Saleen Automotive, Inc., 2735 Wardlow Road, Corona, CA 92882.
* Less than 1% ownership
(1) Consists of shares of Common Stock that may be acquired in the event of the conversion of 302,133.875 shares of Super Voting Common Stock within 60 days of July 13, 2015. Assuming the conversion of the remaining outstanding shares of Super Voting Common Stock, which are convertible into 384,211,645 shares of Common Stock, Mr. Saleen owns 35.8% of our outstanding voting securities
(2) Consists of shares of Common Stock issuable upon the exercise of stock options which are currently exercisable or will become exercisable within 60 days of July 13, 2015.
(3) Includes of 302,133,875 shares of Common Stock that may be acquired in the event of the conversion of 302,133.875 shares of Super Voting Common Stock within 60 days of July 13, 2015, and 333,334 shares of Common Stock issuable upon the exercise of stock options which are currently exercisable or will become exercisable with 60 days of July 13, 2015.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than the transactions described below, since April 1, 2012, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:
● in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years; and
● in which any director, executive officer, stockholders who beneficially owns more than 5% of our Common Stock or any member of their immediate family had or will have a direct or indirect material interest.
During the year ended March 31, 2015 and 2014, we incurred $131,787 and $340,000, respectively, in officers’ salary expense due our Director, Chairman and CEO, Mr. Steve Saleen of which $300,000 was unpaid as of March 31, 2013. In addition, during the year ended March 31, 2014, Mr. Saleen loaned the Company $20,500 payable on demand. In March 2014, Mr. Saleen agreed to forgive $352,287 of salary owed, which the Company recognized as a gain in the Statement of Operations. As of March 31, 2015 and 2014, the balances of $223,455 and $100,000, respectively, were payable to Mr. Saleen for his unpaid officers’ salary, and is included in Accounts Payable - related parties.
During the year ended March 31, 2015 and 2014, we incurred $69,418 and $365,251, respectively, in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by our former Director and General Counsel, Mr. Jonathan Michaels. During the years ended March 31, 2015 and 2014, we paid $550 and $110,000, respectively, to Michaels Law Group. In March 2014, we entered into a Retainer Agreement with Michaels Law Group whereby we issued 1,447,500 shares of our Common Stock and five year warrants to purchase 1,447,500 shares of our Common Stock at an exercise price of $0.15 per share along with cash of $36,459 in exchange for amounts owed through February 2014. The value of the Common Stock issued was $405,300 based on a stock price of $0.28 on date of settlement and the value of the warrants was determined to be $332,491. As of March 31, 2014, $23,954 was payable to Michaels Law Group for March 2014 services. In January 2015, we entered into a Fee Reduction Agreement with Michaels Law Group whereby Michaels Law Group reduced the amount we owed to $75,000 and we agreed to issue 2,500,000 shares of Common Stock to Michaels Law Group as full payment. The value of the Common Stock issued of $75,000 was based on a fair value of $0.03 per share.
On January 23, 2015, we entered into a First Amendment to Securities Purchase Agreement dated June 26, 2013 by and among us and W-Net and Europa, our two largest stock and note holders (“June 2013 Notes”), whereby the note holders agreed to amend the Securities Purchase Agreement entered into on June 26, 2013 to provide for the issuance of up to $600,000 in additional Notes for a period up to June 26, 2015 under the same terms as the June 2013 Notes. In addition, we entered into a Second Amendment to 3% Senior Secured Convertible Notes whereby the conversion price of the June 2013 Notes was amended to be the lesser of (a) $0.075 and (b) 70% of the average of the three lowest VWAPs occurring during the twenty consecutive trading days immediately preceding the applicable conversion date on which the note holders elects to convert all or part of the note. However, in no event shall the conversion price be less than $0.02. In conjunction with these amendments, on January 26, 2015 we issued two 3% Senior Secured Convertible Notes in the principal amount of $499,892 with W-Net and Europa of which $98,708 was converted from a revolver entered into with W-Net in November 2013.
During the year ended March 31, 2015 and 2014, we incurred $50,000 and $35,000, respectively, of which we paid $12,500 and $10,000, respectively, in investment advisor and research services from Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of March 31, 2015 and 2014, $62,500 and $25,000, respectively, was payable to TopHat Capital for these services.
During the year ended March 31 2015, we incurred and paid $31,343 and $25,000, respectively, for research report services to Crystal Research Associates, whose co-founder and Chief Executive Officer, Jeffrey Kraws, is a Director of the Company. As of March 31, 2015, $6,343 was payable to Crystal Research Associates for these services.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES\
The following table presents the fees for professional audit services rendered by Weinberg & Company, P.A. for the audit of our annual financial statements for the year ended March 31, 2015 and 2014. All services reflected in the following fee table for 2015 and 2014 were pre-approved, respectively, in accordance with the policy of the Audit Committee of our board of directors.
NOTES:
(1) Audit fees consist of audit and review services, consents and review of documents filed with the SEC.
The Audit Committee of our board of directors pre-approves all audit (including audit-related) and permitted non-audit services to be performed by our independent auditors. Our Audit Committee will annually approve the scope and fee estimates for the year-end audit to be performed by our independent auditors for the fiscal year. With respect to other permitted services, our Audit Committee pre-approves specific engagements, projects and categories of services on a fiscal year basis, subject to individual project and annual maximums. To date, we have not engaged our auditors to perform any non-audit related services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS
(a) The following documents are filed as part of this report:
(1) Financial Statements:
All financial statements as set forth under Item 8 of this report.
(2) Exhibits
See Item 15(b) below.
(b) Exhibits:
The exhibit list required by this Item is incorporated by reference to the Exhibit Index immediately following the signature page of this report.
(c) Financial Statement Schedules: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Saleen Automotive, Inc.
a Nevada Corporation
Date: July 14, 2015 /S/ Steve Saleen
Steve Saleen
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steve Saleen his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/S/ Steve Saleen
Chief Executive Officer and Director
July 14, 2015
Steve Saleen
/S/ David J. Fiene
Chief Financial Officer & Secretary
July 14, 2015
David J. Fiene
/S/ Jeffrey Kraws
Director
July 14, 2015
Jeffrey Kraws
/S/ Joe Amato
Director
July 14, 2015
Joe Amato
Saleen Automotive, Inc.
EXHIBIT INDEX
Exhibit Number
Description of Exhibit
2.1
Agreement and Plan of Merger dated May 23, 2013, among the Registrant, Saleen California Merger Corporation, Saleen Florida Merger Corporation, SMS Signature Cars, Saleen Automotive, Inc. and Steve Saleen. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on May 30, 2013.
3.1.1
Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-176388) filed with the Securities and Exchange Commission on August 18, 2011.
3.1.2
Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock. Incorporated by reference to Exhibit 3.1.2 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
3.1.3
Articles of Merger effective June 17, 2013. Incorporated by reference to Exhibit 3.1.3 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
3.1.4
Amendment to Certificate of Designation After Issuance of Class or Series. Incorporated by reference to Exhibit 3.1.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on July 24, 2013.
3.1.5
Certificate of Amendment of Articles of Incorporation. Incorporated by reference to Exhibit A to the Preliminary Information Statement on Schedule 14C (File No. 333-176388) filed with the Securities and Exchange Commission on December 13, 2013.
3.1.6
Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock.
3.2
Bylaws. Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-176388) filed with the Securities and Exchange Commission on August 18, 2011.
4.1
Omnibus Incentive Plan. Incorporated by reference to Exhibit B to the Preliminary Information Statement on Schedule 14C (File No. 333-176388) filed with the Securities and Exchange Commission on December 13, 2013.
10.1
Registration Rights Agreement dated March 13, 2013, among the Registrant, W-Net Fund I, L.P. and Verdad Telecom, Inc. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on March 18, 2013.
10.2
Securities Purchase Agreement dated June 26, 2013, among the Registrant and the purchasers signatory thereto. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.3
Registration Rights Agreement dated June 26, 2013, among the Registrant and the investors signatory thereto.
Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.4
Security Agreement dated June 26, 2013, among the Registrant, Saleen Automotive, Inc., SMS Signature Cars and the purchasers signatory thereto. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.5
Intellectual Property Security Agreement dated June 26, 2013, among the Registrant, Saleen Automotive, Inc., SMS Signature Cars and the purchasers signatory thereto. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.6
Form of 3.0% Senior Secured Convertible Note. Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.7
Commercial Lease dated December 2, 2008, between Larry R. Haupert dba Rexco and SMS Signature Cars. Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.8†
Employment Agreement dated August 1, 2011, between Saleen Automotive, Inc. and Steve Saleen. Incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.9
Commercial Lease dated September 1, 2012, between Larry R. Haupert dba Rexco and Saleen Automotive, Inc. Incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on June 27, 2013.
10.10
Assignment and License Agreement dated May 23, 2013, between W270, Inc. and Steve Saleen. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on May 30, 2013.
10.11
Secured Promissory Note entered into on October 8, 2013 by Saleen Automotive, Inc. in favor of W-Net Fund I, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on October 15, 2013.
10.12
Form of Subscription Agreement. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on October 15, 2013.
10.13
Form of Warrant. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on October 15, 2013.
10.14
Letter Agreement dated September 27, 2013, between Saleen Automotive, Inc. and Ascendiant Capital Markets, LLC. Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 333-176388) filed with the Securities and Exchange Commission on October 15, 2013.
10.15
Form of 7.0% Convertible Note.
10.16
Form of Securities Purchase Agreement between Saleen Automotive, Inc. and KBM Worldwide, Inc. Incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.17
Form of Convertible Promissory Note issued by Saleen Automotive, Inc. to KBM Worldwide, Inc. Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.18
Securities Purchase Agreement dated October 14, 2014, between Saleen Automotive, Inc. and LG Capital Funding, LLC. Incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.19
Form of Convertible Note issued by Saleen Automotive, Inc. to LG Capital Funding, LLC. Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.20
Form of Securities Purchase Agreement between Saleen Automotive, Inc. and JSJ Investments Inc. Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.21
Form of 10% Convertible Note issued by Saleen Automotive, Inc. to JSJ Investments Inc. Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.22
Securities Purchase Agreement dated December 3, 2014, between Saleen Automotive, Inc. Rock Capital, LLC. Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.23
Form of Convertible Note issued by Saleen Automotive, Inc. to Rock Capital, LLC. Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.24
Convertible Note dated December 3, 2014, issued by Saleen Automotive, Inc. to Vista Capital Investments, LLC. Incorporated by reference to Exhibit 10.9 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.25
Securities Purchase Agreement dated December 3, 2014, between Saleen Automotive, Inc. and Coventry Enterprises, LLC. Incorporated by reference to Exhibit 10.10 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.26
Form of Convertible Note issued by Saleen Automotive, Inc. to Coventry Enterprises, LLC. Incorporated by reference to Exhibit 10.11 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.27
Securities Purchase Agreement dated October 28, 2014, between Saleen Automotive, Inc. and Typenex Co-Investment, LLC. Incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.28
Convertible Note dated October 28, 2014, issued by Saleen Automotive, Inc. to Typenex Co-Investment, LLC. Incorporated by reference to Exhibit 10.13 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.29
Convertible Note dated November 6, 2014, issued by Saleen Automotive, Inc. to JMJ Financial. Incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the Quarterly Report on Form 10-Q (File No. 000-55236) filed with the Securities and Exchange Commission on February 19, 2015.
10.30
Securities Purchase Agreement dated April 17, 2015, between Saleen Automotive, Inc. and GreenTech Automotive, Inc.
10.31
Form of 10.0% First Lien Convertible Note issued by Saleen Automotive, Inc. to GreenTech Automotive, Inc.
10.32
Supplemental Agreement dated April 17, 2015, among Saleen Automotive, Inc., Steve Saleen, GreenTech Automotive, Inc. and WM Industries Corp.
10.33
Security Agreement dated April 17, 2015, among Saleen Automotive, Inc., Saleen Automotive, Inc. (the Registrant’s wholly-owned subsidiary), Saleen Signature Cars, Saleen Sales Corporation and GreenTech Automotive, Inc.
10.34
Intellectual Property Security Agreement dated April 17, 2015, among Saleen Automotive, Inc., Saleen Automotive, Inc. (the Registrant’s wholly-owned subsidiary), Saleen Signature Cars, Saleen Sales Corporation and GreenTech Automotive, Inc.
21.1
Subsidiaries of the Registrant.
31.1
Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2
Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance.
101.SCH**
XBRL Taxonomy Extension Schema.
101.CAL**
XBRL Taxonomy Extension Calculation.
101.DEF**
XBRL Taxonomy Extension Definition.
101.LAB**
XBRL Taxonomy Extension Labels.
101.PRE**
XBRL Taxonomy Extension Presentation.
† Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K.
** Furnished herewith