UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2015

 

OR

 

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

 

For the transition period from _________ to _________

 

 

 

SALEEN AUTOMOTIVE, INC.

(Exact Name of Registrant as Specified in Charter)

 

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

2735 Wardlow Road

Corona, California

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

 

(800) 888-8945

Registrant’s telephone number, including area code:

 

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

Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

Yes [  ] No [X]

 

As of March 21, 2016, there were 2,072,139,662 shares of the issuer’s common stock, $0.001 par value per share, outstanding.

 

 

     
 

 

SALEEN AUTOMOTIVE, INC.

FORM 10-Q

INDEX

 

      Page
PART I - FINANCIAL INFORMATION
 
ITEM 1. Unaudited Condensed Consolidated Financial Statements:    
  a) Condensed Consolidated Balance Sheets as of December 31, 2015 (Unaudited) and March 31, 2015   F-1
  b) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine month periods ended December 31, 2015 and 2014   F-2
  c) Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited) for the nine month period ended December 31, 2015   F-3
  d) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine month periods ended December 31, 2015 and 2014   F-4
  e) Notes to Condensed Consolidated Financial Statements (Unaudited)   F-6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk   11
ITEM 4. Controls and Procedures   11
 
PART II - OTHER INFORMATION
 
ITEM 1. Legal Proceedings   13
ITEM 5. Other Information   13
ITEM 6. Exhibits   13

 

  2   
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Financial Statements:

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

    December 31, 2015     March 31, 2015  
    (unaudited)        
ASSETS                
Current Assets                
Cash   $ 60,850     $ 143,083  
Accounts receivable, net of allowance for doubtful accounts of $271,658 at December 31, 2015 and March 31, 2015     22,218       4,945  
Inventory     128,088       725,687  
Prepaid expenses and other current assets     4,337       37,079  
Total Current Assets     215,493       910,794  
                 
Property and equipment, net     525,262       592,116  
Other assets     5,000       5,000  
TOTAL ASSETS   $ 745,755     $ 1,507,910  
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable   $ 1,616,048     $ 1,677,309  
Due to related parties     191,602       326,512  
Notes payable     571,750       671,750  
Current portion of convertible notes, net of discount of nil and $250,892 at December 31, 2015 and March 31, 2015, respectively     922,254       267,332  
Notes payable to related parties     345,584       267,000  
Payroll and other taxes payable     762,639       745,503  
Accrued interest on notes payable     617,786       387,005  
Customer deposits     1,491,240       1,896,568  
Deferred royalty revenue     500,000       -  
Deferred vendor consideration     275,000       275,000  
Derivative liability     181,565       1,268,588  
Other current liabilities     186,913       178,891  
Total Current Liabilities     7,662,381       7,961,458  
Convertible notes payable, net of discount of $954,004 and $1,585,935 at December 31, 2015 and March 31, 2015, respectively     3,747,608       3,215,677  
Total Liabilities     11,409,989       11,177,135  
                 
Commitments and Contingencies                
Stockholders’ Deficit                
Preferred stock; $0.001 par value; 1,000,000 shares authorized; none issued and outstanding at December 31, 2015 and March 31, 2015     -       -  
Common Stock; $0.001 par value; 2,500,000, 000 and 500,000,000 shares authorized; 1,229,633,321 and 174,857,028 issued and outstanding at December 31, 2015 and March 31, 2015, respectively     1,229,632       174,856  
Additional paid in capital     18,557,491       18,530,191  
Accumulated deficit     (30,451,357 )     (28,374,272 )
Total Stockholders’ Deficit     (10,664,234 )     (9,669,225 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 745,755     $ 1,507,910  

 

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

 

  F-1  
 

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

 

    Three month periods ended
December 31,
    Nine month periods ended
December 31,
 
    2015     2014     2015     2014  
Revenue, net   $ 552,342     $ 536,895     $ 2,771,518     $ 3,072,596  
                                 
Costs of goods sold     493,681       552,788       2,332,861       2,725,378  
Gross margin     58,661       (15,893 )     438,657       347,218  
                                 
Operating expenses                                
Research and development     40,939       144,316       190,625       543,070  
Sales and marketing     204,346       232,666       607,005       1,209,248  
General and administrative     468,654       801,757       1,543,907       2,736,796  
Depreciation and amortization     22,034       40,608       79,664       150,323  
Total operating expenses     735,973       1,219,347       2,421,201       4,639,437  
Loss from operations     (677,312 )     (1,235,240 )     (1,982,544 )     (4,292,219 )
Other income (expenses)                                
Interest expense     (330,903 )     (754,488 )     (1,153,804 )     (1,769,289 )
Recognition of derivative liability     -       -       (174,437 )     -  
Private placement costs and loss on debt extinguishment     -       (582,347 )     (27,760 )     (668,230 )
Gain on extinguishment of derivative liability     62,607       -       720,658       2,586,732  
Change in fair value of derivative liabilities     74,657       129,182       540,802       2,602,392  
Net loss   $ (870,951 )   $ (2,442,893 )   $ (2,077,085 )   $ (1,540,614 )
Net loss per share:                                
Basic and diluted   $ (0.00 )   $ (0.02 )   $ (0.00 )   $ (0.01 )
Shares used in computing net loss per share:                                
Basic and diluted     998,464,607       156,891,289       896,120,531       146,930,440  

 

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

 

  F-2  
 

 

Saleen Automotive, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited)

For the Nine month period ended December 31, 2015

 

              Additional              
  Common Stock $0.001 Par     Preferred Stock $0.001 Par     Paid In     Accumulated     Stockholders’  
  Number     Amount     Number     Amount     Capital     Deficit     Deficit  
Balance, March 31, 2015   174,857,028     $ 174,856       -     $ -     $ 18,530,191     $ (28,374,272 )   $ (9,669,225 )
Cancellation of Common Stock held by Steve Saleen, CEO in exchange for Super Voting Preferred Stock   (82,133,875 )     (82,134 )     82,134       82       82,052               -  
Shares issued for services                   63,000       63       113,337               113,400  
Fair value of shares issued upon conversion of convertible notes and accrued interest   750,387,791       750,388                       (243,617 )             506,771  
Fair value of shares issued as payments on accounts payable   2,380,377       2,380                       45,227               47,607  
Fair value of shares issued upon settlement of accounts payable, related party                   239,008       239       253,975               254,214  
Exchange of Super Voting Preferred Stock for Common Stock   384,142,000       384,142       (384,142 )     (384 )     (383,758 )             -  
Fair value of stock-based compensation                                   160,084               160,084  
Net loss                                           (2,077,085 )     (2,077,085 )
Balance, December 31, 2015   1,229,633,321     $ 1,229,632       -     $ -     $ 18,557,491     $ (30,451,357 )   $ (10,664,234 )

 

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

 

  F-3  
 

 

Saleen Automotive Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

    For the Nine month periods ended
December 31,
 
    2015     2014  
Cash flows from operating activities                
Net loss   $ (2,077,085 )   $ (1,540,614 )
Adjustments to reconcile net loss to net cash used in operating activities                
Depreciation and amortization     79,664       150,323  
Gain on change in fair value of derivative liabilities     (540,802 )     (2,602,392 )
Gain on extinguishment of derivative liability     (720,658 )     (2,586,732 )
Gain on settlement of notes payable and accounts payable, related party     -       (89,938 )
Amortization of discount on convertible notes     882,824       1,496,290  
Loss on shares issued as payment on settlement of accounts payable             58,886  
Fair value of share based compensation     160,084       580,933  
Loss on debt extinguishment     27,760       -  
Private placement costs     -       668,230  
Recognition of derivative liability     174,437       -  
Fair value of shares issued for services     113,400       170,000  
Changes in working capital:                
(Increase) Decrease in:                
Accounts receivable     (17,273 )     27,730  
Inventory     597,599       31,456  
Prepaid expenses and other assets     32,742       98,932  
Increase (Decrease) in:                
Accounts payable     (13,654 )     (185,459 )
Due to related parties     119,306       196,787  
Payroll and taxes payable     17,136       (34,325 )
Accrued interest     267,405       220,566  
Customer deposits     (405,328 )     928,255  
Deferred royalty revenue     400,000       -  
Deferred vendor consideration     -       275,000  
Other liabilities     8,020       8,829  
Net cash used in operating activities     (894,423 )     (2,127,243 )
Cash flows from investing activities                
Purchases of property and equipment     (12,810 )     (218,685 )
Net cash used in investing activities     (12,810 )     (218,685 )
Cash flows from financing activities                
Proceeds from unsecured convertible notes     -       638,225  
Proceeds from unsecured convertible notes - related parties     -       250,000  
Proceeds from secured convertible notes     750,000          
Proceeds from notes payable - related parties     120,000       195,000  
Principal payments on notes payable - related parties     (45,000 )     -  
Principal payments on notes payable     -       (326,751 )
Proceeds from issuance of Common Stock     -       185,000  
Net cash provided by financing activities     825,000       941,474  
Net decrease in cash     (82,233 )     (1,404,454 )
Cash at beginning of period     143,083       1,499,889  
Cash at end of period   $ 60,850     $ 95,435  

 

(continued)

 

  F-4  
 

 

Saleen Automotive Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(continued)

 

    Nine month periods ended December 31,  
    2015     2014  
Supplemental disclosures of cash flow information:                
Cash paid during the year for                
Interest   $ 3,484     $ 21,408  
Income taxes   $ -     $ -  
                 
Supplemental schedule of non-cash financing activities:                
Derivative liability related to conversion feature   $ -     $ 1,306,455  
Issuance of Common Stock on conversion of secured convertible Notes Payable and accrued interest     -       596,953  
Issuance of Common Stock on conversion of unsecured convertible Notes payable and accrued interest     506,771       315,142  
Issuance of Common Stock on payment of interest on Notes payable             537,235  
Issuance of Common Stock as settlement of accounts payable     47,607       141,955  
Issuance of Super Voting Preferred Stock as settlement of accounts payable, related parties     254,214       -  
Fair value of beneficial conversion feature     -       250,000  
Fair value of shares issued in exchange for amendment of convertible debts recorded as debt discount     -       112,059  
Cancellation of Common Stock in exchange for Super Voting Preferred Stock     82,134       -  
Accounts payable to be settled by equities securities     -       75,000  
Reclass of note payable to offset deferred royalty revenue     100,000       -  
Reclass of amounts to be settled through the issuance of equity securities     -       470,534  

 

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

 

  F-5  
 

 

Saleen Automotive Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Three and Nine month Periods Ended December 31, 2015 and 2014

 

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

 

NOTE 1 - NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of the Company

 

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

 

Merger

 

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

 

  F-6  
 

 

Consolidation Policy

 

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

 

Going Concern

 

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine months ended December 31, 2015, the Company incurred a net loss of $2,077,085 and utilized $894,423 of cash in operations. The Company also had a stockholders’ deficit and working capital deficit of $10,664,234 and $7,446,888, respectively, as of December 31, 2015, and as of that date, the Company owed $762,639 in past unpaid payroll and other taxes; $846,004 of outstanding notes payable were in default; $1,317,928 of accounts payable was greater than 90 days past due; and $401,689 is owed on past due rent as of the date of filing of this Form 10-Q. In addition, in May 2015, the Company received a complaint from a bank alleging breach of the loan agreement and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under the Company’s 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of the Company’s indebtedness.

 

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

 

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profit from operations. At December 31, 2015, the Company had cash on hand in the amount of $60,850 and is not generating sufficient funds to cover operations. The Company has utilized funding to operate the business during the nine months ended December 31, 2015 with advance royalty payments of $500,000 obtained from an Intellectual Property License Agreement entered into in June 2015 and has received proceeds of $750,000 and $120,000 in secured convertible notes and notes payable from a related party, respectively. However, the Company will need and is currently working on obtaining additional funds, primarily through the issuance of debt or equity securities to operate its business through and beyond the date of this Form 10-Q filing. As further discussed in the Company’s Form 8-K filed on December 8, 2015 and further in Note 5, on December 2, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), with SM Funding Group, Inc. (“SM Funding”). Under the Purchase Agreement, the Company issued to SM Funding a 12% Senior Secured Convertible Note (“Senior Note”) under which SM Funding may advance to the Company up to $2,000,000. Amounts outstanding under the Senior Note are convertible into Preferred Stock the Company may issue to accredited investors in a private placement of up to $10,000,000, but not less than $8,000,000. Under the Senior Note, the Company agreed that it will not enter into, create, assume or suffer to exist any additional indebtedness for borrowed money. The Company has received aggregate advances from SM Funding of $750,000 as of December 31, 2015 and $960,000 as of the date of this filing of Form 10-Q. However, SM Funding is currently in default of its obligations to make advances to the Company under a Binding Letter of Intent (the “LOI”) the Company entered into with SM Funding on October 21, 2015. Accordingly, no assurance can be given that the Company will complete the financing transactions with SM Funding, including obtaining additional advances under the Senior Note, and no assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders in the case of convertible debt and equity financing.

 

  F-7  
 

 

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 inventories and 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 December 31, 2015 and March 31, 2015, the Company’s condensed consolidated balance sheets included the fair value of derivative liabilities of $181,565 and $1,268,588, respectively, which was based on Level 2 measurements.

 

Derivative Financial Instruments

 

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

 

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

 

  F-8  
 

 

Income Taxes

 

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

 

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

 

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

 

Stock Compensation

 

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

 

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

 

Income (Loss) per Share

 

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

 

For the three and nine months ended December 31, 2015 and 2014, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. As of December 31, 2015, stock options, warrants, and convertible notes convertible or exercisable into 6,870,333, 13,313,099, and 485,568,933 shares of common stock, respectively, have been excluded from diluted loss per share because they are anti-dilutive.

 

As of December 31, 2014, stock options, warrants, and convertible notes convertible or exercisable into 7,271,333, 13,313,099, and 139,159,937 shares of common stock, respectively, have been excluded from diluted loss per share because they are anti-dilutive.

 

Significant Concentrations

 

Two customers comprised 18% and 10% of sales, respectively, for the three months ended December 31, 2015 and one separate customer comprised 14% of sales for the nine months ended December 31, 2015. One customer comprised 93% of accounts receivable at December 31, 2015.

 

Sales to three separate customers comprised 28%, 11% and 10%, respectively, and one separate customer comprised 13% of revenues for the three and nine months ended December 31, 2014, respectively. Two different customers comprised 63% and 37% of accounts receivable as of December 31, 2014.

 

  F-9  
 

 

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

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

 

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

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

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

 

NOTE 2 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    December 31, 2015     March 31, 2015  
Tooling   $ 711,053     $ 698,243  
Equipment     210,980       210,980  
Leasehold improvements     203,310       203,310  
Total, cost     1,125,343       1,112,533  
Accumulated depreciation and amortization     (600,081 )     (520,417 )
Total Property, Plant and Equipment   $ 525,262     $ 592,116  

 

Depreciation and amortization expense was $79,664 and $109,715 for the nine months ended December 31, 2015, and 2014, respectively.

 

  F-10  
 

 

NOTE 3 - NOTES PAYABLE

 

Notes payable, exclusive of accrued interest, are comprised as follows:

 

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

 

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

 

  F-11  
 

 

NOTE 4 - NOTES PAYABLE TO RELATED PARTIES

 

Notes payable to related parties, exclusive of accrued interest, are as follows:

 

    December 31, 2015     March 31, 2015  
Unsecured note payable to a stockholder at 10% per annum, due on April 1, 2014, currently in default.   $ 102,000     $ 102,000  
Unsecured 10% note payable to a stockholder and convertible note holder at 10% per annum, payable on demand     120,000       -  
Unsecured payable to a stockholder at 10% per annum, payable on demand     123,584       165,000  
Total notes payable, related parties   $ 345,584     $ 267,000  

 

NOTE 5 - CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable, exclusive of accrued interest, are as follows:

 

    December 31, 2015     March 31, 2015  
3% Senior secured convertible notes payable to a private accredited investor group, convertible into 133,666,799 shares of Common Stock (including accrued interest), $2,001,720 due in June 2017 and $499,892 due in January 2019.   $ 2,501,612     $ 2,501,612  
                 
12% Senior secured convertible note payable to a private accredited inventory group, due on October 12, 2016, convertible into shares of preferred stock that may be issued by the Company in a subsequent offering     750,000       -  
                 
7% Unsecured convertible notes payable to private accredited investor group, convertible into 82,484,267 shares of Common Stock (including accrued interest) as of December 31, 2015, interest accrued at 7% per annum, notes mature in March 2017     2,200,000       2,200,000  
                 
Unsecured convertible notes payable to five separate private accredited investors, convertible into 269,824,686 shares of Common Stock (including accrued interest) as of December 31, 2015, interest accrued at 8% to 12% per annum, notes mature on various dates ending before December 31, 2015, in default     172,254       618,225  
      5,623,866       5,319,837  
Less: discount on notes payable     (954,004 )     (1,836,828 )
Notes payable, net of discount     4,669,862       3,483,009  
Less: notes payable, current     (922,254 )     (267,332 )
Notes payable, long-term   $ 3,747,608     $ 3,215,677  

 

  F-12  
 

 

3% Senior secured convertible notes

 

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

 

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

 

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

 

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

 

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

 

During the nine months ended December 31, 2015 and 2014, the Company amortized $24,761 and $270,701, respectively, of the valuation discount. The remaining unamortized valuation discount of $49,260 and $74,021 as of December 31, 2015 and March 31, 2015, respectively, has been offset against the face amount of the notes for financial statement purposes. As of December 31, 2015, the principal balance of the convertible Notes outstanding was $2,501,612 and potentially convertible into 133,666,799 shares of Common Stock including accrued and unpaid interest.

 

  F-13  
 

 

12% Senior secured convertible note

 

As noted above under “Going Concern” on December 2, 2015, the Company entered into the Purchase Agreement with SM Funding. Under the Purchase Agreement, the Company issued to SM Funding a 12% Senior Secured Convertible Note under which SM Funding may advance to the Company up to $2,000,000. Pursuant to the LOI (defined below) SM Funding was required to advance the Company at least $1,000,000 within seven business days after its execution in October 2015. However, as of December 31, 2015, the Company had only received aggregate advances from SM Funding of $750,000 evidenced by the Senior Note. Advances under the Senior Note will mature on October 12, 2016, bear interest at a rate of 12% per annum, and will be, at the holder’s option, convertible into shares of preferred stock (“Preferred Stock”) that may be issued by the Company in an offering described below. The Company’s subsidiaries have guaranteed the obligations under the Senior Note pursuant to a Subsidiary Guaranty, and the Company’s obligations under the Senior Note and the obligations of its subsidiaries under the Subsidiary Guaranty are secured pursuant to a Security Agreement and an Intellectual Property Security Agreement the Company entered into in favor of SM Funding. In addition, pursuant to a Binding Letter of Intent (the “LOI”) the Company entered into with SM Funding on October 21, 2015, the Company entered into a Subordination Agreement with SM Funding and certain existing holders of the Company’s existing 3% Senior secured convertible notes discussed above and 7% Unsecured convertible notes discussed below (the “Existing Lenders”) to memorialize the senior position of the Senior Note relative to the notes held by the holders of the 3% Notes.

 

Amounts outstanding under the Senior Note are convertible into Preferred Stock the Company may issue to accredited investors in a private placement of up to $10,000,000 (the “Target Amount”) but not less than $8,000,000, including the conversion of the principal and interest under the Senior Note (the “Qualified Offering”). Pursuant to the LOI and the Senior Note, upon completion of the Qualified Offering at the Target Amount, the investors in the Qualified Offering will collectively and beneficially own 60.9% of the Company, the Existing Lenders will beneficially own 26.1% of the Company (pursuant to the conversion of their notes into shares of preferred stock), Steve Saleen will beneficially own 10% of the Company (excluding a warrant to purchase 5% of the Company’s outstanding shares of Common Stock), and all other stockholders will beneficially own approximately 3% of the Company. There can be no assurance that SM Funding will make additional advances to the Company under the Senior Note or that the Company will be able to consummate a Qualified Offering with SM Funding or otherwise.

 

Without the prior written consent of the holder of the Senior Note, the Company is prohibited from (i) entering into, creating, assuming or suffering to exist any additional indebtedness for borrowed money, (ii) entering into, creating, assuming or suffering to exist any additional liens on or with respect to any of the Company’s properties or assets, (iii) repurchasing shares of the Company’s Common Stock or common stock equivalents other than repurchases of common stock or common stock equivalents from departing employees up to an aggregate maximum of $150,000, (iv) paying cash dividends, and (v) entering into transactions with its affiliates that would be required to be disclosed in public filings with the Securities and Exchange Commission, unless such transaction is expressly approved by a majority of the disinterested directors on the Company’s board of directors.

 

7% Unsecured convertible notes

 

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

 

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

 

  F-14  
 

 

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 $544,556 and $422,206 for the nine months ended December 31, 2015 and 2014, respectively. As of December 31, 2015 and March 31, 2015, the remaining unamortized valuation discount of $904,744 and $1,449,300, respectively, has been offset against the face amount of the notes for financial statement purposes. As of December 31, 2015, the outstanding principal balance of these notes was $2,200,000 and potentially convertible into 82,077,448 shares of Common Stock including accrued and unpaid interest.

 

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

 

In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of the 7% Notes. As a result, the Company determined that the conversion feature of the 7% Notes was not considered indexed to the Company’s own stock pursuant to FASB guidance on “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Therefore, the Company characterized the fair value of the 7% Note conversion feature of $13,148 in June 2015 as derivative liability. See Note 6 for further discussion.

 

Unsecured convertible notes

 

From September 2014 to December 2014, the Company issued Unsecured Convertible Promissory Notes (“Notes”) to eight separate accredited investors with a remaining principal balance of $172,254 and $618,225 as of December 31, 2015 and March 31, 2015, respectively. The original Notes contained interest ranging from 8% to 12% per annum and matured on various dates from April 2015 to December 2016. The notes outstanding as of December 31, 2015 contain interest rates ranging from 8% to 10% and matured on dates prior to December 31, 2015 and as such, were in default as of December 31, 2015. The Company may not prepay the Notes without the Note holder’s consent. Notes under default contain provisions that, 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.

 

  F-15  
 

 

During the nine months ended December 31, 2015, Note holders converted $473,731 of principal and $33,040 of accrued interest into 750,387,791 shares of the Company’s Common Stock. In addition, in June 2015, the Company agreed to allow one note holder to assign their then note principal balance of $49,240, which was in default due to non-payment after maturity date and insufficient availability of Common Stock available upon conversion, to a separate note holder, who is also a note holder under the 3% Notes and 7% Notes, for the new note holder’s payment of $77,000 to the original note holder. As a result of this assignment, the Company recorded $27,760 as loss on extinguishment during the nine months ended December 31, 2015 as a result of the increase in principal balance from $49,240 to $77,000. As of December 31, 2015, the principal balance of the convertible Notes outstanding was $172,254 and potentially convertible into 269,824,686 shares of Common Stock including accrued and unpaid interest.

 

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

 

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

 

NOTE 6 - DERIVATIVE LIABILITY

 

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

 

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

 

    December 31, 2015     June 30, 2015     March 31, 2015  
Conversion feature:                        
Risk-free interest rate     0.01 - 1.31 %     0.02 - 0.03        0.004 - 1.55 %
Expected volatility     217 %     203 %     179 %
Expected life (in years)     .01 - 1.5 years       1.62 - 1.8 years        .2 - 1.6 years  
Expected dividend yield     -       -       -  
                         
Fair Value:                        
Conversion feature   $ 181,565     $ 174,437     $ 1,268,588  

 

  F-16  
 

 

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 estimated remaining terms of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of Common Stock in the past and does not expect to pay dividends to holders of its Common Stock in the future.

 

During the nine months ended December 31, 2015 and 2014, the Company recognized $540,802 and $2,602,392, respectively, as other income, which represented the difference in the value of the derivative from the respective prior period. In addition, the Company recognized a gain of $720,658 and $2,586,732, which represented the extinguishment of derivative liabilities related to the conversion of the unsecured convertible notes during the nine months ended December 31, 2015 and 2014, respectively.

 

In June 2015, the Company determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of certain of its Notes. As a result, the Company was required to record a derivative liability of $174,437 in June 2015.

 

NOTE 7 - ADVANCE ROYALTY

 

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

 

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

 

As part of the License agreement, SMI agreed to advance to the Company $500,000 in royalties of which $250,000 was applied from loan advances previously made to the Company under the 10% Notes made by GTA pursuant to a Securities Purchase Agreement and 10.0% First Lien Convertible Note entered into in May 2015; $100,000 was applied from the cancelation of a note entered into between GTA and the Company in March 2015; and $150,000 was paid by GTA in cash to the Company. As of December 31, 2015, the Company recognized a deferred advance royalty of $500,000 and will recognize this amount as revenue based on actual future royalties resulting from sales by SMI under the License Agreement.

 

  F-17  
 

 

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.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

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

 

Related Party:   December 31, 2015     March 31, 2015  
Steve Saleen (a)   $ 122,759     $ 223,455  
Top Hat Capital (b)     62,500       62,500  
Crystal Research     6,343       6,343  
Molly Saleen, Inc. (c)     -       34,214  
    $ 191,602     $ 326,512  

 

(a) As of March 31, 2015 the Company owed $223,455 to Mr. Saleen for his unpaid officers’ salary. On June 16, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors. Further, during the nine months ended December 31, 2015, the Company incurred $122,759 in officers’ salary expense to its Director, Chairman and CEO, Mr. Steve Saleen, which was due and owing as of December 31, 2015. As discussed in Note 9, in October 2015, shares of Super Voting Preferred stock were converted into shares of Common Stock.
   
(b) The Company previously incurred $75,000 of expense, of which the Company paid $12,500, for investment advisor and research services provided by Top Hat Capital, whose co-founder and Managing Partner, Jeffrey Kraws, is a Director of the Company. As of December 31 and March 31, 2015, $62,500 was payable to Top Hat Capital for these services.
   
(c) As of March 31, 2015 the Company owed $34,214 for apparel merchandise purchased on behalf of the Company by Molly Saleen, Inc., dba Mollypop (“Mollypop”), who’s owner, Molly Saleen, is the Chief Executive Officer of Mollypop and is the daughter of Steve Saleen. On June 22, 2015, the Company issued to Mollypop, 19,007.777 shares of Super Voting Preferred Stock to reimburse Mollypop for the amount owed of $34,214. The per share price of Super Voting Preferred Stock issued to Mollypop was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. During the nine months ended December 31, 2015, the Company incurred $802 of such costs, which was paid. As discussed in Note 9, in October 2015, shares of Super Voting Preferred stock were converted into shares of Common Stock.

 

Other Transactions

 

On June 22, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred Stock issued to MLG was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. As discussed in Note 9, in October 2015, all shares of Super Voting Preferred stock were converted into shares of Common Stock.

 

  F-18  
 

 

NOTE 9 - STOCKHOLDERS’ EQUITY

 

Authorized Shares

 

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

 

Issuance of Common Stock

 

During the nine months ended December 31, 2015, the Company issued an aggregate of 750,387,791 shares of common stock upon conversion of the Company’s convertible notes payable and accrued interest amounting to $506,771 (see Note 5).

 

During the nine months ended December 31, 2015, the Company entered into Settlement Agreement and Mutual Release agreement with a vendor whereby the Company issued an aggregate of 2,380,377 shares of Common Stock with a fair value of $47,607 in exchange for extinguishment of amount owed of $47,607. The value of the Common Stock was based on the market price of the Company’s Common Stock as of the date of the Settlement Agreement.

 

Designation of Super Voting Preferred

 

On June 12, 2015, the Company filed a Certificate of Designation designating the rights and restrictions of 1,000,000 shares of Super Voting Preferred Stock, par value $0.001 per share, pursuant to resolutions approved by the Company’s Board of Directors on June 11, 2015. In October 2015, upon the increase in our authorized shares of common stock to 2,500,000,000, all 384,142 outstanding shares of Super Voting Preferred Stock were automatically cancelled and converted into 384,142,000 shares of Common Stock , and the Super Voting Preferred Stock ceased to be a designated class of Preferred Stock.

 

Issuance of Super Voting Preferred

 

During the nine months ended December 31, 2015, the Company issued 63,000 shares of Super Voting Preferred Stock to Michaels Law Group, APLC (“MLG”) as a retainer for legal services to be provided by MLG in connection with various outstanding claims and suits in which the Company is plaintiff, and for other legal matters. Jonathan Michaels, the founding member of MLG, previously served as a member of the Company’s Board of Directors and as our general counsel. The per share price of Super Voting Preferred Stock issued was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.0018) of Common Stock as of June 19, 2015, the date the issuance was approved by the Board of Directors. The Company recorded these fees as general and administrative expense during the nine months ended December 31, 2015.

 

During the nine months ended December 31, 2015, the Company issued 220,000 shares of Super Voting Preferred Stock to Mr. Saleen in satisfaction of $220,000 of debt owed to Mr. Saleen. The per share price of Super Voting Preferred Stock issued to Mr. Saleen was based on the conversion ratio of Super Voting Preferred Stock into 1,000 shares of Common Stock, multiplied by the per share closing price ($0.001) of Common Stock as of June 11, 2015, the date the issuance was approved by the Company’s Board of Directors.

 

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

 

In order to make available additional shares of Common Stock to facilitate the conversion of outstanding debt, during the nine months ended December 31, 2015 the Company issued to Steve Saleen, the Company’s Chief Executive Officer and President, 82,133.875 shares of Super Voting Preferred Stock in exchange for 82,133,875 shares of Common Stock held by Mr. Saleen.

 

As discussed above, all shares of Super Voting Preferred Stock were automatically cancelled and converted into shares of Common Stock in October 2015.

 

  F-19  
 

 

Omnibus Incentive Plan

 

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

 

Stock option activity is set forth below:

 

    Number of
Shares
    Weighted
Average
Exercise Price
per Share
    Aggregate
Intrinsic
Value
    Weighted-Average
Remaining
Contractual Term
(in years)
 
Balance at March 31, 2015     13,459,000     $ -     $ -       -  
Options granted during the period     -       -       -       -  
Options cancelled during the period     (792,334 )     0.10       -       -  
Options exercised during the period     -       -       -       -  
Balance at December 31, 2015     12,666,666     $ 0.10     $ 0       8.69  
Exercisable at December 31, 2015     6,870,333     $ 0.10     $ 0       8.71  
Expected to vest after December 31, 2015     5,796,333     $ 0.10     $ 0       8.69  

 

The aggregate intrinsic value shown in the table above represents the difference between the fair market value of the Company’s common stock of $0.0007 on December 31, 2015 and the exercise price of each option.

 

During the nine months ended December 31, 2015, the Company recorded stock compensation expense of $160,084 of which $5,782, $120,069, and $34,233 was included in research and development, sales and marketing, and general and administrative expenses, respectively. Unearned compensation of $143,997 at December 31, 2015, related to non-vested stock options, will be recognized into expense over a weighted average period of .4 years.

 

During the nine months ended December 31, 2014, the Company recorded stock compensation expense of $580,933 of which $56,805, $229,305, and $294,822 was included in research and development, sales and marketing, and general and administrative expenses, respectively.

 

Warrants

 

The following summarizes warrant activity for the Company during the nine months ended December 31, 2015:

 

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

 

As of December 31, 2015, 13,313,099 warrants were exercisable and the intrinsic value of the warrants was nil.

 

  F-20  
 

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

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

 

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 the aggregate $1,555,000 of FinishMaster products. In consideration for the Company’s exclusive use of FinishMaster’s products and fulfilling this purchase commitment, FinishMaster paid the Company $25,000, which was recorded as deferred vendor consideration, and FinishMaster will pay an additional $25,000 upon the achievement of purchase level milestones, as outlined in the agreement. Should the Company not complete a set purchase level milestone, the Company would be required to re-pay the $25,000 along with $11,475 compensation to FinishMaster. This amount will be recorded as reduction to costs of goods sold in future periods based upon a prorated percentage of the purchased amount over the purchase commitment if the Company determines there is a reasonable certainty in achieving the purchase commitment.

 

Litigation

 

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

 

The Company is a defendant in a case filed by MSY Trading, Inc. on April 13, 2012 in the California Superior Court, Riverside County, that claimed breach of contract related to an engine installed by a third party vendor. The suit claimed $200,000 in damages plus interest, legal fees and costs of litigation. SSC filed a cross complaint against MSY Trading, Inc. for breach of warranty, negligence, and indemnification. On January 10, 2014, the Company settled this claim by agreeing to pay $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 these payment obligations. 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, Saleen Automotive, Inc. (formerly Saleen Electric Automotive, Inc.), the Company’s wholly-owned subsidiary, received a Complaint from Green Global Automotive B.V. (“GAA”) alleging causes of action for breach of contract and breach of the covenant of good faith and fair dealing, related to a European Distribution Agreement entered into in December 2011 between GAA and Saleen Automotive. The suit seeks contract and economic damages of $50,000 along with compensatory damages, restoration, lost profits and attorneys’ fees. The Company believes this case is without merit and that the Company is not liable under the alleged contract.

 

In December 2014, the Company received a Complaint from Ford of Escondido seeking damages based on 1) claim and delivery of personal property, 2) money due on a contract, and 3) common count. This matter was settled with the Company agreeing to a judgment in the amount of $300,000 and the transfer to the Company of title to four vehicles held by Ford of Escondido. The judgment has been entered, but no collection efforts have started.

 

  F-21  
 

 

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 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, 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.

 

NOTE 11 - SUBSEQUENT EVENTS

 

Subsequent to December 31, 2015 through the date of this Filing of this Form 10-Q, SM Funding advanced the Company $210,000 under the terms of the 12% Senior Secured Note, as discussed in Note 5.

 

In January, February 2016 and as of the date of the Filing of this Form 10-Q, note holders related to the unsecured convertible notes, as discussed in Note 5, converted approximately $200,000 of principal and interest into 842,506,341 shares of common stock.

 

  F-22  
 

 

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

 

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

 

General Overview

 

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

 

  3  
 

 

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

 

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

 

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

 

Merger

 

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

 

In June 2015, our board of directors approved an increase in our authorized shares of common stock from 500,000,000 to 2,500,000,000. The increase became effective in October 2015.

 

Critical Accounting Policies

 

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

 

  4  
 

 

Three Months Ended December 31, 2015 Compared to Three Months Ended December 31, 2014

 

Our revenue, operating expenses, and net loss for the three months ended December 31, 2015 as compared to the three months ended December 31, 2014 were as follows:

 

    For the Three months ended           Percentage  
    December 31,           Change  
    2015     2014     Change     Inc. (Dec.)  
Revenue, net   $ 552,342     $ 536,895     $ 15,447       3 %
                                 
Costs of goods sold     493,681       552,788       (59,107 )     (11 %)
Gross profit (loss)     58,661       (15,893 )     74,554       (469 %)
Operating expenses                                
Research and development     40,939       144,316       (103,377 )     (72 %)
Sales and marketing     204,346       232,666       (28,320 )     (12 %)
General and administrative     468,654       801,757       (333,103 )     (42 %)
Depreciation and amortization     20,034       40,608       (18,574 )     (46 %)
Total operating expenses     735,973       1,219,347       (483,374 )     (40 %)
Loss from operations     (677,312 )     (1,235,240 )     557,928       (45 %)
Other income (expenses)                                
Interest expense     (330,903 )     (754,488 )     423,585       (56 %)
Private placement costs and loss on debt extinguishment     -       (582,347 )     582,347       -  
Gain on extinguishment of derivative liability     62,607       -       62,607       -  
Change in fair value of derivative liabilities     74,657       129,182       (54,525 )     (42 %)
Net Loss   $ (870,951 )   $ (2,442,893 )   $ 1,571,942       (64 %)

 

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

 

Total revenues for the three months ended December 31, 2015 were $552,342, an increase of $15,447 or 3% from $536,895 for the three months ended December 31, 2014. The slight increase was driven by higher conversion revenue offset somewhat by lower chassis revenue, as dealers opted to obtain and send to us the chassis rather than us procuring the chassis on their behalf.

 

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.

 

  5  
 

 

Total costs of goods sold for the three months ended December 31, 2015 were $493,681, a decrease of $59,107 or 11% from $552,788 of costs of goods sold for the three months ended December 31, 2014. The decrease was primarily attributable to the lower chassis costs, as dealers opted to obtain and send to us the chassis at their own cost, rather than us procuring the chassis on their behalf, and improved pricing obtained from certain vendors.

 

Gross Margin: Gross Margin from the sale of vehicles and parts increased $74,554 to a margin of $58,661 for the three months ended December 31, 2015 from a gross loss of $15,893 for the three months ended December 31, 2014. The increase in gross margin mainly reflects higher conversion sales and less chassis sales in the current period versus the same period in the prior year, as we obtain minimal to no margin from chassis sales.

 

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

 

Research and development expenses decreased by $103,377, or 72%, to $40,939 during the three months ended December 31, 2015 from $144,316 for the three months ended December 31, 2014. The decrease was primarily due to lower salaries and less expenses related to outside services along with lower non-cash stock based compensation expense.

 

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

 

Sales and marketing expenses decreased by $28,320, or 12%, to $204,346 for the three months ended December 31, 2015 from $232,666 for the three months ended December 31, 2014. The decrease was primarily related to lower headcount offset somewhat by higher website expenses related to our performance parts website.

 

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 $333,103, or 42%, to $468,654 for the three months ended December 31, 2015 from $801,757 for the three months ended December 31, 2014. The decrease was primarily comprised of lower non-cash stock based compensation expense; lower professional fees; lower general and administrative salaries as a result of headcount reduction; and a decrease in other expenses primarily resulting from our efforts to reduce costs.

 

Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $18,574, or 46%, to $22,034 for the three months ended December 31, 2015 from $40,608 for the three months ended December 31, 2014.

 

Interest Expense: Interest expense decreased by $423,585 or 56% to $330,903 for the three months ended December 31, 2015 from $754,488 for the three months ended December 31, 2014. The decrease was primarily attributable to lower non-cash interest expense incurred during the three months ended December 31, 2015 as compared to same period in the prior year.

 

Private Placement Costs: In conjunction with the issuance of convertible notes from October to December 2014, the conversion features of such notes were bifurcated from the notes and recorded as derivative liability. The Company recorded a $1,064,572 derivative liability with an offsetting charge to valuation discount of $482,225 with the remainder of $582,347 recorded as an expense included in other income (expense) during the three months ended December 31, 2014. We incurred no similar expense during the three months ended December 31, 2015.

 

  6  
 

 

Gain on Extinguishment of Derivative Liability: Gain on the extinguishment of derivative liability related to gains of $62,607 during the three months ended December 31, 2015 as a result of the extinguishment of derivative liabilities resulting from the optional conversion of convertible debt to stock by the holders of such convertible notes in accordance with their terms. We incurred no similar expense during the three months ended December 31, 2014.

 

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of certain convertible notes issued by us was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of these notes are characterized as a derivative liability, which is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the three months ended December 31, 2015 and 2014, we recorded a gain of $74,657 and $129,182, respectively, due to the change in the fair value of our derivative liability.

 

Net Loss: Net loss decreased by $1,571,942, or 64%, to a net loss of $870,951 for the three months ended December 31, 2015 from a net loss of $2,442,893 for the three months ended December 31, 2014. The decrease in net loss was primarily attributable to lower interest expense of $423,585 and costs of private placement of $582,347 in the three months ended December 31, 2014, which did not recur in the current period. In addition, the decrease in net loss was also positively impacted by $557,928 decrease in loss from operations related to $483,374 decrease in operating expenses and $74,554 increase in gross margin.

 

Nine months Ended December 31, 2015 Compared to Nine months Ended December 31, 2014

 

Our revenue, operating expenses, and net loss for the nine months ended December 31, 2015 as compared to the nine months ended December 31, 2014 were as follows:

 

    For the Nine months ended           Percentage  
    December 31,           Change  
    2015     2014     Change     Inc. (Dec.)  
Revenue, net   $ 2,771,518     $ 3,072,596     $ (301,078 )     (10 %)
                                 
Costs of goods sold     2,332,861       2,725,378       (392,517 )     (14 %)
Gross profit     438,657       347,218       91,439       26 %
Operating expenses                                
Research and development     190,625       543,070       (352,445 )     (65 %)
Sales and marketing     607,005       1,209,248       (602,243 )     (50 %)
General and administrative     1,543,907       2,736,796       (1,192,889 )     (44 %)
Depreciation and amortization     79,664       150,323       (70,659 )     (47 %)
Total operating expenses     2,421,201       4,639,437       (2,218,236 )     (48 %)
Loss from operations     (1,982,544 )     (4,292,219 )     2,309,675       (54 %)
Other income (expenses)                                
Interest expense     (1,153,804 )     (1,769,289 )     615,485       (35 %)
Private placement costs and loss on debt extinguishment     (27,760 )     (668,230 )     640,470       (96 %)
Recognition of derivative liability     (174,437 )     -       (174,437 )     -  
Gain on extinguishment of derivative liability     720,658       2,586,732       (1,866,074 )     (72 %)
Change in fair value of derivative liabilities     540,802       2,602,392       (2,061,590 )     (79 %)
Net Loss   $ (2,077,085 )   $ (1,540,614 )   $ (536,471 )     35 %

 

Revenues: Total revenues for the nine months ended December 31, 2015 were $2,771,518, a decrease of $301,078 or 10% from $3,072,596 for the nine months ended December 31, 2014. The decrease in revenues was primarily related to lower chassis revenue, as dealers opted to obtain and send to us the chassis rather than us procuring the chassis on their behalf, and lower conversion revenue due to product mix of vehicles sold as volume remained consistent on a year over year basis. This decrease was offset somewhat by an increase in revenue from sales of our aftermarket retail parts.

 

  7  
 

 

Cost of Goods Sold: Total costs of goods sold for the nine months ended December 31, 2015 were $2,332,861, a decrease of $392,517 or 14% from $2,725,378 of costs of goods sold for the nine months ended December 31, 2014. The decrease was primarily attributable to the decrease in chassis purchased, as dealers opted to obtain and send to us the chassis at their own cost rather than us procuring the chassis on their behalf, offset somewhat from higher parts costs and our performance parts sales increased during the nine months ended December 31, 2015 as compared to the same period in the prior year.

 

Gross Margin: Despite the decline in revenue of $301,078 from the nine months ended December 31, 2014, gross Margin from the sale of vehicles and parts increased $91,439 to a margin of $438,657 for the nine months ended December 31, 2015 from a gross margin of $347,218 for the nine months ended December 31, 2014. The increase in gross margin reflects the sales mix as compared to the same period in the prior year along with sales of less chassis and increase in performance parts sales.

 

Research and Development Expenses: Research and development expenses decreased by $352,445, or 65%, to $190,625 during the nine months ended December 31, 2015 from $543,070 for the nine months ended December 31, 2014. The decrease is primarily due to lower salaries and less expenses related to outside services and research and development parts along with lower non-cash stock based compensation expense.

 

Sales and Marketing Expense: Sales and marketing expenses decreased by $602,243, or 50%, to $607,005 for the nine months ended December 31, 2015 from $1,209,248 for the nine months ended December 31, 2014. The decrease was primarily related to lower salaries and benefit expenses due to lower headcount; lower car show expenses, as we incurred higher car show expenses in the prior year related to the 50th anniversary celebration of the Ford Mustang; lower public relations and promotional expenses; and lower non-cash stock based compensation.

 

General and Administrative Expense: General and administrative expenses decreased by $1,192,889, or 44%, to $1,543,907 for the nine months ended December 31, 2015 from $2,736,796 for the nine months ended December 31, 2014. The decrease is primarily comprised of lower professional fees; lower general and administrative salaries and benefits as a result of headcount reduction; lower auto, travel and entertainment costs due to less car show expenses; lower non-cash stock based compensation; and decrease in other expenses primarily resulting from our efforts to reduce costs.

 

Depreciation and Amortization Expense: Depreciation and amortization expense relates to our depreciating and amortizing costs incurred for leasehold improvements, equipment and tooling. Depreciation and amortization expense decreased by $70,659, or 47%, to $79,664 for the nine months ended December 31, 2015 from $150,323 for the nine months ended December 31, 2014.

 

Interest Expense: Interest expense decreased by $615,485 or 35% to $1,153,804 for the nine months ended December 31, 2015 from $1,769,289 for the nine months ended December 31, 2014. The decrease is primarily attributable to lower non-cash interest expense incurred during the nine months ended December 31, 2015 as compared to same period in the prior year.

 

Recognition of Derivative Liability: In June 2015, we determined that there was not sufficient authorized and available Common Stock available for issuance upon conversion of certain of its Notes. As a result, we recognized a derivative liability of $119,929 in June 2015. In addition, as a result of the assignment of a convertible note to a separate note holder, we recognized a derivative liability of $54,508 in June 2015. We did not incur a comparable expense during the nine months ended December 31, 2014.

 

Private Placement Costs and Loss on Debt Extinguishment: In conjunction with a note holder agreeing to assign its then outstanding note and principal balance of $49,240 to a separate note holder in exchange for the new note holder’s payment of $77,000 to the original note holder, we recorded $27,760 as loss on extinguishment during the nine months ended December 31, 2015 representing the increase in principal balance from $49,240 to $77,000. 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. The Company recorded a $1,306,455 derivative liability with an offsetting charge to valuation discount of $638,225 with the remainder of $668,230 recorded as an expense included in other income (expense) during the nine months ended December 31, 2014.

 

  8  
 

 

Gain on Extinguishment of Derivative Liability: Gain on the extinguishment of derivative liability related to gains of $720,658 during the nine months ended December 31, 2015 as a result of the extinguishment of derivative liabilities resulting from the optional conversion of convertible debt to stock by the holders of such convertible notes in accordance with their terms. During the nine months ended December 31, 2014, we recognized a gain of $2,586,732 related to the extinguishment of a derivative liability related to our 3% Senior Secured Convertible Notes.

 

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of certain convertible notes issued by us was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of these notes are characterized as a derivative liability, which is re-measured at the end of every reporting period with the change in value recognized as a gain or loss in our statement of operations. During the nine months ended December 31, 2015, we recorded a gain of $540,802 due to the change in the fair value of our derivative liability. During the nine months ended December 31, 2014, we recorded a $2,602,392 gain due to the change in the derivative liability from issuance date of which $2,446,054 related to the June 17, 2014 amendment.

 

Net Loss: Net loss increased by $536,471, or 35%, to a net loss of $2,077,085 for the nine months ended December 31, 2015 from a net loss of $1,540,614 for the nine months ended December 31, 2014. The increase in net loss was primarily attributable to a decrease of $2,061,590 in gain on extinguishment of derivative liability; a $1,866,074 decrease in change in fair value of derivative liability; and a $174,437 recognition of a derivative liability offset somewhat by a $615,485 decrease in interest expense and a $640,470 decrease in costs of private placement. This increase in net loss was offset by a $2,309,675 decrease in loss from operations related to a $2,218,236 decrease in operating expenses along with a $91,439 improvement in gross profit.

 

Liquidity and Capital Resources

 

Our working capital deficit as of December 31, 2015 and March 31, 2015 are follows:

 

    As of      As of  
    December 31, 2015    

March 31, 2015

 
Current Assets   $ 215,493     $ 910,794  
Current Liabilities     (7,662,381 )     (7,961,458 )
Net Working Capital Deficit   $ (7,446,888 )   $ (7,050,664 )

 

Summary of cash flow activity for the nine months ended December 31, 2015 and December 31, 2014 are as follows:

 

Cash Flows 

 

    Nine months     Nine months  
    Ended     Ended  
    December 31, 2015     December 31, 2014  
Net cash used in Operating Activities   $ (894,423 )   $ (2,127,243 )
Net cash used in Investing Activities     (12,810 )     (218,685 )
Net cash provided by Financing Activities     825,000       941,474  
Decrease in Cash during the nine month period     (82,233 )     (1,404,454 )
Cash, Beginning of Period     143,083       1,499,889  
Cash, End of Period   $ 60,850     $ 95,435  

 

  9  
 

 

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

 

As further presented in our condensed consolidated financial statements and related notes, during the nine months ended December 31, 2015, we incurred a net loss of $2,077,085 and utilized $894,423 of cash in operations. We also had a stockholders’ deficit and working capital deficit of $10,664,234 and $7,446,888, respectively as of December 31, 2015, and as of that date, we owed $762,639 in past unpaid payroll and other taxes; $846,004 of outstanding notes payable were in default; $1,317,928 of accounts payable was greater than 90 days past due; and $401,689 is owed on past due rent as of the date of this filing of Form 10-Q. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our condensed consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of our indebtedness. 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 generate revenues at a level that will result in profitably and positive cash flows from operations. At December 31, 2015, we had cash on hand in the amount of $60,850 and we are not generating funds from operations to cover current production and operating expenses, and we will have to obtain additional financing. As such, we will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for production and to operate our business through and beyond the date of this Form 10-Q filing. To this end, and as further discussed in our Form 8-K filed on December 8, 2015 and further in Note 5 to our condensed consolidated financial statements, on December 2, 2015, we entered into a Securities Purchase Agreement (the “Purchase Agreement”), with SM Funding Group, Inc. (“SM Funding”). Under the Purchase Agreement, we issued to SM Funding a 12% Senior Secured Convertible Note (“Senior Note”) under which SM Funding may advance to us up to $2,000,000. Amounts outstanding under the Senior Note are convertible into Preferred Stock we may issue to accredited investors in a private placement of up to $10,000,000, but not less than $8,000,000. Under the Senior Note, we agreed that we will not enter into, create, assume or suffer to exist any additional indebtedness for borrowed money. Pursuant to a Binding Letter of Intent (“LOI”) we previously entered into with SM Funding, SM Funding was required to advance us at least $1,000,000 within seven business days after the execution of the LOI in October 2015. However, as of December 31, 2015, we had only received aggregate advances from SM Funding of $750,000, and subsequent to December 31, 2015 to the date of this filing of Form 10-Q, SM Funding advanced us an additional $210,000 under the Senior Note. Accordingly, there can be no assurance that we will complete the financing transactions with SM Funding and no assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions and covenants on our operations, in the case of debt financing, or cause substantial dilution for our stockholders (including the issuance of securities sufficient to result in a change in control of our company), in the case of convertible debt and equity financing.

 

At December 31, 2015, we had a working capital deficit of $7,446,888 compared to a working capital deficit of $7,050,664 at March 31, 2015. The decrease in working capital deficit was primarily related to a decrease in current assets of $695,301 primarily due to a $597,599 decrease in inventory and a $82,233 decrease in cash. This was offset somewhat by a $299,077 decrease in current liabilities primarily due to a $1,087,023 decrease in derivative liability; a $405,328 decrease in customer deposits; a $61,261 decrease in accounts payables with related parties; and a $134,910 decrease in notes payable, which was offset by $633,506 in higher notes payable, primarily due to $750,000 obtained from SM Funding, and a $230,781 increase in accrued interest.

 

  10  
 

 

Net cash used in operating activities for the fiscal year ended March 31, 2015 totaled $894,423 after the net loss of $2,077,085 was decreased by $188,890 of non-cash charges and by $993,772 in net changes to the working capital accounts. This compares to net cash used in operating activities for the nine months ended December 31, 2014 of $2,127,243 after the net loss of $1,540,614 was increased by $2,133,448 in non-cash charges and decreased by $1,546,819 in net changes to the working capital accounts.

 

Net cash used in investing activities was $12,810 for nine months ended December 31, 2015 as compared to $218,685 of cash used in investing activities for the nine months ended December 31, 2014.

 

Net cash provided by financing activities for the nine months ended December 31, 2015 was $825,000, which was comprised of $45,000 of principal payments on notes payable to related parties offset by a $120,000 note payable received from a related party and $750,000 in proceeds from senior secured convertible notes. This compares to net cash provided by financing activities for the nine months ended December 31, 2014 of $941,474 of which $888,225 came through the issuance of our unsecured convertible notes, $185,00 came from the issuance of 1,183,344 shares of our common stock and $195,000 came from issuances of notes to related parties. Cash of $326,751 was used to pay principal on long-term notes.

 

Defaults on Notes and Accounts Payable

 

As of December 31, 2015, we were in default on $846,004 of unsecured notes payable; $1,232,250 of accounts payable was past 90 days outstanding; and $384,704 was past due on rent for our facilities, including late fees. While we are in discussions with the note holders and vendors to arrange extended payment terms, the initiation of collection actions by these note holders and vendors may severely affect our ability to execute on our business plan and operations. In addition, in May 2015, we received a complaint from Citizens Business Bank alleging breach of our loan agreement with the bank and breach of a commercial guaranty by Steve Saleen and demanding full payment of principal, interest and fees of $369,302. A default under the loan agreement triggers a cross default under our 3% Senior Secured Convertible Notes and 7% Convertible Notes (see Note 5 to our consolidated financial statements) enabling the holders thereof to, at their election until the later of 30 days after such default is cured or otherwise resolved or the holder becomes aware of such cure or resolution, accelerate the maturity of our indebtedness.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2015, we carried out an evaluation, under the supervision and with the participation of our principal executive and 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 principal executive and 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 principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

  11  
 

 

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

 

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

 

Changes in Internal Control

 

During the nine months ended December 31, 2015, there were no changes in internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

  12  
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The information under “Litigation” in Note 10 of the Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I is hereby incorporated by reference.

 

ITEM 5. OTHER INFORMATION

 

On March 18, 2016, we accepted the resignation of our Chief Financial Officer, David Fiene.

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

 

Exhibit Number   Description of Exhibit
     
31.1   Certification by Principal Executive and 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 and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS**   XBRL Instance.
     
101.SCH**   XBRL Taxonomy Extension Schema.
     
101.CAL**   XBRL Taxonomy Extension Calculation.
     
101.DEF**   XBRL Taxonomy Extension Definition.
     
101.LAB**   XBRL Taxonomy Extension Labels.
     
101.PRE**   XBRL Taxonomy Extension Presentation.

 

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

 

  13  
 

 

SIGNATURES

 

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

 

  Saleen Automotive, Inc.
  a Nevada Corporation
   
Date: March 24, 2016 /S/ Steve Saleen
  Steve Saleen
  Chief Executive Officer
(principal executive, financial and accounting officer)

 

  14  
 

 

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Steve Saleen, certify that:

 

1. I have reviewed this Quarterly report on Form 10-Q of Saleen Automotive, Inc.;
   
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15-15(f) and 15d-15(f)) for the registrant and I have:

 

  a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such valuation; and
     
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: March 24, 2016

 

/s/ Steve Saleen  
Steve Saleen  
Chief Executive Officer
(principal executive, financial and accounting officer)
 

 

     
 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the report of Saleen Automotive, Inc. (the “Company”) on Form 10-Q as of and for the three and nine month period ended December 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steve Saleen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Steve Saleen  
Steve Saleen  
Chief Executive Officer
(principal executive, financial and accounting officer)
 
   
March 24, 2016