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TMCNet:  SALEEN AUTOMOTIVE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 14, 2014]

SALEEN AUTOMOTIVE, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 nine months ended December 31, 2013 and 2012. 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 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.


We design, develop, manufacture and sell high performance cars built from base chassis' of Ford Mustangs, Chevrolet Camaros and Dodge Challengers. 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 the manufacturers (Ford, Chevrolet, and Dodge)) of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. 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.

Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. 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 developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.

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 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 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 outstanding capital stock of Saleen Automotive received an aggregate of 554,057 shares of our Super Voting Preferred 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 shares of our Super Voting Preferred Stock issued to Saleen pursuant to the Assignment and License Agreement discussed below) 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 (which currently has two vacancies). In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.

On May 23, 2013, we also entered into an Assignment and License Agreement with Saleen pursuant to which Saleen agreed, as of the effective time of the Merger, to contribute certain intellectual property that relates to the "Saleen" brand name and related rights which are currently owned by him to us, license to us the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the "Saleen" brand, and assign to us all shares of the capital stock of SMS Retail - Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. On June 21, 2013, we amended the Assignment and License Agreement to terminate the obligation to assign to us all shares of the capital stock of SMS Retail - Corona and Saleen Automotive Show Cars, Inc., and Saleen agreed to dissolve those entities within 30 days after the Closing. Concurrently with the Closing, pursuant to the Assignment and License Agreement, as amended, Saleen assigned certain intellectual property that relates to the "Saleen" brand name and related rights which are currently owned by him to us, and licensed the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the "Saleen" brand to us, and commenced the process of dissolving each of SMS Retail - Corona and Saleen Automotive Show Cars, Inc. The aforementioned license may only be terminated in the event we file a petition for relief under Chapter 7 of the U.S. Bankruptcy Code, or a petition for relief is converted to a Chapter 7 proceeding under the U.S. Bankruptcy Code. In exchange for entering into the Assignment and License Agreement, as amended, we issued to Saleen, as of the effective time of the Merger, 341,943 shares of our Super Voting Preferred Stock.

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. Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to 'Saleen Automotive' refer to Saleen Automotive, Inc., our wholly-owned Florida subsidiary.

22 -------------------------------------------------------------------------------- Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive's former shareholders were exchanged for 554,057 shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen an additional 341,943 shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock is convertible into 125 shares of our common stock in accordance with the terms of the Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock (the "Certificate of Designations"), as amended. Accordingly, as a result of the Merger and the transactions effectuated pursuant to the Assignment and License Agreement, as amended, Saleen and the former shareholders of Saleen Automotive own approximately 112,000,000 shares of our common stock on an as-converted basis, and our existing stockholders own 8,000,000 shares of our common stock.

The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the historical operations of the Saleen Entities prior to the Merger and that of the combined company following the Merger. The accompanying consolidated financial statements are prepared as if we will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.

Three months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012 Our revenue, operating expenses, and net loss from operations for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012 were as follows - some balances on the prior period's consolidated financial statements have been reclassified to conform to the current period presentation: Three Months Ended, Percentage Change December 31, 2013 December 31, 2012 Change Inc (Dec) Revenue Vehicles and parts $ 1,076,153 $ 607,490 $ 468,663 77.1% Design Services - 1,245,985 (1,245,985 ) (100.0)% Total revenue 1,076,153 1,853,475 (777,322 ) (41.9)% Costs of goods sold Vehicles and parts 773,467 532,932 240,535 45.1% Design Services - 859,541 (859,541) (100.0)% Total Costs of Goods Sold 773,467 1,392,473 619,006 44.5% Gross Margin 302,686 461,002 (158,316 ) (34.3)% Operating Expenses Research and development 204,026 3,269 200,757 6,141.2% Sales and marketing 320,077 74,224 245,853 331.2% General and administrative 1,029,054 646,694 382,360 59.1% Depreciation and amortization 18,588 20,391 (1,803 ) (8.8)% Total operating expenses 1,571,745 744,578 827,167 111.1% Loss from operations (1,269,059) (283,576) (985,483) 347.5% Other income (expenses) Interest expense (186,004) (37,595) (148,409) 394.8% Gain on extinguishment of derivative liability 40,548 - 40,548 - Change in fair value of derivative liability (125,026 ) - (125,026 ) - Net Loss $ (1,539,541 ) $ (321,171 ) $ (1,218,370 ) 379.4% Revenues: Total revenues for the three months ended December 31, 2013 were $1,076,153, a decrease of $777,322 or 41.9% from $1,853,475 for the three months ended December 31, 2012. Revenue from the sale of automotive vehicles and parts increased $468,663 or 77.1% to $1,076,153 for the three months ended December 31, 2013 from $607,490 for the three months ended December 31, 2012. The increase reflects sales efforts achieved by our expanded sales force whereby we sold a higher number of vehicles during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Growth was achieved primarily through expansion with existing dealers as well as the addition of new dealer networks. Traditionally, from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shut down of plants and shipping for several weeks causing delivery of cars to be interrupted which has an effect on our sales. During the three months ended December 31, 2012, revenues of $1,245,985 were realized from a contract completed on December 31, 2012 with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie. We did not have any design contracts during the three months ended December 31, 2013.

23 -------------------------------------------------------------------------------- Cost of Goods Sold: Total costs of goods sold for the three months ended December 31, 2013 were $773,467, a decrease of $619,006 or 44.5%, from $1,392,473 of costs of goods sold for the three months ended December 31, 2012.

The decrease is primarily attributable to cost of $859,541 incurred related to a design contract completed during the three months ended December 31, 2012. We did not have any design contracts during the three months ended December 31, 2013. This decrease was somewhat offset by $240,535 of additional costs attributable to increased vehicle and parts sales during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012.

Gross Margin: Gross Margin from the sale of vehicles and parts increased $228,128 to $302,686 or 306.0% for a gross margin of 28% for the three months ended December 31, 2013 from a gross margin of $74,558 or 12% for the three months ended December 31, 2012. The improvement in gross margin reflects both the increase in sales net of an increase in costs of goods sold as a percentage of sales during the three months ended December 31, 2013. Gross Margin from design services contributed $386,444 for the three months ended December 31, 2012.

Research and Development Expenses: Research and development expenses increased by $200,757 or 6,141.2% during the three months ended December 31, 2013 from $3,269 for the three months ended December 31, 2012. The increase is due to our expanded engineering team and development of our existing and new high performance vehicles including the recent introduction of our 30th year anniversary cars.

Sales and Marketing Expense: Sales and marketing expenses relate to costs incurred to promote our existing and new products, such as through car shows and other media outlets, along with sales expenses such as commissions and incentives. Sales and marketing expense increased by $245,853 or 331.2% to $320,077 for the three months ended December 31, 2013 from $74,224 for the three months ended December 31, 2012. The increase was primarily attributable to our expanded sales and marketing team and efforts to promote our existing and new products including our attending of varies car shows and launch of our 30th year anniversary cars.

General and Administrative Expense: General and administrative expenses include expenses for sales, marketing, engineering and administrative salaries and benefits, occupancy costs, professional fees, and other general and administrative costs. General and administrative expenses increased by $382,360 or 59.1% to $1,029,054 for the three months ended December 31, 2013 from $646,694 for the three months ended December 31, 2012. The increase was primarily comprised of $138,163 of higher salaries and benefits expense resulting from our expansion of personnel to support the increased sales volume; $48,123 increase in occupancy costs from our expansion of our campus to support our growth and new engineering and design facilities used to expand development; $115,000 settlement of a previous claim; and $81,074 increase in other general and administrative expenses incurred to support the additional sales and marketing efforts.

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 $1,803 or 8.8% to $18,588 for the three months ended December 31, 2013 from $20,391 for the three months ended December 31, 2012.

Interest Expense: Interest expense increased by $148,409 or 394.8% to $186,003 for the three months ended December 31, 2013 from $37,595 for the three months ended December 31, 2012. The increase is primarily attributable to $103,791 of non-cash interest expense and $42,941 of accrued interest during the three months ended December 31, 2013 attributable to the amortization of the convertible debt discount and 3% interest on our $3,000,000 of senior secured convertible notes issued on June 27, 2013. The interest incurred on the convertible debt is convertible into common shares upon the holders request to convert.

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of our $3,000,000 convertible notes issued on June 27, 2013 was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability that 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, 2013, we recorded a $125,026 loss due to the change in the derivative liability from issuance date to December 31, 2013. We did not have a comparable gain during the three months ended December 31, 2012.

Gain on Extinguishment of Derivative Liability: Gain on extinguishment of derivative liability of $40,548 resulted from certain note holders request to convert their convertible debt to stock in accordance with the convertible note.

We did not have a comparable gain during the three months ended December 31, 2012.

Net Loss: Net loss increased by $1,218,370, or 379.4%, to a net loss of $1,539,541 for the three months ended December 31, 2013 from a net loss of $321,171 for the three months ended December 31, 2012. This net loss reflects the increased operating expenses offset somewhat by higher gross margin discussed above.

Nine Months Ended December 31, 2013 Compared to the Nine Months Ended December 31, 2012 Our revenue, operating expenses, and net loss from operations for the nine months ended December 31, 2013 as compared to the nine months ended December 31, 2012 were as follows - some balances on the prior period's consolidated financial statements have been reclassified to conform to the current period presentation: 24 -------------------------------------------------------------------------------- Nine Months Ended, Percentage Change December 31, 2013 December 31, 2012 Change Inc (Dec) Revenue Vehicles and parts $ 3,570,722 $ 1,277,476 $ 2,293,246 179.5% Design services - 1,245,985 (1,245,985 ) (100.0)% Total revenue 3,570,722 2,523,461 1,824,583 72.3% Costs of goods sold Vehicles and parts 2,852,665 1,056,141 1,796,524 170.1% Design services - 859,451 (859,451 ) (100.0)% Total Costs of Goods Sold 2,852,665 1,915,592 937,073 48.9% Gross Margin 718,057 607,869 110,188 18.1% Operating expenses Research and development 489,723 29,815 459,908 1,542.5% Sales and marketing 942,238 115,710 826,528 714.3% General and administrative 3,576,843 1,984,012 1,592,831 80.3% Depreciation and amortization 65,332 60,944 4,388 7.2% Total operating expenses 5,074,136 2,190,481 2,883,655 131.6% Loss from operations (4,356,079) (1,582,612) (2,773,467) 175.2% Other income (expenses) Interest expense (362,784) (138,281) (224,503) 162.4% Expenses of reverse merger transaction (365,547) - (365,547) - Gain on extinguishment of derivative liability 40,548 - 40,548 - Change in fair value of derivative liability -73,892 - -73,892 - Net Loss $ (5,117,754 ) $ (1,720,893 ) $ (3,396,861 ) 197.4% Revenues: Total revenues for the nine months ended December 31, 2013 were $3,570,722, an increase of $1,824,583 or 72.3% from $2,523,461 for the nine months ended December 31, 2012. Revenue from the sale of automotive vehicles and parts increased $2,293,246 or 179.5% to $3,570,722 for the nine months ended December 31, 2013 from $1,277,476 for the nine months ended December 31, 2012.

The increase reflects sales efforts achieved by our expanded sales force whereby we sold a higher number of vehicles during the nine months ended December 31, 2013 as compared to the nine months ended December 31, 2012. Growth was achieved primarily through expansion with existing dealers as well as the addition of new dealer networks. Traditionally, from November through mid-January, auto industry production slows due to the holidays and the subsequent temporary shut down of plants and shipping for several weeks causing delivery of cars to be interupted which has an effect on our sales. During the nine months ended December 31, 2013, revenues of $1,245,985 were realized from a contract completed on December 31, 2012 with a major Hollywood movie producer to design and build replica supercar racing automobiles for a movie. We did not have any design contracts during the nine months ended December 31, 2013.

Cost of Goods Sold: Total costs of goods sold for the nine months ended December 31, 2013 were $2,852,665, an increase of $937,073 or 48.9%, from $1,915,592 of costs of goods sold for the nine months ended December 31, 2012. The increase was primarily attributable to $1,796,524 of higher costs attributable to increased vehicle and parts sales during the nine months ended December 31, 2013 as compared to the three months ended December 31, 2012. The increase was partly offset by the decrease in costs of design services of $859,541 incurred related to a design contract during the nine months ended December 31, 2012. We did not have any design contracts during the nine months ended December 31, 2013.

Gross Margin: Gross Margin from the sale of vehicles and parts increased $496,722 to $718,057 or 224.4% for a gross margin of 20% for the nine months ended December 31, 2013 from a gross margin of $221,335 or 17% for the nine months ended December 31, 2012. The improvement in gross margin reflects both the increase in sales net of an increase in costs of goods sold as a percentage of sales during the nine months ended December 31, 2013. Gross Margin from design services contributed $386,444 for the nine months ended December 31, 2012.

Research and Development Expenses: Research and development expenses increased by $459,908 or 1,542.5% to $489,723 during the nine months ended December 31, 2013 from $29,815 for the nine months ended December 31, 2012. The increase is due to our expanded engineering team and development of our existing and new high performance vehicles including the recent introduction of our George Follmer edition and 30th year anniversary cars.

Sales and Marketing Expense: Sales and marketing expenses relate to costs incurred to promote our existing and new products, such as through car shows and other media outlets, along with sales expenses such as commissions and incentives. Sales and marketing expenses increased by $826,528 or 714.3% to $942,238 for the nine months ended December 31, 2013 from $115,710 25 -------------------------------------------------------------------------------- for the nine months ended December 31, 2012. The increase was primarily related to our sales and marketing team and marketing efforts to promote our existing and new products including our attending of various car shows, launch of new products such as our George Follmer and 30th year anniversary cars, and the general promotion of our Company.

General and Administrative Expense: General and administrative expenses include expenses for sales, marketing, engineering and administrative salaries and benefits, occupancy costs, professional fees, stock compensation, and other general and administrative costs. General and administrative expenses increased by $1,592,831 or 74.7% to $3,576,843 for the nine months ended December 31, 2013 from $1,984,012 for the nine months ended December 31, 2012. The increase is primarily comprised of $223,674 of higher salaries and benefits expense resulting from our expansion of personnel to support the increased sales volume; $180,562 increase in occupancy costs from our expansion of our campus to support our growth and new engineering and design facilities used to expand development; $504,481 in non-cash stock compensation primarily related to stock granted in exchange for board services; $208,000 from settlements of previous claim; and a $476,114 increase in other general and administrative and professional fee expenses incurred to support the growth of our Company.

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 $4,389 or 7.2% to $65,333 for the nine months ended December 31, 2013 from $60,944 for the nine months ended December 31, 2012.

Interest Expense: Interest expense increased by $224,503 or 162.4% to $362,784 for the nine months ended December 31, 2013 from $138,281 for the nine months ended December 31, 2012. The increase is primarily attributable to $215,348 of non-cash interest expense during the nine months ended December 31, 2013 attributable to the amortization of the convertible debt discount on our $3,000,000 of senior secured convertible notes issued on June 27, 2013.

Expenses of Reverse Merger Transaction: During the nine months ended December 31, 2013, we incurred $365,547 of expenses related to the reverse merger transaction. This includes $39,547 of liabilities assumed, $46,000 in legal fees, and dividends of $280,000 paid to our existing shareholders prior to the Merger. We did not have a comparable expense of this type during the nine months ended December 31, 2012.

Change in Fair Value of Derivative Liability: In accordance with the FASB authoritative guidance, the conversion feature of our $3,000,000 convertible notes issued on June 27, 2013 was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability that 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, 2013, we recorded a $73,892 loss due to the change in the derivative liability from issuance date to December 31, 2013. We did not have a comparable gain during the three months ended December 31, 2012.

Gain on Extinguishment of Derivative Liability: Gain on extinguishment of derivative liability of $40,548 resulted from certain note holders request to convert their convertible debt to stock in accordance with the convertible note.

We did not have a comparable gain during the three months ended December 31, 2012.

Net Loss: Net loss increased by $3,396,861, or 197.4%, to a net loss of $5,117,754 for the nine months ended December 31, 2013 from a net loss of $1,720,893 for the nine months ended December 31, 2012. This net loss reflects the increased operating expenses offset somewhat by higher gross margin discussed above.

Liquidity and Capital Resources On May 23, 2013, we entered into the Merger Agreement with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, SMS and Steve Saleen. The closing of the transactions contemplated by the Merger Agreement occurred on June 26, 2013.

The Merger was accounted for as a reverse merger (recapitalization) with the Saleen Entities deemed to be the accounting acquirers, and our company deemed to be the legal acquirer. Accordingly, the following represents a discussion of the operations of our wholly-owned subsidiaries, Saleen Automotive and Saleen Signature Cars (Formerly SMS), for the periods presented. The accompanying consolidated financial statements are prepared as if we will continue as a going concern. The consolidated financial statements do not contain adjustments, including adjustments to recorded assets and liabilities, which might be necessary if we were unable to continue as a going concern.

On June 26, 2013, we issued 3.0% Senior Secured Convertible Notes for a cash purchase price of $2,500,000 and the conversion of $500,000 of Saleen Automotive's existing secured convertible debt, for an aggregate principal amount of $3,000,000 outstanding under the Notes. The Notes, excluding accrued interest through their maturity, are convertible into 40,000,000 shares of our common stock at a conversion price of $0.075 per share. Under the Notes, we are obligated to repay to the Purchasers on June 25, 2017, the principal amount of $3,000,000. The Notes accrue interest at the rate of 3% per annum (which interest rate shall be increased to 12% from and for the continuation of an event of default) on the unpaid/unconverted principal balance, payable on the maturity date of the Notes. As the Notes provide that interest is payable on the maturity date, no cash interest will be paid on the Notes.

26 -------------------------------------------------------------------------------- On October 8, 2013, we entered into a Secured Promissory Note with W-Net pursuant to which W-Net loaned an aggregate of $500,000 to us. The note bears interest at the rate of 8% per annum, which is payable along with all principal under the note on October 7, 2014, unless earlier repaid. Our obligations under the note are secured by a second priority security interest in all of our assets, other than an S7 automobile in which W-Net has a first priority security interest. During the nine months ended December 31, 2013, and subsequently in January and February 2014, we entered into Subscription Agreements with accredited investors pursuant to which the investors purchased from us an aggregate of 6,453,333 shares of our common stock at a per share price of $0.15 for aggregate proceeds of $968,000. Management expects that the current funds on hand, together with current operations plus additional proceeds received from additional sales of stock subsequent to December 31, 2013 will be sufficient to continue operations through March 31, 2013 without additional funding. However, management will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the Company's business beyond March 31, 2014.

As presented in the consolidated financial statements, we incurred a net loss of $5,117,754 during the nine months ended December 31, 2013, and losses are expected to continue in the near term. The accumulated deficit since inception was $13,861,286 at December 31, 2013. We have been funding our operations through private loans and the sale of common stock in private placement transactions. Management anticipates that significant additional expenditures will be necessary to develop and expand our automotive assets before significant positive operating cash flows will be achieved and funds will be needed in order to achieve these objectives.

Our consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred an accumulative loss of $13,861,286 from inception through December 31, 2013. In addition, we had a stockholders deficit of $8,066,266 as of December 31, 2013, and as of that date, we were delinquent in payment of $729,314 of payroll taxes, $1,402,889 of outstanding notes payable is in default, and had a negative working capital of $7,192,703. Our cash resources are insufficient to meet our planned business objectives without additional financing. These and other factors raise substantial doubt about our 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 our company to continue as a going concern.

Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013, we had cash on hand in the amount of $10,840. In January and February 2014, we issued 2,003,333 shares of restricted common stock to certain accredited individuals ("Stock Subscriptions") at an offering price of $0.15 per share for total proceeds of $300,500. We will need and are currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the business beyond March 31, 2014. No assurance can be given that any additional financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for its stockholders, in case or equity financing.

Cash, total current assets, total assets, total current liabilities and total liabilities as of December 31, 2013 as compared to March 31, 2013, were as follows: December 31, March 31, 2013 2013 Cash $ 10,840 $ 4,434 Total current assets 559,036 746,493 Total assets 1,161,372 1,124,070Total current liabilities 7,751,739 4,722,099 Total liabilities 9,227,637 5,272,357 At December 31, 2013, we had a working capital deficit of $7,192,703 compared to a working capital deficit of $3,975,606 at March 31, 2013. Current liabilities increased to $7,751,739 at December 31, 2013 from $4,722,099 at March 31, 2013 primarily as a result of accounts payable, accrued payroll taxes, accrued interest, derivative liability, and increase in current portion of notes payable primarily related to additional borrowings.

Net cash used by operating activities for the nine months ended December 31, 2013 totaled $3,375,364 after the cash used in the net loss of $5,117,754 was decreased by $843,505 in non-cash charges offset by $898,885 in net changes to the working capital accounts. This compares to cash used by operating activities for the nine months ended December 31, 2012 of $1,050,159 after the net loss for the period of $1,720,898 was decreased by $383,444 in non-cash charges and by $287,290 in changes to the working capital accounts.

27 -------------------------------------------------------------------------------- Net cash used in investing activities was $285,090 for nine months ended December 31, 2013. This compares to $237 of cash used in investing activities for the nine months ended December 31, 2012. This increase is primarily related to purchasing of tooling and other research and development activities.

Net cash provided by financing activities for the nine months ended December 31, 2013 was $3,666,860. Of this amount, $3,000,000 came from the issuance of our senior secured convertible notes; $550,000 came from the issuance of note payable to a shareholder; and $544,000 came from the issuance of 3,836,665 shares of common stock. Cash of $223,895 was used to pay principal on long term notes and cash of $203,243 was used to pay principal on notes payable to related parties. This compares to $1,046,512 in cash provided by financing activities during the nine months ended December 31, 2012, of which $864,573 came from the sale of common stock; $250,000 came from notes payable to a related party; $25,000 was used to pay principal on note payable to a related party; and $43,061 was used to pay principal on notes payable.

3% Senior Secured Convertible Notes Payable On June 26, 2013, pursuant to a Securities Purchase Agreement, we issued senior secured convertible notes, having a total principal amount of $3,000,000, to 12 accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements. The Notes will pay 3.0% interest per annum with a maturity of 4 years. 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 Note is convertible at any time into common stock at a specified conversion price, which is currently $0.075 per share The Note conversion price is subject to specified adjustments for certain changes in the numbers of outstanding shares of our common stock, including conversions or exchanges of such. If our shares are issued, except in specified exempt issuances, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance.

Defaults on Notes Payable As of December 31, 2013, we were in default on $984,465 and $385,972 of secured and unsecured notes payable, respectively. While we are in discussions with the note holders to arrange extended payment terms, the initiation of collection actions by these note holders may severely affect our ability to execute on our business plan. In addition, Saleen Signature Cars received a Complaint from our Senior Secured note payable to a bank, which was filed on February 6, 2014 in California Superior Court, Riverside County. The Complaint alleges, among others, breach of promissory note due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of $520,388 plus accrued and unpaid interest. We are currently involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.

Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements.

Critical Accounting Policies In December 2001, the SEC requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following represents a summary of our critical accounting policies.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which 28-------------------------------------------------------------------------------- form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

Revenue Recognition Sales of High Performance Cars and Parts We generate revenues primarily from the sale of high performance automobiles and parts. We recognize revenue from the sale of completed high performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the our products or delivery of the products to the destination specified by the customer.

We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs upon acceptance by the customer when we place the cars or products with the buyer's carrier. We regularly review our customers' financial positions to ensure that collectability is reasonably assured. Except for warranties, we have no post-sales obligations.

Contract Revenue and Cost Recognition on Design Services During the year ended March 31, 2013, we completed a contract a with a movie producer to develop and manufacture working replicas of high performance racing "supercars" that are to be featured in a new movie. We recognized revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because we consider costs to be the best available measure of progress on this contract. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. As of December 31, 2013, and March 31, 2013, there were no contracts in progress.

Research and Development Expenses All research and development costs are expensed as incurred and include costs of employees and consultants who conduct research and development on our behalf.

Derivative Financial instruments We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is re-valued at each reporting date, with changes in fair value reported in the condensed consolidated statement of operations. For stock-based derivative financial instruments, we use a Monte Carlo pricing model to value the derivatives instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Recently Issued Accounting Standards Recent accounting pronouncements did not or are not believed by management to have a material impact on our present or future consolidated financial statements.

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