Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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x
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2011
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¨
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Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
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or the transition period from
to
Commission File Number: 333-137755
General Automotive Company
(Exact name of small business issuer as specified in its charter)
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Nevada
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20-3893833
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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5422 Carrier Drive, Suite 309 Orlando, FL 32819
(Address of principal executive offices)
407-363-5633
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] 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. (check one):
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,354,417 common shares as of November 21, 2011.
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Part I
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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8
11
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Item 4T.
Part II
Item 6.
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Exhibits
Signatures
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12
13
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PART I. FINANCIAL INFORMATION
ITEM 1.Financial Statements
GENERAL AUTOMOTIVE COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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September 30, 2011
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December 31, 2010
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(Unaudited)
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(Audited)
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Assets
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Current assets:
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Cash
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$ | 1,221 | $ | 5,410 | ||||
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Accounts receivable, net
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1,458,198 | 1,858,598 | ||||||
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Inventories
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836,482 | 1,059,926 | ||||||
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Other current assets
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37,193 | 46,230 | ||||||
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Total current assets
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2,333,094 | 2,970,164 | ||||||
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Property and equipment, net
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20,455 | 25,794 | ||||||
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Other assets, net
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0 | 3,335 | ||||||
| $ | 2,353,549 | $ | 2,999,293 | |||||
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Liabilities and Shareholders’ Deficit
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Current liabilities:
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Accounts payable
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$ | 1,164,990 | $ | 1,571,355 | ||||
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Line of credit
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1,102,423 | 1,555,033 | ||||||
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Accrued expenses
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667,314 | 462,811 | ||||||
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Notes payable -Current
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657,710 | 107,263 | ||||||
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Notes payable to related parties
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835,000 | 660,000 | ||||||
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Total current liabilities
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4,427,437 | 4,356,462 | ||||||
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Long-term notes payable
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308,791 | 644,185 | ||||||
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Shareholders’ deficit:
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Preferred stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding
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- | - | ||||||
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Common stock; $0.001 par value; 90,000,000 shares authorized, 18,354,417 issued and outstanding at September 30, 2011 and 18,354,417 issued and outstanding at December 31, 2010
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18,354 | 18,354 | ||||||
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Additional paid-in capital
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10,163,741 | 10,156,839 | ||||||
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Accumulated deficit
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(12,564,774 | ) | (12,176,547 | ) | ||||
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Total shareholders’ deficit
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(2,382,679 | ) | (2,001,354 | ) | ||||
| $ | 2,353,549 | $ | 2,999,293 | |||||
See accompanying notes to consolidated financial statements
ITEM 1.Financial Statements (continued)
GENERAL AUTOMOTIVE COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
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Three months ended September 30,
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Nine months ended September 30,
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2011
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2010
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2011
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2010
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Revenues
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$ | 2,641,521 | $ | 3,337,201 | $ | 8,919,892 | $ | 8,666,556 | ||||||||
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Costs of goods sold
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2,318,505 | 3,033,938 | 7,913,101 | 7,752,686 | ||||||||||||
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Gross profit
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323,016 | 303,263 | 1,006,791 | 913,870 | ||||||||||||
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Expenses:
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Selling, general and administrative
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370,243 | 453,115 | 1,197,307 | 1,291,781 | ||||||||||||
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Total expenses, net
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370,243 | 453,115 | 1,197,307 | 1,291,781 | ||||||||||||
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Loss from operations
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(47,228 | ) | (149,852 | ) | (190,516 | ) | (377,911 | ) | ||||||||
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Other income (expense):
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Interest expense
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(70,247 | ) | (45,545 | ) | (193,176 | ) | (131,752 | ) | ||||||||
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Other, net
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- | - | - | - | ||||||||||||
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Total other income (expense), net
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(70,247 | ) | (45,545 | ) | (193,176 | ) | (131,752 | ) | ||||||||
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Net loss from operations
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(117,475 | ) | (195,397.00 | ) | (383,692 | ) | (509,663.00 | ) | ||||||||
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Loss from equity method investment
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- | - | (10,935 | ) | - | |||||||||||
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Net loss
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$ | (117,475 | ) | $ | (195,397 | ) | $ | (394,627 | ) | $ | (509,663 | ) | ||||
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Loss per share
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Basic and diluted loss per share
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$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
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Weighted average number of common shares outstanding:
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Basic and diluted
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18,354,417 | 18,354,417 | 18,354,417 | 20,187,750 | ||||||||||||
See accompanying notes to consolidated financial statements
ITEM 1.Financial Statements (continued)
GENERAL AUTOMOTIVE COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS (Unaudited)
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Nine months ended September 30,
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2011
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2010
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Cash flows from operating activities:
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Net cash used in operating activities
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$ | 62,242 | $ | (781,167 | ) | |||
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Cash flows from investing activities:
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- | (61,491 | ) | |||||
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Decrease in other assets
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- | 82,753 | ||||||
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Net cash provided by investing activities
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- | 21,262 | ||||||
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Cash flows from financing activities:
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Net borrowings/repayments under lines of credit
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(452,610 | ) | 210,509 | |||||
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Borrowings on notes payable
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386,179 | 445,000 | ||||||
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Borrowings (payments) on notes to related parties
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- | 200,000 | ||||||
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Net cash provided by financing activities
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(66,431 | ) | 855,509 | |||||
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Net increase (decrease) in cash
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(4,189 | ) | 95,604 | |||||
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Cash, beginning of year
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5,410 | 3,701 | ||||||
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Cash, end of period
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$ | 1,221 | $ | 99,305 | ||||
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Supplemental disclosure of cash flow information:
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Interest paid
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$ | 193,176 | $ | 131,752 | ||||
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Supplemental schedule of non-cash financing activities:
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Reclassification of unearned stock compensation
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$ | 122,413 | $ | - | ||||
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Common stock issued for services
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$ | - | $ | - | ||||
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Warrants issued in conjunction with debt
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$ | 642 | $ | 3,598 | ||||
See accompanying notes to consolidated financial statements
ITEM 1.Financial Statements (continued)
GENERAL AUTOMOTIVE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidated Financial Statements.
In the opinion of management, the accompanying consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of General Automotive Company and its subsidiaries (collectively, the “Company”) at September 30, 2011 and December 31, 2010 and the results of its operations and cash flows for the three and nine month periods ended September 30, 2011 and 2010. The financial information included herein is unaudited.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Regulation S-X. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the operating results for the full year.
Going Concern.
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company incurred losses in the current quarter of $117,475 and has an accumulated deficit of $12,564,774 at September 30, 2011. The Company’s current liabilities exceeded its current assets by $2,094,343as of September 30, 2011. Additionally the Company is reporting a shareholders’ deficit of $2,382,679 as of September 30, 2011 as compared to a shareholders’ deficit of $2,001,354 at December 31, 2010. Management
believes that it will be successful in its plans to return the Company to profitability; however there can be no assurances that we will be able to obtain additional financing, increase revenues and improve gross margins in order to be able to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its entire operations.
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Earnings (loss) per share.
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Basic earnings (loss) per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common stock issuable upon exercise of stock options and warrants and conversion of debt using the treasury stock method. Adjustments to earnings per share calculation include reversing interest related to the convertible debts and changes in derivative instruments. During periods when losses are incurred dilutive common shares are not considered in the EPS computations as
their effect would be anti-dilutive. Common share equivalents of 34,448,284 shares at September 30, 2011 and 21,262,451 shares at September 30, 2010 representing outstanding warrants and options were not included in the computation of diluted earnings per share for the three month period ended September 30, 2011 and September 30, 2010 as their effect would have been anti-dilutive.
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Inventory.
Inventory consists principally of finished goods.
Use of Estimates.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the realizable value of accounts receivable and the reserve for bad debts and the realizable value of our inventory.
Recent accounting pronouncements.
The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.
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2 . Debt.
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Line of credit
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The Company’s wholly owned subsidiary, OES, operates under a revolving line of credit with a bank. The maximum borrowing under this OES Line is $2,000,000 and carries an interest rate of prime plus 1.0% (3.25% at September 30, 2011). The accounts receivable, inventory and other non-secured assets of OES secure the line. In addition, the OES Line is a note payable on demand is subject to certain financial covenant ratios and was guaranteed by the Company. At September 30, 2011, the Company was in technical default of the covenants agreements associated with the line of credit. At September 30, 2011, the outstanding balance of the OES Line was $1,102,423. Draws under these lines are limited to 85% of
eligible accounts receivable and 50% of inventory and as such our unused portion of the line was $21,750 at September 30, 2011.
Promissory Notes
During 2009 the Company borrowed $100,000 evidenced by a promissory note due 24 months from the issue date bearing interest at 12% per annum.
During 2010 the Company borrowed an aggregate of $640,000 evidenced by promissory notes due 24 months from the issue dates bearing interest at 12% per annum.
During the nine month period ending September 30, 2011 the Company borrowed and aggregate of $180,000 evidenced by promissory notes due 24 months from the issue date bearing interest at 12% per annum.
In conjunction with the notes the Company issued an aggregate of 175,000 warrants to purchase common stock at $0.30 per share.
The Company estimated the value of the warrants using the Black-Scholes option pricing model with the following assumptions:
Risk free interest rate – 2%; Expected Volatility 238%; expected life 3 years; dividend rate 0%
The fair value of the options aggregated $5,125 which was recorded as a reduction in the principal balance of the debt and an increase in paid in capital. The fair value is being amortized over the term of the notes.
The balance of the notes is payable as follows:
Due 2011: $100,000
Due 2012: $631,125 ($635,000 less the unamortized discount of $3,875)
Due 2013: $180,000
Related Party
During the nine months ended September 30, 2011, a related party advanced the Company an additional $100,000 for working capital bringing the balance due to this affiliate to $835,000 at September 30, 2011. The advances bear interest at 12% per annum and are due August 28, 2012.
Other
During August, 2008 the Company borrowed $35,590 from Huntington National Bank which bears interest at 7.5% per annum. As of September 30, 2011 the remaining balance of the note is $17,025 and is due July 2013.
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3. Common Stock and Equity Securities.
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There were no additional common shares, stock options or warrants issued for services or cash for the three months ended September 30, 2011.
A summary of option activity presented below:
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Shares
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Weighted-Average
Exercise Price
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Weighted-Average
Remaining Contractual Term
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Intrinsic
Value
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Outstanding at December 31, 2010
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31,595,000
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$
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0.07
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3.25
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$ -
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Granted
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-
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-
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-
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-
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Exercised
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-
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-
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-
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-
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Forfeited or expired
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-
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Outstanding at September 30, 2011
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31,595,000
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$
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0.07
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3.25
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-
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Exercisable at September 30, 2011
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31,595,000
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$
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0.07
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3.25
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$ -
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As of September 30, 2011, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $0.00 and the aggregate intrinsic value of currently exercisable stock options was approximately $0.00. The intrinsic value of each option is the difference between the fair market value of the common stock and the exercise price of such option to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The
intrinsic value calculation is based on the $0.03 closing stock price of the common stock on September 30, 2011. There were no in-the-money options outstanding and exercisable as of September 30, 2011.
Since there were no options exercised during the three months ended September 30, 2011, there was no intrinsic value of options exercised.
The total fair value of options granted during the three months ended September 30, 2011, was approximately $0 (none were granted).
The following table summarizes information about fixed price stock options at September 30, 2011:
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Exercise
Price
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Weighted
Average Number
Outstanding
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Weighted
Average
Contractual Life
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Weighted
Average
Exercise Price
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Number
Exercisable
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Exercise
Price
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$
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.07
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31,595,000
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3.25
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$
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0.07
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31,595,000
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$
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0.07
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4. Equity Method Investment
The company holds a 36.18% interest in Greencell, Inc. In 2010 when the company's share of losses equaled the carrying value of its investment, the equity method of accounting was suspended, and no additional losses were charged to operations. The company's unrecorded share of Greencell, Inc. loss for 2010 totaled $220,943. In 2010 Greencell, Inc. reported a loss of $664,429, of which the company's share was $240,411. Accordingly, the company has included $19,468 in its net loss for 2010, representing the Company's share of Greencell’s loss for 2010 up to the amount of its investment.
During the nine months ended September 30, 2011, the Company advanced an additional $10,935 funding in Greencell. During the nine months ended September 30, 2011, Greencell, Inc. reported a loss of $219,955, of which the company's share was $79,580. Accordingly, the company has included $10,935 in its net loss for the nine months ended September 30, 2011, representing the Company's share of Greencell’s loss for 2011 up to the amount of its investment.
Summarized unaudited financial information for Greencell, Inc. as of and for the six months ended September 30, 2011, is as follows:
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Current assets
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$
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22,080
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Total assets
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$
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22,080
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Total liabilities
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$
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246,243
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Stockholders’ Equity
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$
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(224,163
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)
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Revenue
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$
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-
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Net loss
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$
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(219,955
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)
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5. Acquisition Event
On February 5, 2010 the Company announced that it had signed an agreement to acquire privately held S.P.E.C., Inc. based in Birmingham, AL (SPEC) for 750,000 restricted shares of its common stock plus $2,065,000 cash. Closing of the SPEC transaction is subject to completion of due diligence and other considerations
The transaction was scheduled to close by April 15, 2010, but did not as we were unable to secure the financing necessary to close. On or about April 15, 2010, the parties informally agreed to extend the closing dated to May 31, 2010, which period has also expired without the transaction closing as we were unable to secure the financing necessary to close. As of September 30, 2011, S.P.E.C., Inc. has not declared a default. However, it now appears unlikely that we will be able to secure a source of financing that will enable us to close the transaction. Even if we were able to secure the necessary financing, there can be no assurance that S.P.E.C., Inc. will agree to close the
transaction as the parties have not executed a written extension of the closing date.
6. Concentrations
During the nine months ended September 30, 2011, the Company sold the majority of its products to two customers. During the nine months ended September 30, 2011, sales to these two customers were approximately 55% and 42% of total revenues. At September 30, 2011, the amount of accounts receivable due from these customers was 66% compared to the 27% concentration at September 30, 2010.
The Company expanded its purchasing concentration from two major vendors for the nine months ended September 30, 2010 to four vendors as of September 30, 2011. This shift in purchasing practices accounted for approximately 29%, 18%, 15%, and 10% from these respective vendors for the nine months September 30, 2011. Comparatively during the nine months ended September 30, 2010, purchases from two suppliers were approximately 42% and 12% of total purchases.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements:
Forward-looking statements in this Form 10-Q including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements made in this report, other than statements of historical fact, are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following factors,
among others, could cause actual results to differ materially from those set forth in the forward-looking statements — our ability to successfully develop, market, and sell our brands and products in a timely manner, and the outcomes of our efforts related to mergers and acquisitions. Additional factors include, but are not limited to, the size and growth of the market for our products, competition, pricing pressures, market acceptance of our products, the effect of economic conditions, the value and exploitation of our intellectual property rights, the results of financing efforts, risks in new product development, and other risks including but not limited to those identified in this report and our other periodic filings with the Securities and Exchange Commission.
Results of Operations:
Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010
We generated $2,641,521 in revenues from operations during the three months ended September 30, 2011, compared to $3,337,201 during the three months ended September 30, 2010. The decrease of $695,680 (20.85%) in revenues can be attributed to a protracted delivery schedule of inventories during the quarter. Normalized delivery schedules will likely resume during the first quarter of 2012. The impact of the deferred sales in the OES subsidiary was partially offset by increased sales in the PVP subsidiary.
Our cost of goods sold during the three months ended September 30, 2011 was $2,318,505 compared to $3,033,938 for the three months ended September 30, 2010. The change in the concentration of our vendors contributed to the offsetting effect of the decrease in overall revenue for the quarter. However more effective buying efforts resulted in a higher gross profit for the three months ending September 30, 2011 when compared to the same period in 2010. Our aggregate increase in gross profit was 6.12%, $19,753 in the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. Our gross profit margin was 12.23% for the three months ended September 30, 2011 compared to 9.09% for the
same period of 2010. Currently, the subsidiaries are continuing programs to increase the number of domestic and international sources for its products in addition to expanding its product offerings.
Our selling, general and administrative expenses decreased $82,872 (18.29%) for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. The Company continues to strive to reduce selling, general and administrative expenses as a result of continued cost containment initiatives. The stock based compensation awards during the three months ended September 30, 2011 were minimal, $2,268, and were a result of amortized vesting of the employee options granted in prior periods.
Interest expense in the three months ended September 30, 2011 increased $24,702 when compared to the three months ended September 30, 2010. The interest expenses for the quarter ended September 30, 2011 of $70,247 includes an increase in expense associated with the asset-based borrowing as well as interest expenses associated with the promissory note financing agreements that have been executed at various periods during 2010 and 2011.
The Company has active programs to increase revenues and reduce costs for the fiscal 2011. We intend to increase our margins by expanding our sourcing efforts in Asia during 2011. Additionally public company costs continue to be monitored and where possible either eliminated or reduced as we have more experience as a public company.
During the three months ended September 30, 2011 we recorded a net loss of $117,475, compared to a loss of $195,397 for the three months ended September 30, 2010.
Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010
We generated $8,919,892 in revenues during the nine months ended September 30, 2011, compared to $8,666,556 during the nine months ended September 30, 2010. The increase in revenues was due primarily the continued expansion of the PVP subsidiary during the nine months ended September 30, 2011. The gross profit margin increased for the nine months ended September 30, 2011 to 11.29% compared to 10.54% for the nine months ended September 30, 2010.
Our cost of goods sold during the nine months ended September 30, 2011 increased $160,415 compared to the nine months ended September 30, 2010, due to the increase in sales. Our total gross profits were $92,921 higher in the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 and our gross profits were approximately 11.29% and 10.54% during both periods. OES is continuing its program to increase the number of domestic and international sources for its products. Although the automotive aftermarkets parts industry continues to experiences some contraction, we are beginning to realize higher line item gross margins as a result of our more
effective purchasing practices during the nine months ended
September 30, 2011.
Our selling, general and administrative expenses were $94,474 lower for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2011. The decrease in selling, general and administrative costs reflects reduced consulting service and financing commission fees were offset by additional legal fees for the nine months ended September 30, 2011 when compared to the same period in 2010.
Interest expense in the nine months ended September 30, 2011 increased $61,424 when compared to the nine months ended September 30, 2010. The interest expenses for the nine months ended September 30, 2011 of $193,176 includes a marginal increase in expense associated with the asset-based borrowing as well as interest expenses associated with the promissory note financing agreements that have been executed at various periods during 2010 and 2011.
The Company has active programs to increase revenues and reduce costs for the fiscal 2011. We intend to increase our margins by expanding our sourcing efforts in Asia during 2011. Additionally public company costs continue to be monitored and where possible either eliminated or reduced.
During the nine months ended September 30, 2011 we recorded a net loss of $394,627, compared to a loss of $509,663 for the nine months ended September 30, 2010.
Liquidity and Capital Resources
As of September 30, 2011, we had current assets in the amount of $2,333,094 consisting primarily of, accounts receivable, and inventory. On the same date, we had current liabilities of $4,427,437, consisting of accounts payable, a line of credit and notes payable. Thus, as of September 30, 2011, we had a working capital deficit of $2,094,343 as compared to a working capital deficit of $1,386,297 at December 31, 2010.
Our ongoing operations consumed more cash during the three months ended September 30, 2011 than they generated in the three months ended September 30, 2010. As of September 30, 2011, we expect that the cash flows derived from our existing ongoing operations together with our cash resources available under the OES Line of credit are unlikely to be sufficient to meet our needs for the next twelve months. In order to bridge these short term cash needs, since approximately October 2009, we have been raising additional working capital by selling short term promissory notes in private transactions. As of December 31, 2009, we had borrowed $100,000 through these efforts and as of
September 30, 2011, we had raised a total of $915,000. The notes are generally due within 24 months of initial issuance and bear interest at a rate of 12%. Our ability to repay these notes, as well as to continue to obtain the cash necessary to meet our ongoing operational needs over the next twelve months, is dependent upon our ability to either raise additional capital through the sales of debt or equity or upon an improvement in cash flows from our ongoing operations. There can be no assurance that we will be able to raise the capital necessary to meet these commitments on favorable terms or at all, nor can there be any assurance that we will be successful in improving our existing operations such that they will generate sufficient cash flows for meet our liquidity needs over the next twelve months. If we are unable to do so our business
and operations will be adversely affected.
Our ability to satisfy our liquidity needs over the longer term is contingent upon a combination of improved revenues/gross profit from our existing operations and any additional operations we are able to obtain from acquisitions or joint-venture transaction. Our management is actively seeking to acquire additional, complementary businesses or joint venture opportunities that will enhance the value of the Company as wells as improve our cash flows. Our Management has invested time evaluating several proposals for possible acquisition or joint-venture, however, majority of these opportunities were not pursued and none have closed during the period ended September 30, 2011. There can be no assurance that
we will be able to identify and acquire complementary businesses or enter into joint ventures on favorable terms or at all, nor can there be any assurances that we will be successful in improving our existing operations such that they will generate sufficient cash flows for meet our long term liquidity needs. If we are unable to do so our business and operations will be adversely affected.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our allowance for accounts receivable and stock-based compensation. Management bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates given a change in conditions or assumptions that have been consistently applied.
The Company’s significant accounting policies are described in note 1 of our financial statements herein and Note 1 of our Form 10-K for the year ended December 31, 2010. The methodology for its estimates and assumptions are as follows:
Going Concern
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company incurred losses in the current quarter of $117,475 and has an accumulated deficit of $12,564,774 at September 30, 2011. The Company’s current liabilities exceeded its current assets by $2,094,343 as of September 30, 2011. Additionally the Company is reporting a shareholders’ deficit of $2,382,679 as of September 30, 2011 as compared to a shareholders’ deficit of $2,001,353 at December 31, 2010. Management
believes that it will be successful in its plans to return the Company to profitability; however there can be no assurances that we will be able to obtain additional financing, increase revenues and improve gross margins in order to be able to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its entire operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include the allowance for bad debts and the valuation of inventory.
Revenue Recognition
The Company recognizes revenue when the following conditions have been met: there is persuasive evidence an arrangement exists which includes a fixed price, there is reasonable assurance of collection, the services or products have been provided and delivered to the customer, no additional performance is required, and title and risk of loss has passed to the customer.
Accounts Receivable
The Company extends credit to its customers based upon a written credit policy. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for
recovery is considered remote. The Company does not require collateral on accounts receivable.
Share-Based Payments
ASC 718, Stock Compensation requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award.
We record the grant date fair value of stock-based compensation awards as an expense over the vesting period of the related stock options. In order to determine the fair value of the stock options on the date of grant, we use the Black-Scholes-Merton option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. Although the risk-free interest rates and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility, forfeiture rate and option life assumptions require a greater level of judgment which makes
them critical accounting estimates.
We use an expected stock-price volatility assumption that is based on historical volatilities of our common stock and we estimate the forfeiture rate and option life based on historical data related to prior option grants.
Recent Accounting Pronouncements
The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements
Off Balance Sheet Arrangements
As September 30, 2011, there were no off balance sheet arrangements.
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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This item is not applicable to the Company because we are a smaller reporting company.
ITEM 4T. CONTROLS AND PROCEDURES
Management’s Report On Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of September 30, 2011, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2011 in reporting on a timely basis information required to be disclosed by us in the reports we file or submit under the Exchange Act
because of material weaknesses relating to internal controls as described in Item 9A (T) of the Company’s Form 10-K for the year ended December 31, 2010.
During the fiscal quarter ended September 30, 2011, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that the material weaknesses in internal control as described in Item 9A(T) of the Company’s Form 10-K for the year ended December 31, 2010, have not been fully remediated. We are committed to finalizing our remediation action plan and implementing the necessary enhancements to our policies and procedures to fully remediate the material weaknesses discussed
above.
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PART II.
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OTHER INFORMATION
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Legal Proceedings
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None.
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Risk Factors
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This item is not applicable to the Company because we are a smaller reporting company.
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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None.
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Item 3.
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Defaults upon Senior Securities
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None.
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Item 4.
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[ Removed and Reserved]
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Item 5.
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Other Information
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Not applicable.
ITEM 6. Exhibits
Exhibit
Number Description of Exhibit
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31.1
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Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there under duly authorized.
GENERAL AUTOMOTIVE COMPANY
By: /s/ Dan Valladao
Dan Valladao
Chief Executive Officer
November 21, 2011
By: /s/ Shawn Powell Joseph
Shawn Powell Joseph
Chief Financial Officer
November 21, 2011
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