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| GNAU.OB > SEC Filings for GNAU.OB > Form 10-K on 15-Apr-2009 | All Recent SEC Filings |
15-Apr-2009
Annual Report
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.
Forward-Looking Statements
The following discussion reflects our plan of operation. This discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. These statements involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10K.
This Annual Report on Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. To the extent that any statements made in this Report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as "expects," "plans," "will," "may," "anticipates," believes," "should," "intends," "estimates," and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation:
• Our limited and unprofitable operating history;
• the ability to raise additional capital to finance our activities;
• legal and regulatory risks associated with the Merger;
• the future trading of our common stock;
• our ability to operate as a public company;
• general economic and business conditions;
• the volatility of our operating results and financial condition; and
• our ability to attract or retain qualified senior scientific and management personnel.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report on Form 10-K.
Information regarding market and industry statistics contained in this Report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness of the data included in this Report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.
Overview
Our business model focuses on automotive parts sales and distribution. Through our wholly-owned subsidiary, we focus on selling and distributing engine management products and other traditional auto parts to the largest US distributors. Our management intends to continue expanding the customer base of OES and its level of sales. At the same time we plan to increase the volume of our business through the acquisition of similar companies involved in the sale and distribution of automotive parts.
Discussion and Analysis
As discussed in greater detail on a current report on our Form 8-K filed February 28, 2008, we entered into a Merger Agreement on February 22, 2008, with GAS Nevada whereby GAS Nevada merged with and into UIR Sub, and we subsequently merged with UIR Sub in a short-form merger transaction under Nevada law and, in connection with this short
form merger, changed our name to General Automotive Company, effective February 22, 2008. As a result of the merger, in exchange for 100% of the outstanding capital stock of GAS Nevada, the former stockholders of GAS Nevada had the right to receive 8,149,535 shares of our common stock, which represented approximately 58.70% of our outstanding common stock following the Merger and related transactions. Thus, GAS Nevada is considered the accounting acquirer in the Merger, and all references to our financial and other history in this Form 10K, and in particular in the Management's Discussion and Analysis section, refer to the history of GAS Nevada unless the context specifically indicates that we are referencing the businesses of Bridgefilms or UIR.
Through the Merger, we also acquired 100% interest in the two wholly-owned subsidiaries of GAS Nevada, Global Parts Direct, Inc. ("GPD") and OE Supply, LC ("OES"). OES is our sole operating subsidiary at present. During the third quarter of 2008, we decided to discontinue the operations of our wholly-owned subsidiary, GPD. During November 2008 our board of directors agreed to the disposal of GPD through a sale of selected assets. This sale was closed on November 14, 2008. The sale was fundamentally at liquidation value resulting in a loss on disposal of $946,790. The board's decision was based on continued reductions in the demand for the type of electronic products that were being provided by GPD during the year combined with customer pricing pressures and the inability to source low product quantities at favorable pricing. All of our business operations are now conducted through the remaining subsidiary, OES as described above (see "Description of Business"). Our combined Net Loss for the Year ended December 31, 2008 was $3,318,765 compared to $1,751,144 for the prior year. $946,790 of the $1,567,621 increase in loss was attributable to the loss on the sale of GPD.
Results of Operations for the Years Ended December 31, 2008 and December 31, 2007
We generated $12,383,241 in revenues during the year ended December 31, 2008, compared to $11,566,002 during the year ended December 31, 2007. The increase in revenues was due primarily to larger scheduled customer orders through the first nine months of the year. The general economic conditions of the final quarter of the year diminished the previous realized growth to only approximately $1 million in revenue. Revenue from increased orders were offset by a new rebate program which resulted in a net increase in revenue of $817,239. While gross profit margins on product sales were improved by new domestic dealers and Asian product sourcing, an increase in the cost of shipping due to fuel surcharges caused a decline in gross profit of $67,323. This represents a decline in the rate of gross profit from 10.59% to 9.34%.
Our selling, general and administrative expense was $1,435,055 higher for the year ended December 31, 2008 as compared to the year ended December 31, 2007. These expenses for our wholly-owned subsidiary, OES, were comparable for the years ended December 31, 2008 and 2007, however the impact of public company costs of approximately $645,000, corporate payroll and other operating expenses of approximately $610,000 plus approximately $180,000 of professional services expensed in connection with the merger during the year ended December 31, 2008 contributed to these higher expenses.
Stock-based compensation cost decreased by $554,570 during the year ended December 31, 2008 as compared to the same period in 2007 due to a reduction in the number of transactions involving the issuance of stock for services and the reduction in the price of the Company's stock.
Interest expense decreased by $105,038 during the year ended December 31, 2008 as compared to the same period in 2007 due to the conversion of the related party notes payable accompanied by a reduction of total debt structure.
The net loss from discontinued operations of $420,741, excluding the loss on disposal in 2008 of $946,790, was comparable to the 2007 net loss from discontinued operations of $657,730 considering the lesser number of months of existence in 2008.
The result was a net loss of $3,318,765 for the year ended December 31, 2008 compared to a net loss of $1,751,144 for the year ended December 31, 2007.
Liquidity and Capital Resources
As of December 31, 2008, we had current assets in the amount of $2,144,340, consisting mostly of accounts receivable and inventory. On the same date, we had current liabilities of $3,123,428, consisting mostly of accounts payable and a bank line of credit. Thus, as of December 31, 2008, we had a working capital deficit of $979,088 as compared to a working capital deficit of $6,968,406 at December 31, 2007. This reduction in our working capital deficit during the year ended December 31, 2008 is directly related to the conversion to common stock of $ 6,776,831 of related party notes and accrued interest and the sale of common stock.
The conversion of approximately $6.7 million of notes payable and accrued interest into the common stock of GAS Nevada immediately prior to the Merger and the sale of 2,373,516 shares of our common stock for $1,465,957 net of issuance costs
in connection with our private placement better positions us to implement our business plan over the next twelve months. To support the additional working capital needed for revenue growth we increased the bank line of credit from $1.5 million to $2.0 million during the third quarter of 2008. Approximately 65% of this new line was used to satisfy the balance on the existing line of credit. At the end of the year 2008 we were in violation of one of the financial covenants under the new line of credit but received a waiver for this violation. We had $71,552 available on the line of credit at December 31,2008.
Parallel to expanding the customer base of our wholly-owned subsidiary, OES through expansion of product offerings and identification of new customers, we plan to continue our search for companies involved in the sale and distribution of automotive parts that would be available for acquisition. It is management's belief that the return to profitability is dependent upon the ability to increase revenue volume. If we determine that we do not presently have sufficient capital to fully fund our growth and development, we will seek additional capital through the financial markets. In connection with raising this additional capital, we will incur appropriate accounting and legal fees. 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.
Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon General Automotive Company's 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. The methodology for its estimates and assumptions are as follows:
Allowance for Doubtful Accounts. The Company maintains current receivable amounts and regularly monitors and assesses its risk of not collecting amounts owed to it by customers. This evaluation is based upon an analysis of amounts currently and past due along with relevant history and facts particular to the customer. Based upon the results of this analysis, the Company records an allowance for uncollectible accounts. This analysis requires the Company to make significant estimates and as such, changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.
Stock-based compensation. Stock-based compensation represents the cost related to common stock granted to employees and related parties of the Company. The Company measures stock-based compensation cost at the date the common stock was issued, based on the quoted market price of the Company's common stock and recognizes the cost as expense over the requisite service period. For officer and director stock purchase options we use volatility estimates based on similar public companies within the industry with readily determinable historical stock price information. In addition we used the five year treasury bond rate at time of grant for the risk free rate in the Black-Scholes fair value estimation model.
The Company records deferred tax assets for awards that result in deductions on the Company's income tax returns, based on the amount of compensation cost recognized and the Company's statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Company's income tax return are recorded in Additional Paid-In Capital.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement 141R, "Business Combinations" (SFAS 141R), which applies to all transactions or other events in which an entity obtains control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals" and combinations achieved without the transfer of consideration. This statement replaces FASB Statement No. 141 and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for some business combinations. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The Company believes that adoption of the FAS 141R will have an effect on our operating results with respect to future acquisitions, if any.
In February 2008, the FASB issued FASB Staff Position 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 ("FSP 157-1"). FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its scope. In addition, on February 12, 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which amends SFAS 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This pronouncement was effective upon issuance. We have deferred the adoption of SFAS 157 with respect to all non-financial assets and liabilities in accordance with the provisions of this pronouncement. On January 1, 2009, SFAS 157 will be applied to all other fair value measurements for which the application was deferred under FSP FAS 157-2. We are currently assessing the impact SFAS 157 will have in relation to non-financial assets and liabilities on our consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements of Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not anticipate the adoption of SFAS No. 161 will have a material impact on its results of operations, cash flows or financial condition.
In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). This FSP also adds certain disclosures to those already prescribed in SFAS No. 142. FSP No. FAS 142-3 becomes effective for fiscal years, and interim periods within those fiscal years, beginning in the Company's fiscal year 2010. The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date. We are currently assessing the impact FSP No. FAS 142-3 will have on our consolidated financial statements.
In June 2008, FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP concludes that unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities under FASB No. 128, Earnings Per Share and should be included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that we currently use to determine earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. We do not expect the adoption of this FSP effective January 1, 2009 will have a material impact on our results of operations or financial position.
In June 2008, the FASB's Emerging Issues Task Force reached a consensus regarding EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5). EITF 07-5 outlines a two-step approach to evaluate the instrument's contingent exercise provisions, if any, and to evaluate the instrument's settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year of adoption as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption is not permitted. The Company is currently evaluating the impact of the adoption of EITF 07-5.
Off Balance Sheet Arrangements
As of December 31, 2008, there were no off balance sheet arrangements.
Contractual Obligations
As of December 31, 2008, we were obligated for $229,000 in future lease payments through 2011for the office and warehouse space at 5422 Carrier Drive in Orlando, Florida. The amounts due over the next three years are approximately $76,900 in 2009, $78,600 in 2010 and $73,500 in 2011.
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