UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
For the quarterly period ended
or
For the transition period from ____________ to ____________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer Identification No.) |
(Address of principal executive offices and Zip Code)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
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.
Indicate by check mark whether the registrant
has submitted electronically 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No
As of August 17, 2024, the registrant had
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ECD AUTOMOTIVE DESIGN, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | (audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax asset | ||||||||
| Right-of-use assets | ||||||||
| Brand name, net | ||||||||
| Deposit | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Deferred taxes liability | ||||||||
| Lease liability, current | ||||||||
| Floor plan payable | ||||||||
| Income tax payable | ||||||||
| Share issuance liability | ||||||||
| Other payable | ||||||||
| Total current liabilities | ||||||||
| Lease liability, non-current | ||||||||
| Convertible note, net of debt discount | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| Redeemable preferred stock, $ | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1
ECD AUTOMOTIVE DESIGN, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold (exclusive of depreciation expense shown below) | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Advertising and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Depreciation and amortization expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Foreign exchange loss | ( | ) | ( | ) | ||||||||||||
| Other income (expense), net | ||||||||||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ( | ) | ||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
ECD AUTOMOTIVE DESIGN, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023
| Redeemable Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance – December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Issuance of common shares | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance – March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Issuance of common shares to vendors | ||||||||||||||||||||||||||||
| Fair value of share based compensation | - | - | ||||||||||||||||||||||||||
| Correction of shareholder distributions | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance – June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Redeemable Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance – December 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stockholder distributions | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance – March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Stockholder distributions | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ||||||||||||||||||||||||||
| Balance – June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
ECD AUTOMOTIVE DESIGN, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
| Depreciation expense | ||||||||
| Noncash lease expense | ||||||||
| Amortization of debt discount | ||||||||
| Equity based compensation | ||||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid and other current assets | ( | ) | ||||||
| Deposit | ( | ) | ||||||
| Deferred tax asset | ||||||||
| Deferred tax liability | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Other payable | ( | ) | ||||||
| Lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Disposal of asset | ||||||||
| Purchase of assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of floor plan payable | ( | ) | ||||||
| Proceeds from floor plan payable | ||||||||
| Cash distributed to stockholders | ( | ) | ||||||
| Correction of shareholder distribution | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | $ | ||||||
| Supplemental cash flow disclosure: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of noncash cash flow information | ||||||||
| Record right-to-use asset and lease liability per ASC 842 | $ | $ | ||||||
| Intangible asset acquired | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
ECD Automotive Design, Inc (the “Company,” “ECD,” “we,” “us,” or “our), formerly known as EF Hutton Acquisition Corporation I (“EFHAC”) (the Company) is engaged in the production and sale of Land Rover vehicles. Since the Company’s commencement of operations in 2013, they have established a facility geared towards producing the most customized Land Rovers with the highest quality of parts and the highest quality labor force building each vehicle. The Company primarily earns revenue from the sale of the customized vehicle directly to the customer. Additionally, revenue is generated from providing repair or upgrade services to customers and from the sale of extended warranties.
On December 12, 2023, ECD completed the business combination contemplated by the merger agreement dated as of March 3, 2023 (the “Merger Agreement”) by and among EFHAC, Humble Imports Inc., d/b/a ECD Auto Design, a Florida corporation (“Humble” or “ECD”), ECD Auto Design UK, Ltd., an England and Wales corporation (the “ECD UK”), EFHAC Merger Sub, Inc., a Florida corporation (“Merger Sub”) and wholly-owned subsidiary of EFHAC, and Scott Wallace, as the Securityholder Representative. At part of the closing Merger Sub merged with and into ECD with ECD as the surviving corporation and becoming a wholly-owned subsidiary of EFHAC. In connection with the Merger, EFHAC changed its name to “ECD Automotive Design Inc.” or such other name designated by E.C.D. by notice to EFHAC. See Note 4 for further information.
The business combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, although EFHAC acquired the outstanding equity interest in ECD in the business combination, EFHAC is treated as the “acquired company” and ECD was treated as the accounting acquirer for financial statement purposes. Accordingly, the Business Combination was treated as the equivalent of ECD issuing stock for the net assets of EFHAC, accompanied by a recapitalization. The net assets of EFHAC are stated at historical cost, with no goodwill or other intangible assets recorded.
Furthermore, the historical financial statements of ECD became the historical financial statements of the Company upon the consummation of the merger. As a result, the financial statements included in this Annual Report reflect (i) the historical operating results of ECD prior to the merger; (ii) the combined results of EFHAC and ECD following the close of the merger; (iii) the assets and liabilities of ECD at their historical cost and (iv) ECD’s equity structure for all periods presented, as affected by the recapitalization presentation after completion of the merger. See Note 5 - Reverse Capitalization for further details of the merger.
The Company also consolidates, ECD Audit Design UK LTD (“ECD UK”), a private limited company incorporated on July 16, 2021 in England and Wales. ECD UK was formed for the purpose of procuring parts overseas for the Company. ECD UK is a consolidated variable interest entity (“VIE”) for which the company is the primary beneficiary. The Company is the primary beneficiary of ECD UK as it has both the power to direct the most significant activities impacting on its economic performance and the obligation to absorb losses or receive benefits significant to them.
In April 2024, the Company acquired certain assets of BNMC Continuation Cars LLC (“BNMC”). See Note 5 for further information.
2. LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2024, the Company had cash and
cash equivalents of approximately $
The Company’s primary source of operating
funds since the Company’s inception in 2013 has been from cash receipts from vehicle sales and proceeds from loans. Immediately
prior to the closing of the Business Combination on December 12, 2023, the Company executed and delivered to Defender SPV LLC (the “Lender”)
a senior secured convertible note (the “Convertible Note”), in exchange for a loan in the principal amount of $
On May 15, 2024, the Company entered into a loan
agreement for up to $
Based on the cash balance of $
5
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of ECD and ECD Auto Design UK Ltd. The accompanying consolidated financial statements have been prepared in accordance with GAAP, expressed in U.S. dollars. In the opinion of management, all adjustments necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. All such adjustments consisted of all normal recurring items, including the elimination of all intercompany transactions and balances. References to GAAP issued by the FASB in these accompanying notes to the consolidated financial statements are to the FASB Accounting Standards Codification (“ASC”).
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in the 2023 Form 10-K, with the exception of presentation of restated interim results included in Note 2 and 17 of the Form 10-K. The December 31, 2023 condensed consolidated balance sheet included herein was derived from the December 31, 2023 audited consolidated balance sheet included in the 2023 Form 10-K.
After the filing of the Company’s 2023 Form 10-K management determined
there was a misallocation of revenue and expenses in the unaudited interim financial information contained in Note 2 and 17 of the Form
10-K, resulting in second quarter 2023 revenue being understated by $
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include assumptions used in revenue recognition, useful life of assets, and allowance for doubtful accounts.
Segment Information
Operating segments are defined as components of
an enterprise for which separate discrete financial information is evaluated regularly by the Company’s Chief Executive Officer
(“CEO”), who is the Chief Operating Decision Maker (“CODM”), in deciding how to allocate resources and assess
performance. The CODM reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating
financial performance. Accordingly, the Company operates and manages its business as
6
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid investments acquired with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, because of the short maturity of these instruments.
Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the Federal
Deposit Insurance Corporation Coverage limit of $
Revenue Recognition
Revenue is recognized when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Product Revenue – Builds
The Company generates revenue through the sale of rebuilt or upgraded Land Rover Defender, Range Rover Classics, Land Rover Series, Jaguar E-Types, and Mustang vehicles directly to customers. There is a single performance obligation in all of the Company’s contracts, which is the Company’s promise to transfer the Company’s product to customers based on the transfer of title or shipping terms in the arrangement. The entire transaction revenue is allocated to this performance obligation.
Upon execution of the contract, the Company bills
its customers the total consideration of the contract. The Company receives from
Warranty and Other Revenue
The Company also generates revenue through the
sale of extended warranties to customers. The customers agree to the terms and conditions at the time of purchase, which represents the
customer arrangements. The period covered by the extended warranty is usually
The Company generates revenue through providing repair services to customers. The Company agrees with the customer on a budget. There is a single performance obligation, which is the Company’s promise to perform the retrofit, repair work on the vehicle. The entire transaction price is allocated to this single performance obligation. Service revenue is recognized when the repair work is completed, and the customer receives the vehicle.
Product Limited Warranty
Consistent with industry practice, the Company generally offers customers a limited warranty for work performed on the vehicle under the builds/sales contract. The customers do not have a contractual right of return. The Company only offers a limited warranty for the work performed on the vehicle under the contract. If a customer disputes any work performed, the Company will attempt to remedy the work, however, it shall not be required to discount the transaction price. The Company considered this an assurance-type warranty and not a separate performance obligation.
Warranty Reserve
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including quality control test driving vehicles, the warranty obligation is affected by historical warranty costs per vehicle. Should actual costs differ from the Company’s estimates, revisions to increase or decrease the estimated warranty liability may be required.
7
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Revenue Policies
Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised products to the customer will be one year or less, which is the case with substantially all customers.
Applying the practical expedient in ASC 606-10-25-18B, the Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. The Company records the related costs as part of the cost of goods good.
Disaggregation of Revenue
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Builds | ||||||||||||||||
| Warranty and other | ||||||||||||||||
| Total revenues, net | $ | $ | $ | $ | ||||||||||||
| June 30, 2024 | December 31, 2023 | |||||||
| Beginning balance, January 1 | $ | $ | ||||||
| Additional deposits received | ||||||||
| Revenue Recognized during the year at a point-in-time | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
As of June 30, 2024 and December 31, 2023, in
addition to the customer deposits noted above, the Company has $
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the original invoice amount less
an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management
estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are
written off against the allowance upon management’s determination that such accounts are uncollectible. Recoveries of accounts receivable
previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to
the financial position of the Company or results of operations. The Company had trade accounts receivable of $
Inventories
Work in progress, work in progress – shipping
and consumables, and work in progress – labor costs reported in inventories are carried at the lower of cost or net realizable value.
Cost is determined on the basis of the direct and indirect costs that are directly attributable. The measurement of inventories is generally
based on the weighted average method. Finished goods inventory is comprised of vehicles for which the build is completed but title has
not been legally transferred, or in some cases, the vehicle has not been delivered. The measurement of finished goods inventories is the
total cost of the materials, shipping and consumables, and labor attributed to the build of each specific completed vehicle. Overhead
costs are allocated to inventory based on the rate of inventory turned for the period. As of June 30, 2024 and December 31, 2023, inventory
was $
8
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is calculated using the straight-line method over the asset’s estimated useful life of
Long-Lived Assets
The Company follows a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. No impairments were recognized for the three and six months ended June 30, 2024 and 2023.
Advertising and Marketing
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income taxes
Prior to the Business Combination on December 12, 2023, the Company was an S corporation. As an S corporation, the Company was not directly liable for federal income taxes. As of the date of the Business Combination, the operations of the Company ceased to be taxed as an S corporation resulting in a change in tax status for federal and state income tax purposes.
The Company follows the asset and liability method of accounting for income taxes under ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company records deferred tax assets to the extent management believes that it is more likely than not that these assets will be realized in the future. Future realization of deferred income tax assets (meaning, items that may provide tax deductions in future periods) requires evidence that there will be sufficient taxable income in those future periods, or within any carryback periods available under tax law. The Company evaluates the realizability of its deferred tax assets on a quarterly basis. The majority of the Company’s deferred tax assets are comprised of income tax carryforwards, including federal and state net operating loss carryforwards (“NOLs”) and non-deductible interest expense carryforwards. Some of these carryforwards are subject to annual usage limitations and expiration, while other state NOLs and a portion of federal NOLs do not have expirations.
While the Company remains in a financial reporting loss position based on a cumulative pre-tax loss for the three-year period ended June 30, 2024, the determination of the valuation allowance is based on its evaluation of the periods over which future taxable items are expected to be utilized to offset tax loss and deduction carryforward items in those future periods. That is, future forecasts of our taxable income are not considered in the evaluation of realizability of its deferred tax assets. Therefore, changes in its deferred tax asset valuation allowances will primarily be affected by changes in the estimates of the time periods over which those future taxable items will occur.
ASC 740 prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by
taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax
expense. Management has evaluated the Company’s tax positions, including its previous status as a pass-through entity for
federal and state tax purposes, and has determined that the Company has taken no uncertain tax positions that require adjustment to
the condensed consolidated financial statements. The Company’s reserve related to uncertain tax positions was
9
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Share
The Company accounts for net loss per share in accordance with Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of any potentially issuable common shares. Diluted net loss per share is calculated by including any potentially dilutive share issuances in the denominator. For the three months ended June 30, 2024 and 2023, all potentially dilutive securities were not included in the calculation of diluted net income (loss) per share as their effect would be anti-dilutive.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use asset (“ROU asset”) and short-term and long-term lease liability are included on the face of the consolidated balance sheets.
ROU asset represents the right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease. Operating lease ROU asset and liability are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date over the respective lease term in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.
Fair Value of Financial Instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of cash, accounts receivable, accounts payable and accrued expenses, and other payables approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of lease liability also approximates fair value since the instrument bears market rates of interest. None of these instruments are held for trading purposes.
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
10
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The Company determines the accounting classification of warrants it issues as either liability or equity classified by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480”), then in accordance with ASC 815-40 (“ASC 815”), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480, the Company assesses the requirements under ASC 815, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its Common Stock and whether the warrants are classified as equity under ASC 815 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date.
Stock-based compensation
The Company accounts for its stock-based compensation awards in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and non-employees including grants of stock options, to be recognized as expense in the statements of operations based on their grant date fair values.
The Company periodically issues common stock and common stock options to consultants for various services.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation in the consolidated financial statements and these accompanying notes. The reclassifications did not have a material impact on the Company’s consolidated financial statements and related disclosures. The impact on any prior period disclosures was immaterial.
Redeemable Preferred Stock
Accounting for convertible or redeemable equity instruments in the Company’s own equity requires an evaluation of the hybrid security to determine if liability classification is required under ASC 480-10. Liability classification is required for freestanding financial instruments that are not debt in legal form and are: (1) subject to an unconditional obligation requiring the issuer to redeem the instrument by transferring assets (i.e. mandatorily redeemable), (2) instruments other than equity shares that embody an obligation of the issuer to repurchase its equity shares, or (3) certain types of instruments that obligate the issuer to issue a variable number of equity shares. Securities that do not meet the scoping criteria to be classified as a liability under ASC 480 are subject to redeemable equity guidance, which prescribes securities that may be subject to redemption upon an event not solely within the control of the issuer to be classified outside permanent equity (i.e., classified in temporary equity). Securities classified in temporary equity are initially measured at the proceeds received, net of issuance costs and excluding the fair value of bifurcated embedded derivatives (if any). Subsequent measurement of the carrying value is not required unless the instrument is probable of becoming redeemable or is currently redeemable. When the instruments are currently redeemable or probable of becoming redeemable, the Company will recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the then current maximum redemption value at the end of each reporting period.
New Accounting Pronouncements
Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU No. 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which is intended to enhance the transparency surrounding the use of supplier finance programs. The guidance requires companies that use supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated roll forward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The Company adopted the guidance when it became effective on January 1, 2023, except for the roll forward information, which is effective for fiscal years beginning after December 15, 2023. The Company does not have any supplier finance programs and accordingly, the adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements, and the Company does not believe the impact of adopting the roll-forward requirement in this accounting standard update will be material to the unaudited condensed consolidated financial statements.
11
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The Company adopted the standard on January 1, 2024 with no impact on its unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which will add required disclosures of significant expenses for each reportable segment, as well as certain other disclosures to help investors understand how the CODM evaluates segment expenses and operating results. The new guidance requires public entities to disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), the amount and composition of other segment items by reportable segment, any additional measures of a segment’s profit or loss used by the CODM when assessing performance and deciding how to allocate resources, and the CODM’s title and position. Additionally, public entities will be required to provide in interim periods all disclosures about a reportable segment’s profit or loss that are currently required annually by Topic 280. This standard is effective on a retrospective basis for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The standard will be effective for public companies for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
4. RECAPITALIZATION
As discussed in Note 1, “Nature of Operations”, on December 12, 2023, ECD completed the business combination (the “Business Combination”) contemplated by the merger agreement, dated as of March 3, 2023 (the “Merger Agreement”) by and among EFHT, Humble Imports Inc., d/b/a ECD Auto Design, a Florida corporation (“Humble” or “ECD”), ECD Auto Design UK, Ltd., an England and Wales corporation (the “ECD UK”), EFHAC Merger Sub, Inc., a Florida corporation (“Merger Sub”) and wholly-owned subsidiary of EFHT, and Scott Wallace, as the Securityholder Representative. The Merger Agreement was previously reported on the Current Report on Form 8-K filed by EFHT with the SEC on March 6, 2023.
At the Closing, pursuant to the terms of the Merger Agreement and after giving effect to the redemptions of shares of EFHT Common Stock:
| ● | the
total consideration paid at the Closing (the “Merger Consideration”) by EFHT to Humble security holders was |
| ● | each
share of Merger Sub common stock, par value $ |
Following the filing of a Certificate of Merger with the Florida Department of State, Merger Sub merged with and into Humble with Humble as the surviving corporation, effective December 12, 2023. Thus, Humble became a wholly-owned subsidiary of the Company. In connection with the Merger, the Company changed its name to “ECD Automotive Design, Inc.”
Although EFHAC was the legal acquirer of ECD in the merger, ECD is deemed to be the accounting acquirer, and the historical financial statements of ECD became the basis for the historical financial statements of the Company upon the closing of the merger. ECD was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
| ● | ECD’s existing stockholders have the greatest voting interest in the combined company; | |
| ● | ECD’s existing stockholders have the ability to control decisions regarding election and removal of directors and officers of the combined company; | |
| ● | ECD is the larger entity in terms of substantive operations and employee base; |
12
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| ● | ECD comprises the ongoing operations of the combined company; and | |
| ● | ECD’s existing senior management is the senior management of the combined company. |
In accordance with guidance applicable to these
circumstances, the equity structure has been restated in all comparable periods up to December 12, 2023, to reflect the number of shares
of the Company’s common stock, $
| Cash-trust and cash, net of redemptions | $ | |||
| Less: transaction expenses paid | ( | ) | ||
| Net proceeds from the Business Combination | ||||
| Less: recognition of SPAC closing balance sheet | ( | ) | ||
| Reverse recapitalization, net | $ | ( | ) |
| EFHAC Class A common stock, outstanding prior to the Business Combination | ||||
| Less: Redemption of EFHAC Class A common stock | ( | ) | ||
| Class A common stock of EFHAC | ||||
| EFHAC public rights shares outstanding | ||||
| EFHAC founder shares outstanding | ||||
| EFHAC private shares outstanding | ||||
| EFHAC private rights shares outstanding | ||||
| EFHAC shares issued to EF Hutton (underwriter) | ||||
| Business Combination shares | ||||
| ECD Shares | ||||
| Common Stock immediately after the Business Combination |
| ECD Shares | ECD Shares after conversion ratio | |||||||
| Class A Common Stock (before Defender SPV shares) | ||||||||
Public and private placement warrants
The
Redemption
Prior to the closing of the Business Combination, certain EFHAC public
shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in total redemptions of
13
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. BNMC CONTINUATION CARS LLC ASSET ACQUISITION
On April 3, 2024, the Company entered into an
Asset Purchase Agreement (the “Original Asset Purchase Agreement”) with BNMC Continuation Cars LLC, an Oklahoma limited liability
company and David W. Miller II (collectively “Sellers”), that was subsequently amended on April 24, 2024 Amended and Restated
Asset Purchase Agreement (the A&R Asset Purchase Agreement”).The Company agreed to purchase certain assets relating to vehicle
builds, including the trademark “Brand New Muscle Car” (the “Purchased Assets”) from Sellers in exchange for up
to $
On April 24, 2024, following the satisfaction
or waiver of closing conditions, the Company and Sellers closed the transactions contemplated by the A&R Asset Purchase Agreement.
In connection with the closing of the A&R Asset Purchase Agreement, the Company and the Sellers executed and delivered the following
agreements: (1) the IP Assignment Agreement, dated April 24, 2024, by and between Sellers, as assignors, and ECD, as assignee (the “IP
Assignment Agreement”), (2) the Trademark License Agreement, dated April 24, 2024, by and between ECD, as licensor and Sellers,
as licensees (the “Trademark License Agreement”), and (3) Consulting Agreement, dated April 24, 2024, by and between ECD,
as the company and BNMC Films LLC, a wholly owned subsidiary of David W. Miller II, as the contractor (the “Consulting Agreement”).
The additional $
The assets acquired under the A&R Asset Purchase
agreement were accounted for as an asset acquisition under FASB ASC Topic 805 Business Combinations. The Company utilized a cost
accumulation and allocation model under which the cost of the acquisition was allocated to the assets acquired and the liabilities assumed
based on the principles described in ASC 805-50.
| Consideration shares (1) | $ | |||
| Transaction costs | ||||
| Total purchase consideration | ||||
| Less: Cash deposits | ( | ) | ||
| Inventory | ( | ) | ||
| Deferred revenue | ||||
| Excess acquisition cost over fair value | $ |
| (1) |
| Acquired asset | Fair value | Percent of fair value | Excess acquisition cost over fair value | Allocated cost | ||||||||||||
| Cash deposits (1) | ||||||||||||||||
| Inventory (1) | ||||||||||||||||
| Intangible asset | % | |||||||||||||||
| (1) |
| Fair value | Useful life | ||||||
| Brand name | $ | ||||||
6. INVENTORIES
| June 30, 2024 | December 31, 2023 | |||||||
| Inventory – work in progress | $ | $ | ||||||
| Inventory – work in progress shipping and consumables | ||||||||
| Inventory – work in progress labor | ||||||||
| Resale inventory | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Overhead costs allocated to inventory were $
14
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. PREPAIDS AND OTHER CURRENT ASSETS
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Prepaid expenses other assets | $ | $ | ||||||
| Prepaid insurance | ||||||||
| $ | $ | |||||||
8. PROPERTY AND EQUIPMENT
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Computer equipment | $ | $ | ||||||
| Office furniture | ||||||||
| Manufacturing equipment | ||||||||
| Vehicles | ||||||||
| Building improvements | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense related to the Company’s
property and equipment was $
9. LEASES
The Company’s right-of-use assets and lease liabilities are related to leased office space in Kissimmee, Florida and the UK and beginning on March 23, 2024 a leased warehouse in Kissimmee, Florida. Some of these real estate leases require variable payments of property taxes, insurance, and common area maintenance, in addition to base rent. Balances of the right-of-use assets and lease liabilities are set forth on the accompanying balance sheets.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Lease expenses | ||||||||||||||||
| Operating lease expenses | $ | $ | $ | $ | ||||||||||||
| Variable and other lease costs | ( | ) | ( | ) | ||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| Other information | ||||||||||||||||
| Cash paid for the amounts included in the measurement of lease liabilities for operating leases: | ||||||||||||||||
| Operating cash flows | $ | $ | $ | $ | ||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||||
| Operating leases | ||||||||||||||||
| Weighted-average discount rate: | ||||||||||||||||
| Operating leases | % | % | % | % | ||||||||||||
15
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Total | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 and beyond | ||||
| Less: present value discount | ( | ) | ||
| Lease liability | $ | |||
10. ACCRUED EXPENSES
| June 30, 2024 | December 31, 2023 | |||||||
| Accrued convertible note interest | ||||||||
| Accrued bonuses | ||||||||
| Accrued interest | ||||||||
| Accrued expenses, other | ||||||||
| Warranty reserve | ||||||||
| Accrued payroll | ||||||||
| $ | $ | |||||||
11. OTHER PAYABLE
| June 30, 2024 | December 31, 2023 | |||||||
| PPG payable (as defined below) | $ | $ | ||||||
| Other | - | |||||||
| $ | $ | |||||||
On February 1, 2022, the Company entered into
an Exclusive Supplier Agreement with a third party, pursuant to which the third party issues a pre-bate in the amount of $
16
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. DEBT
Securities Purchase Agreement
On October 6, 2023 the Company entered into a
Securities Purchase Agreement (the “SPA”) with an institutional Lender (the “Lender”) pursuant to which the Company
issued to the Lender a senior secured convertible note (the “Convertible Note”) in exchange for a loan in the principal amount
of $
The Convertible Note has a maturity date of December 12, 2026 and will rank senior to all outstanding and future indebtedness of the Company and its subsidiaries. The Convertible Notes are secured by a first priority perfected security interest in all the existing and future assets of the Company and its direct and indirect subsidiaries, including a pledge of all of the capital stock of each of the subsidiaries. The Convertible Note also provides that the Company and its subsidiaries execute a guaranty (the “Guaranty”) to guaranty the obligations under the Convertible Note and the Security Agreement, that all insider stockholders of the common stock shall execute a lock-up agreement (the “Lock-Up Agreement”) restricting their sale of the common stock until six months after the registration statement registering the shares of common stock underlying the Convertible Note is declared effective and a joinder agreement (the “Joinder Agreement”) pursuant to which the Company and its Subsidiaries agree and consent to be parties to the Security Agreement.
Certain events of default under the Convertible
Note and the Series A Convertible Preferred Stock have occurred based on the following: the Company’s failure to have its resale
registration statement on Form S-1 declared effective by the SEC within sixty (60) days of December 12, 2023, the financial statements
of the Company’s subsidiary for the years ended December 31, 2022 and 2021 and the quarterly periods ended March 31, 2023, June
30, 2023, and September 30, 2023 were required to be restated, the fact that the Company did not file its Annual Report on Form 10-K for
the year ended December 31, 2023 (the “Form 10-K”) within two (2) trading days of the filing due date of the Form 10-K and
the Company did not file its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023 (the “Form 10-Q”)
within two (2) trading days of the filing due date of the Form 10-Q. The Convertible Note and the Series A Convertible Preferred Stock
each provide for certain remedies based upon the occurrence of an event of default. As a result of the default the lender under the Convertible
Note who is also the holder of the Series A Convertible Preferred Stock calculated default interest on the Convertible Note of an additional
The Convertible Note includes an original issue discount of $
17
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| June 30, 2024 | December 31, 2023 | |||||||
| Principal value of Convertible Note | $ | $ | ||||||
| Debt discount, net of amortization | ( | ) | ( | ) | ||||
| Convertible Note payable | $ | $ | ||||||
Floor Plan Payable
On May 15, 2024, the Company entered into a loan
agreement for up to $
| Three months ended June 30, 2024 | Six months ended June 30, 2024 | |||||||
| Contractual interest expense | $ | $ | ||||||
| Debt discount amortization | ||||||||
| Debt issuance cost amortization | ||||||||
| Finance costs and other | ||||||||
| Total | $ | $ | ||||||
13. REDEEMABLE PREFERRED STOCK
The Company is authorized to issue
Dividend Rights
From and after the first date of issuance of any initial shares of Series A Convertible Preferred Stock (the “Initial Issuance Date”) and prior to the date of the initial exercise of the Preferred Warrants (the “Initial Preferred Warrant Exercise Date”), unless a triggering event has occurred and is continuing, holders of Series A Convertible Preferred Stock shall not be entitled to dividends. From and after the Initial Preferred Warrant Exercise Date, dividends on the Series A Convertible Preferred Stock shall commence accruing and shall be computed on the basis of a 360-day year and twelve 30-day months and shall be payable in arrears for on the first trading day of each fiscal quarter (each, an “Dividend Date”). Dividends shall be payable on each Dividend Date, to each record holder of Series A Convertible Preferred Stock on the applicable Dividend Date, in shares of Common Stock (“Dividend Shares”) so long as there has been no Equity Conditions Failure; provided however, that the Company may, at its option following notice to each holder, pay dividend on any Dividend Date in cash (“Cash Dividend”) or in a combination of Cash Dividend and Dividend Shares.
18
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Liquidation Preference
In the event of a liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, the stockholders of Series A Convertible Preferred Stock shall be entitled
to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders
(the “Liquidation Funds”), before any amount shall be paid to the holders of any of shares of junior stock, but pari passu
with any parity stock then outstanding, an amount per share of Series A Convertible Preferred Stock equal to the sum of (i) the Black
Scholes Value (as defined in the Common Warrants) with respect to the outstanding portion of all Common Warrants held by such holder (without
regard to any limitations on the exercise thereof) as of the date of such event and (ii) the greater of (A)
Conversion and Redemption Rights
At any time after the Business Combination, each
stockholder shall be entitled to convert any portion of the outstanding Series A Convertible Preferred Stock held by such stockholder
into validly issued, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock issuable upon conversion
of any Series A Convertible Preferred Stock shall be determined by dividing (i) the Conversion Amount (as defined in the Certificate of
Designation) of such Series A Convertible Preferred Stock by (y) $
The stockholders of Series A Convertible Preferred Stock have redemption rights upon the occurrence of a Triggering Event (as defined in the Certificate of Designation). The Company has the right to redeem all or any part of Series A Convertible Preferred Stock then outstanding.
Voting and Other Preferred Rights
Holders of Series A Convertible Preferred Stock shall have no voting rights, except as required by law (including without limitation, the DGCL) and as expressly provided in the Certificate of Designations.
14. STOCKHOLDERS’ EQUITY
Common stock — The Company is authorized to issue
On October 11, 2023, ECD closed the transaction
memorialized in the Securities Purchase Agreement, dated October 6, 2023 (the “Humble SPA”) by and between ECD and Defender
SPV LLC (the “Investor”) pursuant to which ECD agreed to issue to the Investor (i)
In advance of the Business Combination Closing,
Warrants - As part of EFHAC’s initial public offering (“IPO”),
EFHAC issued warrants to third-party investors where each whole warrant entitles the holder to purchase
19
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
These warrants expire on the fifth anniversary of the Business Combination or earlier upon redemption or liquidation and are exercisable commencing 30 days after the Business Combination, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their warrants on a cashless basis under the circumstances specified in the warrant agreement) and registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder.
Once the Public Warrants become exercisable, the Company may redeem the outstanding Public Warrants:
| ● | in whole and not in part; | |
| ● | at a price of $ | |
| ● | upon not less than | |
| ● | if, and only if, the reported last reported sale price of the Class A ordinary shares for any |
The Company accounts for the
Share-based Compensation
The Company has adopted the Equity Incentive Plan, which plan was approved by stockholders at the Special Meeting. The purposes of the Plan is to promote the interests of the Company and the stockholders of Company by providing (i) executive officers and other employees of the Company and its Subsidiaries (as defined below), (ii) certain consultants and advisors who perform services for the Company and its Subsidiaries and (iii) non-employee members of the Board with appropriate incentives and rewards to encourage them to enter into and continue in the employ and service of the Company and to acquire a proprietary interest in the long-term success of the Company, as well as to reward the performance of these individuals in fulfilling their personal responsibilities for long-range and annual achievements. Eligible individuals under the Plan may receive awards of Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units, Performance Awards and Other Stock-Based Awards.
The maximum number of shares reserved for the
grant of awards under the Plan shall be
The authority to manage the operation of and administer the Plan shall be vested in a committee (the “Committee”), which shall have all the powers vested in it by the terms of the Plan, including exclusive authority to select the participants to the Plan; to make awards; to determine the type, size, terms and timing of the awards (which need not be uniform); to accelerate the vesting of awards granted pursuant to the Plan, including upon the occurrence of a change of control of the Company; to prescribe the form of the award agreement; to modify, amend or adjust the terms and conditions of any award; to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued pursuant to the Plan. The Committee shall be selected by the Board of Directors and shall consist solely of non-employee directors within the meaning of Rule 16b-3 that are outside directors within the meaning of Code Section 162(m).
Grants may be made under the Plan through the tenth (10th) anniversary of the date it is adopted by the Board and approved by the Committee. Awards outstanding as of the date of termination of the Plan shall not be affected or impaired by the termination of the Plan.
As of June 30, 2024, no awards were granted under
the Equity Incentive Plan. Each of its four non-employee directors were expected to receive a one-time grant of stock options to purchase
up to
20
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In February 2024, the Company entered into a one-year
consulting agreement (the “Agreement”) with an investor relations firm for the purposes of developing, implementing and maintaining
an ongoing stock market support system for the Company with the general objective of expanding awareness in the Company. In connection
with this agreement, the Company has committed to pay $
| ● | If within six (6) months of the Effective Date
of the Agreement, investors hold |
| ● | If within six (6) months of the Effective Date
of the Agreement, investors hold |
| ● | If within six (6) months of the Effective Date
of the Agreement, investors hold |
| ● | If within nine (9) months of the Effective Date
of the Agreement the ten (10) day Volume Weighted Average Price (“VWAP”) of Company common stock equals or exceeds $ |
| ● | If within twelve (12) months of the Effective
Date of the Agreement the ten (10) day Volume Weighted Average Price (“VWAP”) of Company common stock equals or exceeds $ |
In the six months ended June 30, 2024, the Company
recognized $
| 2/13/2024 | ||||||||||||
| Initial shares | Tranche 1 | Tranche 2 | ||||||||||
| Stock price | $ | $ | $ | |||||||||
| Volatility | % | % | % | |||||||||
| Remaining term | ||||||||||||
| Risk-free rate | % | % | % | |||||||||
On June 11, 2024, the Company entered into a marketing
service agreement (the “Marketing Service Agreement”) with an advisory firm. In connection with the Marketing Service Agreement,
the Company agreed to pay the advisory firm $
15. COMMITMENTS AND CONTINGENCIES
We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
21
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
From time to time in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. At June 30, 2024 and December 31, 2023, the Company did not have any pending claims, charges or litigation that were expected to have a material adverse impact on its financial position, results of operations or cash flows.
16. RELATED PARTY TRANSACTIONS
The Company has entered into independent contractor
agreements with Luxury Automotive Transport, Inc. The owner of Luxury Automotive Transport, Inc. is the father of Elliot Humble, the Company’s
Director. ECD secures the services of a specialized contractor to handle the transportation and delivery of their custom luxury vehicles,
ensuring these tasks are managed by a company with substantial expertise in this area. Per the agreement, the customer delivery rate is
$
The Company has no commercial agreement with
British Food Stop. British Food Stop sells breakfast and lunch to employees via a food truck on site. The owners of British Food
Stop are the parents of Emily Humble, the Company’s President, Secretary, and Director. For the six months ended June 30, 2024
and 2023, the Company recorded expenses totaling $
17. SUBSEQUENT EVENTS
Subsequent events have been evaluated through August 19, 2024, which represents the date the financial statements were available to be issued, and no events, other than discussed below have occurred through that date that would impact the financial statements.
Convertible Notes – Event of Default
On December 12, 2023, the Company, through its
predecessor EFHT, issued a Senior Secured Convertible Note with an aggregate principal amount equal to $
Preferred Stock – Event of Default
Defender SPV LLC is the holder of
Recent Unregistered Sale of Equity Securities
On
August 8, 2024, the Company and Theodore Duncan (the “Investor”) entered into a securities subscription agreement (the “Subscription
Agreement”), pursuant to which the Company issued and sold in a private transaction
The foregoing summary of the Subscription Agreement and the Warrant Agreement does not purport to be complete and is qualified in its entirety by reference to the actual agreements which are which filed as Exhibit 10.4 (the Subscription Agreement) and Exhibit 10.5 (the Warrant Agreement) to the Company’s Current Report on Form 8-K, filed on August 12, 2024, and are incorporated herein by reference.
22
ECD AUTOMOTIVE DESIGN, INC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The August 9, 2024 Securities Purchase Agreement
On August 9, 2024, ECD Automotive
Design, Inc. (the “Company”) entered into a securities purchase agreement (the “August SPA”) with Defender SPA,
LLC pursuant to which the Defender SPV, LLC agreed to waive the pre-existing events of default that occurred under the December Note and
the Preferred Stock and the Company agreed to execute and deliver to the Lender a second senior secured convertible note (the “August
Note”), in exchange for a loan in the principal amount of $
The August 9, 2024 Senior Secured Convertible Note
The August Note shall, unless
converted or redeemed, mature on December 12, 2026, subject to the holder’s right to extend such date in certain circumstances.
The August Note shall accrue interest at an annual rate equal to the Prime Interest rate plus
At any time after issuance,
all amounts due under the August Note are convertible at any time, in whole or in part, at the holder’s option, into shares of the
Company’s common stock, par value $
| ● | The Conversion Price then in effect; and |
| ● |
The Conversion Price under
the August Note is also subject to a one-time downward adjustment on the effective date of the registration statement providing for the
resale of the Common Stock issuable upon conversion of the August Note to a conversion price equal to the prior 5-day volume weighted
average price, subject to a floor of $
The Company has the right,
at any time, to redeem in cash all, or any portion, of the August Note at a
The August SPA provides further that the Security Agreement, the Registration Rights Agreement, and the Guaranty are amended so that such Agreements cover and are applicable to the August Note, as well as the December Note.
The foregoing summary of the August SPA and the August Note does not purport to be complete and is qualified in its entirety by reference to the actual agreements forms of which are filed as Exhibit 10.1 (the August SPA) and Exhibit 10.2 (the August Note) to the Company’s Current Report on Form 8-K, filed on August 12, 2024, and are incorporated herein by reference.
The August SPA also provided
that in connection with the August Note, the Company will also issue to the Lender at no additional cost
The foregoing summary of the Common Share Warrant does not purport to be complete and is qualified in its entirety by reference to the actual agreement a form of which is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on August 12, 2024, which is incorporated herein by reference.
Amendment to the A&R Asset Purchase Agreement
On August 11, 2024, the Company and BNMC Continuation
Cars LLC and David W. Miller II (collectively the “Sellers”) entered into an Amendment (the “Amendment”) to the
A&R Asset Purchase Agreement, pursuant to which the parties acknowledged that the Sellers have satisfied all conditions to the A&R
Asset Purchase Agreement to fix the aggregate purchase price at $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “our,” “us” or “we” refer to ECD Automotive Design, Inc. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the Annual Report on Form 10-K and Risk Factors contained therein. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” and “continue,” or the negative of such terms or other similar expressions. Such statements include, but are not limited to, possible business combinations and the financing thereof, and related matters, as well as all other statements other than statements of historical fact included in this Form 10-Q. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other SEC filings. Except as expressly required by applicable securities law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Business Overview and Strategy
ECD is an award winning, custom-car builder with a focus on British classic vehicles. We provide clients a one-of-a kind immersive luxury automotive design experience for each of its unique custom builds, where customers may design every aspect of the vehicle. In sequence, our highly trained technicians, master-certified ASE craftsmen, hand-built, from the ground up, in 2,200 man-hours, a completely restored vehicle, replacing substantially its every single component– customizing the engine, the color, the seating, the stitching, the electronics and the cosmetic finishes. All elements of the process are completed in-house. We primarily earn our revenue from the sale of the customized vehicle directly to the customer, as well as by providing repair or upgrade services to customers, and from the sale of extended warranties. Occasionally we earn commissions on resale of used vehicles. We recognized revenue of $17.2 million and $6.6 million for the six months June 30, 2024 and 2023, respectively. We had a net loss of $2.5 million and $1.1 million, respectively for the six months ended June 30, 2024, and 2023.
The Company’s business is subject to retail industry trends and conditions and the sales of new and used vehicles. Worldwide economic conditions impact consumer spending and if the global macroeconomic environment deteriorates, this could have a negative effect on the Company’s revenues and earnings.
Although we believe that our product is geared towards a certain customer base that is not as vulnerable to the global economic conditions, there are certain levels of volatility related to domestic and international markets, increased competition by manufacturers, technological advancements, customer acceptance, discretionary consumer spending and general economic conditions. All of our products are subject to price fluctuations in materials and labor costs, which could affect the carrying value of inventories and gross margins in the future.
Our headquarters, known as the “Rover Dome,” is a 100,000-square-foot facility located in Kissimmee, FL, where 89 employees are currently located, including 72 talented craftsmen and technicians, who hold a combined 69 National Institute for ASE and 4 master level certifications. ECD, by means of ECD UK, operates a logistics center in the United Kingdom where its professionals work to source and transport over-25-year-old work vehicles back to the United States for restoration.
Merger with EF Hutton Acquisition Corporation I
On December 12, 2023, ECD Automotive Design, Inc., formerly known as EF Hutton Acquisition Corporation I (the “Company” or the “Registrant”), completed the business combination (the “Business Combination”) contemplated by the merger agreement, dated as of March 3, 2023, as amended on October 14, 2023 (the “Merger Agreement”) by and among EF Hutton Acquisition Corporation I (“EFHT”), Humble Imports Inc., d/b/a ECD Auto Design, a Florida corporation (“Humble” or “ECD”), ECD Auto Design UK, Ltd., an England and Wales corporation (the “ECD UK”), EFHAC Merger Sub, Inc., a Florida corporation (“Merger Sub”) and wholly-owned subsidiary of EFHT, and Scott Wallace, as the Securityholder Representative. The Merger Agreement was previously reported on the Current Report on Form 8-K filed by EFHT with the SEC on March 6, 2023.
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At the Closing, pursuant to the terms of the Merger Agreement and after giving effect to the redemptions of shares of EFHT Common Stock:
| ● | the total consideration paid at the Closing (the “Merger Consideration”) by EFHT to Humble security holders was 26,500,000 shares of Company Common Stock, 25,000 shares of Company Preferred Stock, a warrant to purchase 1,091,525 shares of Company Common Stock, and a warrant to purchase 15,819 shares of Company Preferred Stock, (the “Securities Consideration”), and a cash payment of $2,000,000 pro rata to the former security holders of Humble (the “Cash Consideration” and, collectively with the Securities Consideration, the “Merger Consideration”); |
| ● | each share of Merger Sub common stock, par value $0.0001 per share (“Merger Sub Common Stock”), issued and outstanding immediately prior to the Effective Time was converted into one newly issued share of Company Common Stock of the Surviving Corporation. |
Following the filing of a Certificate of Merger with the Florida Department of State, Merger Sub merged with and into Humble with Humble as the surviving corporation, effective December 12, 2023. Thus, Humble became a wholly-owned subsidiary of the Company. In connection with the Merger, the Company changed its name to “ECD Automotive Design, Inc.”
Other Recent Developments
Prior to the Merger, on October 6, 2023, ECD amended its articles of incorporation which authorized 100 shares of common stock with no par value to authorize 500,000,000 shares of common stock with no par value and 20,000,000 shares of Preferred Stock with no par value. Included in this amendment, the Company created and designated 54,819 shares of preferred stock as “Series A Convertible Preferred Stock.”
Effective October 11, 2023, ECD closed the transaction memorialized in the Securities Purchase Agreement, dated October 6, 2023 (the “Humble SPA”) by and between ECD and Defender SPV LLC (the “Investor”) pursuant to which ECD agreed to issue to the Investor (i) 39,000 shares of Series A Convertible Preferred Stock of the Company convertible into shares of ECD Common Stock; (ii) 1,100,000 shares of ECD Common Stock; (iii) a warrant to acquire 1,091,525 additional shares of ECD Common Stock; and (iv) a warrant to acquire 15,819 shares of ECD Series A Convertible Preferred Stock, for a purchase price equal to $300,000.
Securities Purchase Agreement
On October 6, 2023, the Company entered into a Securities Purchase Agreement (the “SPA”) with an institutional Lender (the “Lender”) pursuant to which the Company issued to the Lender a senior secured convertible note (the “Convertible Note”) in exchange for a loan in the principal amount of $15,819,209. The Convertible Note shall accrue interest at an annual rate equal to the Prime Interest rate plus 5% per annum which is payable quarterly in cash, or upon the Company’s option, in securities of the Company provided certain conditions are met at the increased interest rate of the Prime Interest rate plus 8% per annum. The Company is required to pay a late charge of 12% per annum (“Late Charges”) on any amount of principal or other amounts that are not paid when due. The Convertible Note is convertible into shares of the Company’s common stock, par value $0.0001 per share at the option of the Lender at a conversion price of $10.00 per share, subject to a one-time downward adjustment on the effective date of the registration statement providing for the resale of the common stock issuable upon conversion of the Convertible Note to a conversion price equal to the prior 5-day volume weighted average price, subject to a floor of $6.00. The conversion price is subject to a downward adjustment if the Company issues equity in the future at a price less than $10.00, except for equity issued in connection with certain strategic acquisitions. The conversion price is also subject to a downward adjustment if the Company fails to satisfy certain performance conditions set forth in the Convertible Note. Upon the Lender’s conversion, the conversion amount shall be equal to 115% of the principal amount to be converted under the Convertible Note plus any accrued and unpaid interest and accrued and unpaid Late Charges on such principal and interest, if any (the “Conversion Rate”). Lender’s ability to convert the Convertible Note into shares of common stock is subject to a 4.99% blocker, such that Lender cannot convert the Convertible Note into shares of common stock to the extent it will make the Lender a beneficial owner of more than 4.99% of the common stock. The Company has the option to prepay the Convertible Note, upon thirty (30) business day written notice, by paying the product of the 20% redemption premium multiplied by the greater of (i) the conversion amount to be redeemed and (ii) the product of (x) the Conversion Rate with respect to the conversion amount to be redeemed multiplied by (y) the greatest closing sale price of the Company’s common stock on any trading day immediately preceding such notice of redemption and the date the Company makes the entire payment required.
The Convertible Note has a maturity date of December 12, 2026, and will rank senior to all outstanding and future indebtedness of the Company and its subsidiaries. The Convertible Notes are secured by a first priority perfected security interest in all the existing and future assets of the Company and its direct and indirect subsidiaries, including a pledge of all of the capital stock of each of the subsidiaries. The Convertible Note also provides that the Company and its subsidiaries execute a guaranty (the “Guaranty”) to guaranty the obligations under the Convertible Note and the Security Agreement, that all insider stockholders of the common stock shall execute a lock-up agreement (the “Lock-Up Agreement”) restricting their sale of the common stock until six months after the registration statement registering the shares of common stock underlying the Convertible Note is declared effective and a joinder agreement (the “Joinder Agreement”) pursuant to which the Company and its Subsidiaries agree and consent to be parties to the Security Agreement.
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The Convertible Note includes an original issue discount of $2,119,209 and debt issuance costs of $3,088,883. For the three and six months ended June 30, 2024, the Company recorded $434,008 and $868,016, respectively, of amortization expense of the debt discount and debt issuance costs in the consolidated statement of operations. As of June 30, 2024, and 2023, accrued interest on the Convertible Note in the consolidated balance sheets was $699,121 and $0, respectively.
On April 3, 2024, we entered into an Asset Purchase Agreement (the “Original Asset Purchase Agreement”) with BNMC Continuation Cars LLC, an Oklahoma limited liability company and David W. Miller II (collectively “Sellers”) That was subsequently amended on April 24, 2024, into an Amended and Restated Asset Purchase Agreement (the A&R Asset Purchase Agreement”). The Company agreed to purchase certain assets relating to vehicle builds, including the trademark “Brand New Muscle Car” (the “Purchased Assets”) from Sellers in exchange for up to $1.25 million. The price for the Purchased Assets under the A&R Asset Purchase Agreement is to be equal to $950,000 plus an additional $300,000 for up to 3 additional new vehicle builds the Sellers refers to the Company that are accepted by the Company on or before June 24, 2024 (the “A&R Purchase Price”). The A&R Purchase Price is to be paid to Seller by the issuance of such number of shares of Common Stock equal to (a) the A&R Purchase Price divided by (b) the closing price of the Common Stock on the five-month anniversary of the closing date (the “Consideration Shares”). The A&R Purchase Price is to be paid by the Company to the Sellers by the issuance of the Consideration Shares within three (3) business days of the five-month anniversary of the closing date.
On April 24, 2024, following the satisfaction or waiver of the closing conditions, the Company and Sellers closed the transactions contemplated by the A&R Asset Purchase Agreement. In connection with the closing of the A&R Asset Purchase Agreement, the Company and the Sellers executed and delivered the following agreements: (1) the IP Assignment Agreement, dated April 24, 2024, by and between Sellers, as assignors, and ECD, as assignee (the “IP Assignment Agreement”), (2) the Trademark License Agreement, dated April 24, 2024, by and between ECD, as licensor and Sellers, as licensees (the “Trademark License Agreement”), and (3) Consulting Agreement, dated April 24, 2024, by and between ECD, as the company and BNMC Films LLC, a wholly owned subsidiary of David W. Miller II, as the contractor (the “Consulting Agreement”). The additional $300,000 of consideration was fully earned by June 24, 2024.
Key Factors Affecting Results of Operations
We have set out below a discussion of the key factors that have affected our financial performance and that are expected to impact our performance going forward. These factors present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this proxy statement/prospectus titled “Risk Factors”.
Supply Chain Management
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of COVID-19. The pandemic has significantly impacted the economic conditions in the United States, as federal, state, and local governments have reacted to the public health crisis, creating significant uncertainties in the United States, as well as the global economy. In the interest of public health and safety, U.S. jurisdictions (national, state, and local) where our primary operations and those of many of our customers are located, required mandatory business closures and capacity limitations, or other restrictions for those that were permitted to continue to operate. In view of such restrictions, we interrupted our operations on April 1, 2020 and paid all staff a retained reduced rate during the closure. We progressively resumed production as from May 1, 2020, reaching our standard production levels by June 2020. Such interruption caused us to produce six fewer vehicles in 2020 compared to the budget.
Due to the 2020 COVID-19 pandemic, our operations were primarily impacted by the disruption in the global supply chain and price increases in materials and shipping costs, but not in our internal operations, as we and our major suppliers were considered part of the essential activities. In 2020, the cost of available shipping increased due to the lack of port workers and tractor trailer drivers, which negatively affected the transit of cargo ships and caused delays in the delivery of merchandise. At the time, we mostly relied on the Ports of Brunswick and Savannah for the delivery of our parts and materials into the United States. Consequently, in order to mitigate such impacts, we have included additional shipping routes to our operations, namely the Ports of Baltimore, Jacksonville, and Everglades (Miami). In 2021, we avoided impacts to our operations by stocking raw materials and internal inventory prior to our closure in April 2020, ensuring that we would be able to operate at a normal pace once we resumed operations.
During 2022, our North Line was open and operating at its full capacity completing four to five full builds per month.
We continue to explore opportunities to reduce our costs, improve efficiencies, and increase our margins. As a result of these efforts, in July 2021, two shareholders of the Company opened ECD UK. ECD UK was formed to facilitate procuring parts and vehicles overseas for the Company.
We continue to focus on cash flow and anticipate having sufficient resources to operate during 2024.
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Manufacturing Facility Expansion
On August 11, 2021, we entered into a lease agreement, whereby the Company agreed to lease 100,000 sq. ft. of manufacturing, warehouse, and office space in Kissimmee, Florida, for a term of 125 months following the lease commencement date. The new state-of-the art facility allows for production efficiencies, enables us to scale our productions, and positions us for extensive growth. We increased our production by approximately 20% in 2023 utilizing one shift. We are planning to add an additional 10,000 sq. ft. space in the second half of 2024 to accommodate the storage of delivery ready vehicles as well as base vehicles shipped from ECD UK.
Our Growth Plans
We introduced Jaguar E-type in 2022, which we sell at a higher price point and with a higher gross margin as compared to our traditional Land Rover Defender, Range Rover and Land Rover Series models. In April 2024, we purchase the assets of Bran New Muscle Car (BNMC). We plan to leverage the assets of the production of Mustangs in 2024 and 2025. The asset purchase resulted in 6 Mustang contracts. We currently use a third of our production floor for quality control and warranty services. We plan to relocate our quality and warranty services in 2024 to a new facility that will function as a warranty, used vehicles sales, and service center, and to add a third production area that will focus on iconic American vehicles. We expect our margins to further improve as we increase scale, resulting in lower component costs and improved absorption of our fixed manufacturing overhead.
We have opened new marketing channels in 2024. This includes (i) outreach events in the U.S. locations where we have experienced high customer demand, (ii) various events on-site with attendance of market influencers increasing customer participation, (i) marketing by expanding our relationship with the press and social influencers; and (ii) expand into international markets, such as Europe, Canada and United Arab Emirates.
Key Business Metrics
We use certain key metrics and financial measures not prepared in accordance with GAAP to evaluate and manage our business.
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as earnings (loss) before interest expense, income tax expense (benefit), non-recurring fees, equity compensation, other (income) expenses, foreign exchange gains and losses, and depreciation and amortization, as adjusted to exclude transaction expenses. See “Non-GAAP Financial Measures” for a reconciliation of GAAP net loss to adjusted EBITDA. We utilize adjusted EBITDA as an internal performance measure in the management of our operations because we believe the exclusion of these non-cash and non-recurring charges allow for a more relevant comparison of our results of operations to other companies in our industry. Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define adjusted EBITDA differently.
The following table provides a reconciliation of net loss to adjusted EBITDA to net loss for the periods presented:
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net loss | $ | (926,069 | ) | $ | 36,162 | $ | (2,476,373 | ) | $ | (1,086,404 | ) | |||||
| Excluding: | ||||||||||||||||
| Interest expense | 1,151,548 | - | 2,122,325 | - | ||||||||||||
| Income tax (benefit) expense | (9,712 | ) | - | 522,568 | - | |||||||||||
| Non-recurring professional fees | - | - | 408,936 | 210,099 | ||||||||||||
| Equity compensation expense | 139,459 | - | 256,959 | - | ||||||||||||
| Other (income) expense, net | (103,865 | ) | (54,773 | ) | (152,391 | ) | (77,150 | ) | ||||||||
| Foreign exchange loss | 5,607 | - | 10,311 | - | ||||||||||||
| Depreciation | 143,728 | 27,685 | 191,382 | 54,993 | ||||||||||||
| Adjusted EBITDA | $ | 400,696 | $ | 9,074 | $ | 883,717 | $ | (898,462 | ) | |||||||
Adjusted EBITDA increased $0.4 million for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. This increase in gross profit was driven by the increase in average selling price per vehicle of $46,604 offset by high public company expenses. The Company also realized a significant improvement in our gross margins for Builds.
Adjusted EBITDA increased $1.8 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. This increase in gross profit was driven by the increase in average selling price per vehicle of $52,650 offset by high public company expenses. The Company also realized a significant improvement in our gross margins for Builds.
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Components of Results of Operations
We manage our business globally within one operating segment, which is consistent with how our management reviews our business, makes investment and resource allocation decisions, and assesses operating performance.
Net Revenues
Our Net Revenues consist of product revenue, and warranty and other revenue. Each of the categories is described below.
Product Revenue – Builds
The Company generates revenue through the sale of rebuilt or upgraded Land Rover Defender, Range Rover Classics, Land Rover Series and Jaguar E-Types vehicles directly to customers. There is a single performance obligation in all of the Company’s contracts, which is the Company’s promise to transfer the Company’s product to customers based -the transfer of title or shipping terms in the arrangement. The entire transaction revenue is allocated to this performance obligation.
Upon execution of the contract, the Company bills its customers the total consideration of the contract. The Company receives from 25% to 50% of the total consideration of the contract from its customers as acceptance of contract, excluding any upgrades, which are initially recorded in customer deposits, and are recognized as net revenue when the products are shipped.
Warranty and Other Revenue
The Company also generates revenue through the sale of extended warranties to customers. The customers agree to the terms and conditions at the time of purchase, which represents the customer arrangements. The period covered by the extended warranty is usually two years. The Company has elected to apply the optional exemption provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
The Company generates revenue through providing repair services to customers. The Company agrees with the customer on a budget. There is a single performance obligation, which is the Company’s promise to perform the retrofit and repair work on the vehicle. The entire transaction price is allocated to this single performance obligation. Service revenue is recognized when the repair work is completed, and the customer receives the vehicle.
Product Limited Warranty
Consistent with industry practice, the Company generally offers customers a limited warranty for work performed on the vehicle under the builds/sales contract. The customers do not have a contractual right of return. The Company only offers a limited warranty for the work performed on the vehicle under the contract. If a customer disputes any work performed, the Company will attempt to remedy the work; however, it shall not be required to discount the transaction price.
Cost of Goods Sold
Our cost of goods sold primarily consists of cost of materials, labor costs, shipping and freight, customs and duty, outside services, as well as tools and supplies used in the manufacturing facility. Labor costs are tracked by direct labor, warranty labor, and quality control labor.
Advertising and Marketing
The Company’s sales and marketing expenses primarily consist of advertising costs, public relations, marketing and promotional expenses, travel costs, and printing expenses. We expect advertising and marketing expenses will increase in absolute terms with the continued growth of our business and the introduction of new marketing channels.
General and Administrative Expenses
The Company’s general and administrative expenses primarily consist of salaries, benefits and other personnel related costs, professional fees, information technology, outside services, transportation costs, occupancy costs, employee recruitment and training costs, and general office expenses. We expect general and administrative expenses will increase in absolute terms to support continued growth of our business. We also expect to continue to incur the additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
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Depreciation and Amortization Expense
The Company’s depreciation expense consists of depreciation of our long-term assets, building improvements, manufacturing equipment and tooling, office equipment, and furniture and fixtures. Depreciation is calculated using the straight-line method over the asset’s estimated useful life of 5 to 15 years.
The Company amortizes its intangible assets related to the Brand New Muscle Car asset acquisition over the period it expects to utilize the name, or two years.
Other Income and Expenses
The Company’s other income and expenses primarily consist of interest income and expense and other income and expense items. These categories are described in more detail below.
Interest Expense
Interest expense represents interest on the Convertible Note and amortization of the debt issuance costs.
Other Income and Expense
The Company’s other income and expenses represent foreign currency exchange gains and losses, interest income, and other miscellaneous items. Our interest income represents bank interest earned on cash in the Company’s savings account.
Results of Operations
To provide readers with meaningful comparisons, the following analysis provides comparisons of the financial results for the three and six months ended June 30, 2024 and 2023. We analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Operations and Comprehensive (Loss) Income.
Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
The following table sets forth our results of operations for the periods presented:
| For the three months ended | ||||||||||||||||
| June 30, | Variance | Variance | ||||||||||||||
| 2024 | 2023 | ($) | (%) | |||||||||||||
| Revenue, net | $ | 8,872,003 | $ | 3,867,903 | $ | 5,004,100 | 129.4 | % | ||||||||
| Cost of goods sold | 6,054,705 | 2,639,201 | 3,415,504 | 129.4 | % | |||||||||||
| Gross profit | 2,817,298 | 1,228,702 | $ | 1,588,596 | 129.3 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | 271,063 | 101,568 | 169,495 | 166.9 | % | |||||||||||
| General and administrative expenses | 2,284,998 | 1,118,060 | 1,166,938 | 104.4 | % | |||||||||||
| Depreciation and amortization expenses | 143,728 | 27,685 | 116,043 | 419.2 | % | |||||||||||
| Total operating expenses | 2,699,789 | 1,247,313 | 1,452,476 | 116.4 | % | |||||||||||
| Income (loss) from operations | 117,509 | (18,611 | ) | 136,120 | (731.4 | )% | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | -1,151,548 | - | 1,151,548 | 100.0 | % | |||||||||||
| Foreign exchange loss | (5,607 | ) | - | 5,607 | 100.0 | % | ||||||||||
| Other income (expense), net | 103,865 | 54,773 | (158,638 | ) | (289.6 | )% | ||||||||||
| Total other income (loss) | -1,053,290 | 54,773 | 998,517 | 1,823.0 | % | |||||||||||
| Loss before income taxes | (935,781 | ) | 36,162 | 1,134,637 | 3,137.7 | % | ||||||||||
| Income tax expense | 9,712 | - | 9,712 | 100.0 | % | |||||||||||
| Net loss | $ | (926,069 | ) | $ | 36,162 | $ | 1,144,349 | 3,164.5 | % | |||||||
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Net Revenue by Product Category
The following table summarizes the Company’s net unaudited consolidated revenues disaggregated by product category:
| Three Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Builds | $ | 7,989,055 | $ | 3,824,181 | $ | 4,164,874 | 108.9 | % | ||||||||
| Warranty | 882,948 | 43,722 | 839,226 | 1,919.5 | % | |||||||||||
| Total revenues, net | $ | 8,872,003 | $ | 3,867,903 | $ | 5,004,100 | 129.4 | % | ||||||||
Vehicle builds represented 90.0% of the revenue for the three months ended June 30, 2024, compared to 98.9% for the three months ended June 30, 2023, and increased $4,164,874 for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The primary driver of the revenue increase for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was the increase in average selling price per vehicle by $46,604 and increased production due to efficiency improvements. The increased average selling price contributed $1,160,110 to the increase in revenue and the increase in production contributed $3,004,714 to the increase in revenue.
Used sales, parts and warranty revenue represent a small portion of our revenue. Those categories combined represented 10.0% of the revenue for the three months ended June 30, 2024, compared to 1.1% for the three months ended June 30, 2023, and an increase of $839,226 for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023.
Gross Profit and Gross Profit Margin Percentage
| Three Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Builds | $ | 2,665,796 | $ | 1,253,375 | $ | 1,412,421 | 112.7 | % | ||||||||
| 33.37 | % | 32.8 | % | 0.6 | % | |||||||||||
| Warranty and others | 151,502 | (24,673 | ) | 176,175 | (714.0 | )% | ||||||||||
| 17.2 | % | (56.4 | )% | 73.6 | % | |||||||||||
| Total Gross Profit | $ | 2,817,298 | $ | 1,228,702 | 1,588,596 | 129.3 | % | |||||||||
| 31.8 | % | 31.8 | % | 0.0 | % | |||||||||||
Gross profit in the builds category increased by 112.7% during the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Higher ASP’s and efficiencies in the build process drove profit margin higher in the second quarter of 2024, compared to the second quarter of 2023. Also contributing to overall gross profit margin improvement was used, parts and warranty sales in the quarter.
Operating Expenses
| Three months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | $ | 271,063 | $ | 101,568 | $ | 169,495 | 166.9 | % | ||||||||
| General and administrative expenses | 2,284,998 | 1,118,060 | 1,166,938 | 104.4 | % | |||||||||||
| Depreciation and amortization expenses | 143,728 | 27,685 | 116,043 | 419.2 | % | |||||||||||
| Total operating expenses | $ | 2,699,789 | $ | 1,247,313 | $ | 1,452,476 | 116.4 | % | ||||||||
The Company experienced an overall increase in operating expenses of $1,452,476 for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023
For the three months ended June 30, 2024, selling and marketing expenses increased $169,495, as compared to the three months ended June 30, 2023. This increase was primarily attributable to an increased volume of advertising and press as the Company expanded its marketing footprint with existing products and the launch of Mustangs in the second quarter of 2024.
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General and administrative expenses increased $1,166,938 during the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. The primary driver for the increase in general and administrative expenses for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 was due to public company costs. Increases were related to front office staff and salaries of $470,038, additional insurance costs of $116,570, and higher professional fees of $391,954. We have invested in our corporate organization and incurred additional expenses associated with transitioning to, and operating as, a public company, including increased legal, audit, tax and accounting costs, investor relations costs, higher insurance premiums and compliance costs. As a result, we expect that general and administrative expenses will increase, on a year-over-year basis in absolute dollars but decline as a percentage of total revenue over time as we grow the revenue of the business. Our inability to scale our expenses could negatively impact profitability.
For the three months ended June 30, 2024, depreciation and amortization expense increased $116,043, as compared to the three months ended June 30, 2023. This increase was primarily due to the amortization of the Brand New Muscle Car brand name.
Other (Expense)Income
| Three Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Interest expense | $ | (1,151,548 | ) | $ | - | $ | 1,151,548 | 100.0 | % | |||||||
| Foreign exchange loss | (5,607 | ) | - | 5,607 | 100.0 | % | ||||||||||
| Other income (expense), net | 103,865 | 54,773 | 49,092 | 89.6 | % | |||||||||||
| Total other income (loss) | $ | (1,053,290 | ) | $ | 54,773 | $ | 1,206,247 | 2,202.3 | % | |||||||
For the three months ended June 30, 2024, other income (expense), net increased $49,092, as compared to the three months ended June 30, 2023 due to an increase in interest income.
For the three months ended June 30, 2024, interest expense increased $1,151,548 as compared to the three months ended June 30, 2023, due to the accrued interest and amortization of debt issuance costs on the Convertible Note.
Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023
The following table sets forth our results of operations for the periods presented:
| For the six months ended | ||||||||||||||||
| June 30, | Variance | Variance | ||||||||||||||
| 2024 | 2023 | ($) | (%) | |||||||||||||
| Revenue, net | ||||||||||||||||
| Cost of goods sold | $ | 17,180,042 | $ | 6,575,229 | $ | 10,604,813 | 161.3 | % | ||||||||
| Gross profit | 11,885,805 | 5,042,435 | 6,843,370 | 135.7 | % | |||||||||||
| 5,294,237 | 1,532,794 | $ | 3,761,443 | 245.4 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| General and administrative expenses | 614,472 | 206,788 | 407,684 | 197.2 | % | |||||||||||
| Depreciation and amortization expenses | 4,461,943 | 2,434,567 | 2,027,376 | 83.3 | % | |||||||||||
| Total operating expenses | 191,382 | 54,993 | 136,389 | 248.0 | % | |||||||||||
| 5,267,797 | 2,696,348 | 2,571,449 | 95.4 | % | ||||||||||||
| Income (loss) from operations | ||||||||||||||||
| 26,440 | (1,163,554 | ) | 1,189,994 | (102.3 | )% | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Foreign exchange loss | (2,122,325 | ) | - | (2,122,325 | ) | 100.0 | % | |||||||||
| Other income (expense), net | (10,311 | ) | - | (10,311 | ) | 100.0 | % | |||||||||
| Total other income (loss) | 152,391 | 77,150 | 75,241 | 97.5 | % | |||||||||||
| Loss before income taxes | (1,980,245 | ) | 77,150 | (2,057,395 | ) | (2,666.7 | )% | |||||||||
| Income tax expense | (1,953,805 | ) | (1,086,404 | ) | (867,401 | ) | 79.8 | % | ||||||||
| (522,568 | ) | - | (522,568 | ) | 100.0 | % | ||||||||||
| Net loss | ||||||||||||||||
| $ | (2,476,373 | ) | $ | (1,086,404 | ) | $ | (1,389,969 | ) | 127.9 | % | ||||||
The tables presented in this section set forth, for the periods indicated, certain Statement of Operations data for the six months ended June 30, 2024, and June 30, 2023.
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Net Revenue by Product Category
The following table summarizes the Company’s net unaudited consolidated revenues disaggregated by product category:
| Six Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Builds | $ | 16,206,702 | $ | 6,475,431 | $ | 9,731,271 | 150.3 | % | ||||||||
| Warranty | 973,340 | 99,798 | 873,542 | 875.3 | % | |||||||||||
| Total revenues, net | $ | 17,180,042 | $ | 6,575,229 | $ | 10,604,813 | 161.3 | % | ||||||||
Vehicle builds represented 94.3% of the revenue for the six months ended June 30, 2024, compared to 98.5% for the six months ended June 30, 2023, and increased $9,731,271 for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The primary driver of the revenue increase for the six months ended June 30, 2024 compared to the three months ended June 30, 2023 was the increase in average selling price per vehicle by $52,650 and increased production due to efficiency improvements. The increased average selling price contributed $2,737,806 to the increase in revenue and the increase in production contributed $6,993,465 to the increase in revenue.
Used sales, parts and warranty revenue represented 5.7% of the revenue for the six months ended June 30, 2024, compared to 1.5% for the six months ended June 30, 2023, a decrease of $873,542 for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.
Gross Profit and Gross Profit Margin Percentage
| Six Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Builds | $ | 5,199,130 | $ | 1,514,447 | $ | 3,684,683 | 243.3 | % | ||||||||
| 32.08 | % | 23.4 | % | 8.7 | % | |||||||||||
| Warranty and others | 95,107 | 18,347 | 76,760 | 418.4 | % | |||||||||||
| 9.8 | % | 18.4 | % | (8.6 | )% | |||||||||||
| Total Gross Profit | $ | 5,294,237 | $ | 1,532,794 | $ | 3,761,443 | 245.4 | % | ||||||||
| 30.8 | % | 23.3 | % | 7.5 | % | |||||||||||
Gross profit in the Builds category increased by 243.3% during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Higher ASP’s and efficiencies in the build process drove profit margin higher in the first half of 2024, compared to the first half of 2023. Also contributing to overall gross profit margin improvement was Used, Parts & Warranty sales in the six month period.
Operating Expenses
| Six months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | $ | 614,472 | $ | 206,788 | $ | 407,684 | 197.2 | % | ||||||||
| General and administrative expenses | 4,461,943 | 2,434,567 | 2,027,376 | 83.3 | % | |||||||||||
| Depreciation and amortization expenses | 191,382 | 54,993 | 136,389 | 248.0 | % | |||||||||||
| Total operating expenses | $ | 5,267,797 | $ | 2,696,348 | $ | 2,571,449 | 95.4 | % | ||||||||
The Company experienced an overall increase in operating expenses of $2,571,449 for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023
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For the six months ended June 30, 2024, selling and marketing expenses increased $407,684, as compared to the six months ended June 30, 2023. This increase was primarily attributable to an increased volume of advertising and printing as the Company increased its advertising, promotions, and social media presence in response to higher online traffic. In addition, part of the increase was due to the increased price of web advertising compared to the prior year.
General and administrative expenses increased $2,027,376 during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The primary driver for the increase in general and administrative expenses for the six months ended June 30, 2024 as compared to the three six ended June 30, 2023 was due to the public company costs. Increases were related to front office staff and salaries of $1,060,289, additional insurance costs of $237,641, and higher professional fees of $465,073. We have invested in our corporate organization and incurred additional expenses associated with transitioning to, and operating as, a public company, including increased legal, audit, tax and accounting costs, investor relations costs, higher insurance premiums and compliance costs. As a result, we expect that general and administrative expenses will increase, on a year-over-year basis in absolute dollars but decline as a percentage of total revenue over time as we grow the revenue of the business. Our inability to scale our expenses could negatively impact profitability.
For the six months ended June 30, 2024, depreciation and amortization expense increased $136,389, as compared to the six months ended June 30, 2023. This increase was primarily due to the amortization of Brand New Muscle Car brand, and additional depreciation related to equipment purchases.
Other (Expense)Income
| Six Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Change | Change % | |||||||||||||
| Interest expense | $ | (2,122,325 | ) | $ | - | $ | 2,122,325 | 100.0 | % | |||||||
| Foreign exchange loss | (10,311 | ) | - | 10,311 | 100.0 | % | ||||||||||
| Other income (expense), net | 152,391 | 77,150 | 75,241 | 97.5 | % | |||||||||||
| Total other income (loss) | $ | (1,980,245 | ) | $ | 77,150 | $ | 2,207,877 | 2861.8 | % | |||||||
For the six months ended June 30, 2024, other income (expense), net increased $75,241, as compared to the six months ended June 30, 2023 due to an increase in interest income.
For the six months ended June 30, 2024, interest expense increased $2,122,325 as compared to the six months ended June 30, 2023, primarily due to the accrued interest and amortization of debt issuance costs on the Convertible Note and Floor Plan Payable.
Liquidity and Capital Resources
Uses and Availability of Funds
Our primary sources of funds are customer deposits, collections of deferred revenue, and proceeds from loan payable. The Company relies on customer deposits to fund working capital requirements. Upon execution of the contract, the Company bills its customers the total consideration of the contract. The Company receives from 25% to 50% of the total consideration of the contract, except for upgrades, from its customers as acceptance of contract, which are initially recorded in customer deposits, and are recognized as net revenue when the products are titled or delivered. As of June 30, 2024, the Company had customer deposits in the amount of $7,120,378. In addition to the customer deposits, as of June 30, 2024, the Company had $8,373,028 of contract consideration allocated to a performance obligation not yet completed, and deferred revenue for vehicles that were completed, but title had not been transferred to the customer as of June 30, 2024.
Our primary uses of capital are, and we expect will continue to be, inventory purchases, manufacturing costs, compensation and related expenses, advertising and marketing, legal and other regulatory expenses, general administrative costs, and capital expenditures. Our capital requirements will depend on many factors, including our revenue growth rate, the timing and amount of cash received from customers, the expansion of sales and marketing activities and the timing and extent of spending to support development efforts.
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Financial Condition
We are subject to credit risks, particularly if any of the deferred revenue represents a limited number of customers. If we are unable to collect our deferred revenue as it becomes due, it could adversely affect our liquidity and working capital position.
Generally, we have been able to collect our deferred revenue in the ordinary course of business. We hold vehicles as collateral to secure payment from customers. We do not have trade credit insurance for any of our customers to mitigate accounts receivable risk.
As of June 30, 2024, we had cash and cash equivalents of $5,660,684. The Company’s primary source of operating funds since inception has been from cash receipts from sales and proceeds from loan payable. Immediately prior to the closing of the Business Combination on December 12, 2023, the Company executed and delivered to the Lender a senior secured convertible note (the “Convertible Note”), in exchange for a loan in the principal amount of $15,819,209. The Convertible Note shall accrue interest at an annual rate equal to the Prime Interest rate plus 5% per annum which is payable monthly in cash or, upon the Company’s option, in securities of the Company provided certain conditions are met at the increased interest rate of the Prime Interest rate plus 8% per annum. The Company is required to pay a late charge of 12% per annum (“Late Charges”) on any amount of principal or other amounts that are not paid when due. The Convertible Note is convertible into shares of Company Common Stock at the option of the Lender at a conversion price of $10.00 per share, subject to a one-time downward adjustment on the effective date of the registration statement providing for the resale of the Company Common Stock issuable upon conversion of the Convertible Note to a conversion price equal to the prior 5-day volume weighted average price, subject to a floor of $6.00. The note has a three-year term.
Based on the cash balance of approximately $5.7 million and cash flow from operations, after interest payments, the Company has determined that the Company’s sources of liquidity will be sufficient to meet the Company’s financing requirements for the remainder of 2024.
Cash Flows
Cash flows for the six months ended June 30, 2024 and 2023
Increases in inventory, deferred revenue, accrued expenses and current lease liability were the primary drivers that resulted in the increase in the working capital deficit. We plan to use our current cash position as well as collections from accounts receivable, and the cash generated from our operations, when applicable, to fund the current operations of the business. The following table summarizes our cash flow activity for the periods presented:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Provided By (Used In) | ||||||||
| Operating Activities | $ | (3,722,837 | ) | $ | (1,077,946 | ) | ||
| Investing Activities | (46,690 | ) | (13,717 | ) | ||||
| Financing Activities | 1,296,000 | (145,149 | ) | |||||
| Net decrease in cash and cash equivalents | $ | (2,473,527 | ) | $ | (1,236,812 | ) | ||
Net cash used in operating activities
Operating activities used cash of $3,722,837 for the six months ended June 30, 2024, primarily due to the decrease in deferred revenue and the increase in prepaid and other current assets, partially offset by a decrease in inventory and an increase in accounts payable and accrued expenses.
Operating activities used cash of $1,077,946 for the six months ended June 30, 2024, primarily due to an increase in deferred revenue and a decrease in other receivable and prepaid and other current assets, partially offset by an increase in inventories and a decrease in accrued expenses and other payable.
Net cash used in investing activities
Investing activities used cash of $46,690 for the six months ended June 30, 2024, related to the purchasing of warehouse equipment.
Investing activities used cash of $13,717 for the six months ended June 30, 2023, related to the purchasing of warehouse equipment and a press vehicle.
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Net cash provided (used in) by financing activities
Financing activities provided cash of $1,296,000 for the six months ended June 30, 2024, primarily related to proceeds net of repayments of floor loans.
Financing activities used cash of $145,149 for the six months ended June 30, 2023, due to distributions to the shareholders.
Contractual Obligations and Commitments
The following table summarizes our future material cash requirements from our contractual lease obligations at June 30, 2024:
| Total Future Lease Obligations | ||||
| 2024 | $ | 280,053 | ||
| 2025 | 575,360 | |||
| 2026 | 535,720 | |||
| 2027 | 492,318 | |||
| 2028 and beyond | 3,274,183 | |||
| $ | 5,157,634 | |||
We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings and possible future public or private debt and/or equity offerings. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, and access to equity capital markets, taken together, provides adequate resources to fund ongoing operating expenditures for the next twelve months. In the event that they do not, we may require additional funds in the future to support our working capital requirements, or for other purposes, and may seek to raise such additional funds through the sale of public or private equity and/or debt financings, as well as from other sources. No assurance can be given that additional financing will be available in the future or that if available, such financing will be obtainable on terms favorable when required.
Impact of Inflation and Currency Fluctuation
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we have experienced varying levels of inflation during the three and six months ended June 30, 2024, resulting in part from increased shipping and transportation costs, increased product costs, increased labor costs in the supply chain. We have also experienced varying levels of inflation during the three and six months ended June 30, 2023, resulting in part from increased product costs and increased labor costs by the uncertain economic environment. The Company has been actively working to mitigate these factors through a combination of sales price adjustments and other sourcing strategies, as such issues have continued into 2024. Severe increases in inflation could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of operations. Inflation did not have a material impact on our operations for the three and six months ended June 30, 2024, or June 30, 2023.
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into U.S. dollars using prevailing exchange rates at the relevant period end. Net currency exchange gains (losses) were not material for the three and six months ended June 30, 2024, and 2023.
Seasonality
We typically do not experience seasonality in our operations.
Related Party Transactions
The Company has related party transactions consisting of payments for services provided by companies owned by certain family members of the shareholders. See Note 15 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
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Recent Accounting Pronouncements
We are required to adopt certain new accounting pronouncements. See Note 3 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form10-Q.
Critical Accounting Policies and Estimates
General
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions can be subjective and complex and may affect the reported amounts of assets and liabilities, revenues, and expenses reported in those financial statements. As a result, actual results could differ from such estimates and assumptions. During 2021 and 2022, there have been continuous changes to the global economic situation, as a consequence of the COVID-19 pandemic. It is possible that this could cause changes to estimates, as a result of the financial circumstances of the markets in which the Company operates, and the health of the global economy. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements.
While our significant accounting policies are described in more detail in Note 4 to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue is recognized when the Company transfers promised goods or services to the customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under the agreement, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Product Revenue – Builds
The Company generates revenue through the sale of Land Rover vehicles directly to customers. The Company considers the build/sales contracts to be the contracts with the customer. There is a single performance obligation in all of the Company’s contracts, which is to build a vehicle based on customer specifications, transfer title or delivery of product under the terms in the arrangement. Product revenue is recognized when the product build is completed and title has been transferred, or product is delivered. The Company concluded that this was the appropriate time to record revenue based on the following criteria. (1) ECD has a right to full payment for the product. (2) The customer has legal title to the product and (3) The customer has the significant risks and rewards of ownership of the asset. There are certain build contacts, “owner donor vehicles” where title remains with the customer for the entire project. Under these contracts, revenue is recognized at a point in time when the truck is delivered back to the customer.
Upon execution of the contract, the Company bills its customers the total consideration of the contract. The Company receives approximately 50% of the total consideration of the contract from its customers as acceptance of contract, which is initially recorded as deferred revenue. Upon completion of the build the remaining 50% is billed and initially recorded as deferred revenue, and recognized as net revenue when the product build is completed, and title is legally transferred.
Warranty and Other Revenue
The Company generates revenue through the sale of extended warranties to customers. The customers agree to the terms and conditions at the time of purchase, which represents the customer arrangements. The period covered by the extended warranty is usually one year. The Company has elected to apply the optional exemption provided in ASC 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
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The Company also generates revenue through providing repair services to customers. The Company agrees with the customer on a budget. There is a single performance obligation, which is the Company’s promise to perform the retrofit or repair work on the vehicle. The entire transaction price is allocated to this single performance obligation. Service revenue is recognized when the repair work is completed, and the customer receives the vehicle.
Product Limited Warranty
Consistent with industry practice, the Company generally offers customers a limited warranty for work performed on the vehicle under the builds/sales contract. The customers do not have a contractual right of return. The Company only offers a limited warranty for the work performed on the vehicle under the contract. If a customer disputes any work performed, the Company will attempt to remedy the work however, it shall not be required to discount the transaction price. The Company considered this an assurance-type warranty and not a separate performance obligation.
Warranty Reserve
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including quality control test driving vehicles, the warranty obligation is affected by historical warranty costs per vehicle. Should actual costs differ from the Company’s estimates, revisions to increase or decrease the estimated warranty liability may be required.
Other Revenue Policies
Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
Applying the practical expedient in paragraph ASC 606-10-32-18, the Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised products to the customer will be one year or less, which is the case with substantially all customers.
Applying the practical expedient in ASC 606-10-25-18B, the Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. The Company records the related costs as part of the cost of goods good.
Inventories
Work in progress – shipping and consumables, and work in progress – labor costs reported in inventories are carried at a lower of cost or net realizable value. Cost is determined on the basis of the direct and indirect costs that are directly attributable to the product. The measurement of inventories is generally based on the weighted average method. Cost is determined on the basis of the direct and indirect costs that are directly attributable. The measurement of work in progress inventories is generally based on the weighted average method. Finished goods inventory is comprised of vehicles for which the build is completed but title has not been legally transferred, or, in some cases, the vehicle has not been delivered. The measurement of finished goods inventories is the total cost of the materials, shipping and consumables, and labor attributed to the build of each specific completed vehicle. Overhead costs are allocated to inventory based on the rate of inventory turned for the period.
Income taxes
Prior to the Business Combination on December 13, 2023, the Company was an S corporation. As an S corporation, the Company was not directly liable for federal income taxes. As of the date of the Business Combination, the operations of the Company ceased to be taxed as an S corporation resulting in a change in tax status for federal and state income tax purposes.
Management has evaluated the Company’s tax positions, including its previous status as a pass-through entity for federal and state tax purposes, and has determined that the Company has taken no uncertain tax positions that require adjustment to the consolidated financial statements. The Company’s reserve related to uncertain tax positions was zero as of June 30, 2024, and 2023.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences (meaning, inclusions of income and deductions in income tax returns to be filed in future periods) of events that have been included in the financial statements. These items may be referred to as “temporary differences.” Under this method, deferred tax assets and liabilities are determined based on the differences between their financial statement carrying amount (or, basis) and the carrying amount for taxes (or, tax basis) using enacted tax rates in effect for the year in which the differences are expected to affect income in the future tax filings. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
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We record deferred tax assets to the extent we believe that it is more likely than not that these assets will be realized in the future. Future realization of deferred income tax assets (meaning, items that may provide tax deductions in future periods) requires evidence that there will be sufficient taxable income in those future periods, or within any carryback periods available under tax law. We evaluate the realizability of our deferred tax assets on a quarterly basis. To be realized, there must be an objective and verifiable basis for the expectation of taxable income in future periods to offset, or “consume,” the deferred tax assets. The evaluation includes the consideration of all available factors, both positive and negative, regarding (i) the estimated future reversals of existing taxable temporary differences (that is, deferred tax liabilities), (ii) forecasted future taxable income, exclusive of those reversing temporary differences and carryforwards, (iii) historical taxable income in prior carryback periods, if carryback is permitted, and (iv) potential tax planning strategies that may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence, such as future reversals of existing temporary differences and the ability to carryback, are considered before estimated future taxable income (exclusive of temporary differences and tax planning strategies) is considered because future taxable income estimates are more subjective. The majority of our deferred tax assets are comprised of income tax carryforwards, including federal and state net operating loss carryforwards (“NOLs”) and non-deductible interest expense carryforwards. Some of these carryforwards are subject to annual usage limitations and expiration, while other state NOLs and a portion of federal NOLs do not have expirations.
While we remain in a financial reporting loss position based on a cumulative pre-tax loss for the three-year period ended June 30, 2024, the determination of the valuation allowance is based on our evaluation of the periods over which future taxable items are expected to be utilized to offset tax loss and deduction carryforward items in those future periods. That is, future forecasts of our taxable income are not considered in the evaluation of realizability of our deferred tax assets. Therefore, changes in our deferred tax asset valuation allowances will primarily be affected by changes in the estimates of the time periods over which those future taxable items will occur. At June 30, 2024, there was no deferred tax asset valuation allowance.
Fair Value of Financial Instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of cash, accounts receivable, accounts payable and accrued expenses, and loan payable approximate their carrying amounts due to the relatively short maturity of these instruments. The carrying value of lease liability also approximates fair value since the instrument bears market rates of interest. None of these instruments are held for trading purposes.
Warrants
The Company determines the accounting classification of warrants it issues as either liability or equity classified by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480”), then in accordance with ASC 815-40 (“ASC 815”), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480, the Company assesses the requirements under ASC 815, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its Common Stock and whether the warrants are classified as equity under ASC 815 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date.
Redeemable Preferred Stock
Accounting for convertible or redeemable equity instruments in the Company’s own equity requires an evaluation of the hybrid security to determine if liability classification is required under ASC 480-10. Liability classification is required for freestanding financial instruments that are not debt in legal form and are: (1) subject to an unconditional obligation requiring the issuer to redeem the instrument by transferring assets (i.e. mandatorily redeemable), (2) instruments other than equity shares that embody an obligation of the issuer to repurchase its equity shares, or (3) certain types of instruments that obligate the issuer to issue a variable number of equity shares. Securities that do not meet the scoping criteria to be classified as a liability under ASC 480 are subject to redeemable equity guidance, which prescribes securities that may be subject to redemption upon an event not solely within the control of the issuer to be classified outside permanent equity (i.e., classified in temporary equity). Securities classified in temporary equity are initially measured at the proceeds received, net of issuance costs and excluding the fair value of bifurcated embedded derivatives (if any). Subsequent measurement of the carrying value is not required unless the instrument is probable of becoming redeemable or is currently redeemable. When the instruments are currently redeemable or probable of becoming redeemable, the Company will recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the then current maximum redemption value at the end of each reporting period.
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Convertible Notes – Event of Default
On December 12, 2023, the Company, through its predecessor EFHT, issued a Senior Secured Convertible Note with an aggregate principal amount equal to $15,819,209 to Defender SPV LLC (the “December Note”), pursuant to the previously disclosed Stock Purchase Agreement dated October 6, 2023. Certain events of default under the December Note have occurred based on the following: the Company’s failure to have its resale registration statement on Form S-1 declared effective by the SEC within sixty (60) days of December 12, 2023, the financial statements of the Company’s subsidiary for the years ended December 31, 2022 and 2021 and the quarterly periods ended March 31, 2023, June 30, 2023 and September 30, 2023 were required to be restated, the Company did not file its Annual Report on Form 10-K for year ended December 31, 2023 (the “Form 10-K”) within two (2) trading days of the filing due date for the Form 10-K, and the Company did not file its Quarterly Report on Form 10-Q for quarterly period ended March 31, 2024 (the “Form 10-Q”) within two (2) trading days of the filing due date for the Form 10-Q. The December Note provides for certain remedies based upon the occurrence of an event of default. The Company has spoken with the lender under the December Note and plans to attempt to negotiate and enter into a default waiver agreement with the lender. There can be no assurances that the Company will be able to negotiate a waiver agreement with the lender. If the lender seeks to enforce its remedies under the December Note and the lender is successful in obtaining such remedies, then such event could have a material negative effect on the business and finances of the Company.
Preferred Stock – Event of Default
Defender SPV LLC is the holder of 25,000 shares of the Company’s Series A Convertible Preferred Stock. Certain events of default under the Series A Convertible Preferred Stock (the “Preferred Stock”) have occurred based on the following: the financial statements of the Company’s subsidiary for the years ended December 31, 2022 and 2021 and the quarterly periods ended March 31, 2023, June 30, 2023 and September 30, 2023 were required to be restated, the Company did not file its Annual Report on Form 10-K for year ended December 31, 2023 (the “Form 10-K”) within two (2) trading days of the filing due date for the Form 10-K, and the Company did not file its Quarterly Report on Form 10-Q for quarterly period ended March 31, 2024 (the “Form 10-Q”) within two (2) trading days of the filing due date for the Form 10-Q. The Preferred Stock provides for certain remedies based upon the occurrence of an event of default. The Company has spoken with the holder of the Preferred Stock and plans to attempt to negotiate and enter into a default waiver agreement with the holder. There can be no assurances that the Company will be able to negotiate a waiver agreement with the holder. If the holder seeks to enforce its remedies under the Preferred Stock and the holder is successful in obtaining such remedies, then such event could have a material negative effect on the business and finances of the Company.
Commitments and Contingencies
In February 2024, we entered into a one-year consulting agreement (the “Agreement”) with an investor relations firm for the purposes of developing, implementing and maintaining an ongoing stock market support system for the Company with the general objective of expanding awareness in the Company. In connection with this agreement, we have committed to pay $14,500 per month for the first four months of service and $12,500 per month thereafter. We also issued 100,000 shares of restricted Company common stock on May 9, 2024. All shares of Company restricted Company common stock will be subject to a 12-month lock up from the time of issuance. The agreement also provides for incentive shares as follows:
| ● | If within six (6) months of the Effective Date of the Agreement, investors hold 2.5 million or more shares of Company common stock as a result of the investor relations firm introductions, the Company will issue 25,000 shares of restricted Company common stock to the investor relation firm with in ten (10) days of achieving such milestone. |
| ● | If within six (6) months of the Effective Date of the Agreement, investors hold 5.0 million or more shares of Company common stock as a result of the investor relations firm introductions, the Company will issue 25,000 shares of restricted Company common stock to the investor relation firm with in ten (10) days of achieving such milestone. |
| ● | If within six (6) months of the Effective Date of the Agreement, investors hold 10.0 million or more shares of Company common stock as a result of the investor relations firm introductions, the Company will issue 25,000 shares of restricted Company common stock to the investor relation firm with in ten (10) days of achieving such milestone. |
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| ● | If within nine (9) months of the Effective Date of the Agreement the ten (10) day Volume Weighted Average Price (“VWAP”) of Company common stock equals or exceeds $1.90 per share, the Company will issue 50,000 shares of restricted Company common stock to the investor relations firm within ten (10) days of achieving such milestone. All VWAP calculations shall exclude a ten (10) day trading period following any publicly announced M&A transaction. |
| ● | If within twelve (12) months of the Effective Date of the Agreement the ten (10) day Volume Weighted Average Price (“VWAP”) of Company common stock equals or exceeds $3.90 per share, the Company will issue 50,000 shares of restricted Company common stock to the investor relations firm on the twelve (12) month anniversary of the Effective Date. All VWAP calculations shall exclude a ten (10) day trading period following any publicly announced M&A transaction. |
Subsequent Events
Recent Unregistered Sale of Equity Securities
On August 8, 2024, the Company and Theodore Duncan (the “Investor”) entered into a securities subscription agreement (the “Subscription Agreement”), pursuant to which the Company issued and sold in a private transaction 1,000,000 shares of the Company’s common stock and a warrant agreement to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the “Warrant Agreement”) to Theodore Duncan for an aggregate purchase price of $1,000,000. The issuance and sale to the director is exempt from registration under the Securities Act of 1933 in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended.
The foregoing summary of the Subscription Agreement and the Warrant Agreement does not purport to be complete and is qualified in its entirety by reference to the actual agreements which are which filed as Exhibit 10.4 (the Subscription Agreement) and Exhibit 10.5 (the Warrant Agreement) to the Company’s Current Report on Form 8-K, filed on August 12, 2024, and are incorporated herein by reference.
The August 9, 2024 Securities Purchase Agreement
On August 9, 2024, ECD Automotive Design, Inc. (the “Company”) entered into a securities purchase agreement (the “August SPA”) with Defender SPA, LLC pursuant to which the Defender SPV, LLC agreed to waive the pre-existing events of default that occurred under the December Note and the Preferred Stock and the Company agreed to execute and deliver to the Lender a second senior secured convertible note (the “August Note”), in exchange for a loan in the principal amount of $1,154,681. Based on the terms of the August Note, the Company will receive proceeds under the August Note in an amount of $1,000,000, before payment of expenses. The Company’s entry into the August SPA and the August Note were previously disclosed in the Company’s Current Report on Form 8-K, filed on August 12, 2024, which is incorporated herein by reference.
The August 9, 2024 Senior Secured Convertible Note
The August Note shall, unless converted or redeemed, mature on December 12, 2026, subject to the holder’s right to extend such date in certain circumstances. The August Note shall accrue interest at an annual rate equal to the Prime Interest rate plus 5% per annum which is payable monthly in cash or, upon the Company’s option, in securities of the Company provided certain conditions are met at the increased interest rate of the Prime Interest rate plus 8% per annum. The Company is required to pay a late charge of 18% per annum (“Late Charges”) on any amount of principal or other amounts that are not paid when due.
At any time after issuance, all amounts due under the August Note are convertible at any time, in whole or in part, at the holder’s option, into shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”) at the option of the Lender at a conversion price of $10.00 per share (the “Conversion Price”), subject to proportional adjustment upon the occurrence of any stock split, stock dividend, stock combination and/or similar transactions. Upon the Lender’s conversion of the Note, the conversion amount shall be equal to the principal amount to be converted under the Note at a 15% premium plus any accrued and unpaid interest, and accrued and unpaid Late Charges on such principal and interest, if any (the “Conversion Rate”). From and after the occurrence of an event of default, each holder may alternatively elect to convert the August Notes into shares of our Common Stock at the “Alternate Conversion Price”, which is equal to the lowest of:
| ● | The Conversion Price then in effect; and |
| ● | 85% of the lowest volume weighted average price of our Common Stock during the 5 consecutive trading days immediately prior to the date on which we received written notice of such conversion from such holder. |
The Conversion Price under the August Note is also subject to a one-time downward adjustment on the effective date of the registration statement providing for the resale of the Common Stock issuable upon conversion of the August Note to a conversion price equal to the prior 5-day volume weighted average price, subject to a floor of $2.00. The conversion price is also subject to a downward adjustment if the Company fails to satisfy certain performance conditions set forth in the Note.
The Company has the right, at any time, to redeem in cash all, or any portion, of the August Note at a 20% redemption premium to the greater of (a) on the amount then outstanding under the August Notes to be redeemed, and (b) the equity value of our Common Stock underlying the August Notes. The equity value of our common stock underlying the Notes is calculated using the greatest closing sale price of our Common Stock during the period immediately preceding the date of such redemption and ending on the date we make the required payment. Additionally, upon a change of control of the Company, each holder of August Note may require us to redeem in cash all, or any portion, of its Notes at a 25% redemption premium on the greater of (a) the face value of the August Notes, (b) the equity value of our Common Stock underlying the August Notes, and (c) the equity value of the change of control consideration payable to the holder of our common stock underlying such August Notes.
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The August SPA provides further that the Security Agreement, the Registration Rights Agreement, and the Guaranty are amended so that such Agreements cover and are applicable to the August Note, as well as the December Note.
The foregoing summary of the August SPA and the August Note does not purport to be complete and is qualified in its entirety by reference to the actual agreements forms of which are filed as Exhibit 10.1 (the August SPA) and Exhibit 10.2 (the August Note) to the Company’s Current Report on Form 8-K, filed on August 12, 2024, and are incorporated herein by reference.
The August SPA also provided that in connection with the August Note, the Company will also issue to the Lender at no additional cost 300,000 shares of the Company’s common stock (the “Commitment Shares”) and a warrant to purchase 79,673 shares of the Company’s common stock at an exercise price of $11.50 per share (the “Common Share Warrant”).
The foregoing summary of the Common Share Warrant does not purport to be complete and is qualified in its entirety by reference to the actual agreement a form of which is filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on August 12, 2024, which is incorporated herein by reference.
Amendment to the A&R Asset Purchase Agreement
On August 11, 2024, the Company and BNMC Continuation Cars LLC and David W. Miller II (collectively the “Sellers”) entered into an Amendment (the “Amendment”) to the A&R Asset Purchase Agreement, pursuant to which the parties acknowledged that the Sellers have satisfied all conditions to the A&R Asset Purchase Agreement to fix the aggregate purchase price at $1,250,000 payable through the issuance of 1,250,000 shares of the Company’s common stock valued at $1.00 per share. Pursuant to the Amendment the Company will promptly issue the 1,250,000 shares of the Company’s common stock to David W. Miller II in full satisfaction of the Company’s obligation to pay the Purchase Price as set forth in the A&R Asset Purchase Agreement.
The foregoing summary of the Amendment does not purport to be complete and is qualified in its entirety by reference to the actual Amendment, a copy of which is attached hereto as Exhibit 10.14, and is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, due solely to the material weakness in our internal control over financial reporting, including the application of accounting policies for revenue recognition and inventory and technical accounting areas. As a result, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Management intends to implement remediation steps to improve our disclosure controls and procedures and our internal control over financial reporting. Specifically, we intend to expand and improve our review process for complex transactions. We plan to further improve this process by enhancing access to accounting literature, identification of third-party professionals with whom to consult regarding complex accounting applications, and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.
Changes in Internal Control Over Financial Reporting
Except as noted above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period from January 1, 2024 through June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not party to any material legal proceedings. From time to time, we may be involved in legal proceedings or subject to claims incident to the ordinary course of business. The outcome of litigation is inherently uncertain, and there can be no assurances that favorable outcomes will be obtained. In addition, regardless of the outcome, such proceedings or claims can have an adverse impact on us, which may be material because of defense and settlement costs, diversion of resources and other factors.
Item 1A. Risk Factors.
The risks described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 could materially and adversely affect our business, financial condition, results of operations, cash flows, future prospects, and the trading price of our Class A Common Stock. The risks and uncertainties described therein are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that adversely affect our business.
You should carefully read and consider such risks, together with all of the other information in our Annual Report on Form 10-K for the year ended December 31, 2023, in this Quarterly Report on Form 10-Q (including the disclosures in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our condensed consolidated financial statements and related notes), and in the other documents that we file with the SEC.
There have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) During the quarter ended June 30, 2024, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K.
(b) Not applicable.
(c) None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
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Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: August 19, 2024 | ||
| ECD Automotive Design, Inc. | ||
| /s/ Scott Wallace | ||
| Name: | Scott Wallace | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| /s/ Raymond Cole | ||
| Name: | Raymond Cole | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ Scott Wallace | Chief Executive Officer and Director (principal executive officer) | August 19, 2024 | ||
| Scott Wallace | ||||
| /s/ Raymond Cole | Chief Financial Officer (principal financial and accounting officer) | August 19, 2024 | ||
| Raymond Cole | ||||
| /s/ Emily Humble | Chief Product Officer and Director | August 19, 2024 | ||
| Emily Humble | ||||
| /s/ Thomas Humble | Chief Experience Officer and Director | August 19, 2024 | ||
| Thomas Humble | ||||
| /s/ Patrick Lavelle | Director | August 19, 2024 | ||
| Patrick Lavelle | ||||
| /s/ Robert Machinist | Director | August 19, 2024 | ||
| Robert Machinist | ||||
| /s/ Benjamin Piggott | Director | August 19, 2024 | ||
| Benjamin Piggott | ||||
| /s/ Thomas Wood | Director | August 19, 2024 | ||
| Thomas Wood |
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