10-K/A: ECD Automotive Design Restates Financials After Accounting Errors; Faces Nasdaq Compliance Issues

ECD Automotive Design restates its 2022 and 2023 financial statements due to accounting errors and faces ongoing challenges with Nasdaq listing requirements.

Summary

• ECD Automotive Design is filing an amendment to its 2023 annual report to restate consolidated financial statements for the years ended December 31, 2023, and 2022.
• The restatement is due to accounting errors related to the presentation, timing, omission, and classification of items in the previously issued financial statements.
• Barton CPA PLLC was engaged to re-audit the financial statements after the SEC suspended the prior accounting firm, BF Borgers CPA PC.
• The restatement includes corrections for accounts receivable, deferred revenue, revenue, inventory, resale commissions income, and accrued and other liabilities.
• A material weakness in the company's internal control over financial reporting was identified as of December 31, 2023 and 2022.
• The company is working to remediate the material weakness by insourcing accounting functions, hiring experienced professionals, and implementing new ERP software.
• ECD received notices from Nasdaq regarding non-compliance with listing rules related to market value of listed securities and minimum bid price.
• The company has been granted an exception until May 19, 2025, to regain compliance with Nasdaq listing rules.
• ECD acquired certain assets of Brand New Muscle Car for up to $1.25 million, payable in common stock.
• The company entered into investor relations and marketing services agreements with MZHCI and Outside The Box Capital Inc., issuing shares of common stock as compensation.
• ECD entered into a loan agreement with First National Bank of Pasco for a revolving line of credit up to $1.5 million.
• The company entered into agreements with Black Dog Traders to produce branded classic Toyota FJ SUVs.
• ECD entered into a referral agreement with Black Bridge Motors to produce branded classic Land Rover Defender SUVs.
• The company issued senior secured convertible notes to Defender SPV LLC in exchange for loans totaling $2,878,781.
• Raymond Cole resigned as Chief Financial Officer and Benjamin Piggott was appointed as the new CFO.
• Keven Kastner was appointed as the Chief Revenue Officer.
• ECD entered into agreements with One Drivers Club to launch a retail showroom in West Palm Beach, Florida.
• ECD signed an agreement with Ten Easy Street of Nantucket to showcase its vehicles.
• Stockholders approved an amendment to the Companys 2023 Equity Incentive Plan to increase the number of shares of common stock reserved under the Plan from 400,000 shares to 2,500,000 shares at the Annual Meeting.

Sentiment

Score: 4

Explanation: The document contains a mix of positive and negative information. While revenue increased and new partnerships were formed, the restatement of financials and Nasdaq compliance issues raise concerns.

Positives

• The company is taking steps to remediate the material weakness in internal control over financial reporting.
• ECD has been granted an exception to regain compliance with Nasdaq listing rules.
• The acquisition of Brand New Muscle Car assets expands ECD's product offerings.
• Partnerships with One Drivers Club and Ten Easy Street will expand ECD's retail presence.
• The company has secured additional financing through senior secured convertible notes.

Negatives

• The company's financial statements for 2023 and 2022 had to be restated due to accounting errors.
• A material weakness in internal control over financial reporting was identified.
• ECD received delisting notices from Nasdaq and is working to regain compliance with listing rules.
• The company has a working capital deficit of $1,957,784 as of December 31, 2023.

Risks

• The company may not be able to successfully remediate the material weakness in internal control over financial reporting.
• ECD may not be able to regain compliance with Nasdaq listing rules, which could result in delisting.
• The company's business is dependent on the price, availability, and quality of base vehicles.
• ECD's ability to predict future demand for its vehicles and inventory is limited.
• The luxury automotive market is highly competitive.
• General economic conditions may materially and adversely affect ECD's business.
• The company is highly dependent on international and single-source component suppliers.
• Pandemics, epidemics, disease outbreaks and other public health crises, such as the COVID-19 pandemic, have disrupted our business and operations, and future public health crises could materially adversely impact our business, financial condition, liquidity and results of operations.

Future Outlook

When the anticipated third production line is operating at full capacity, the target is to have total annual revenues of between $70.0 million and $80.0 million, and a gross margin between 35.0% and 40.0%.

Management Comments

• The ECD team follows an online build sheet process during production of each vehicle.
• We believe we are one of the most visible brands in the business, and the most transparent builder of any classic vehicle.

Industry Context

ECD operates in the British classic cars segment, which accounted for 15% of the classic vehicles industry in 2023. The classic car dealers market size in the US, which comprises sales, services and restoration, is valued at $2.8 billion, measured in total revenue.

Comparison to Industry Standards

• In 2023, ECD delivered a 23.2% gross margin, substantially higher than the mass market automobile industry average of 17.3% (see Bloomberg and S&P CapIQ Pro as of March 3, 2022).
• ECDs gross margin is on par with other luxury car manufacturers such as Aston Martin, BMW, Mercedes and Porsche, who had gross margins of 32.6%, 18.4%, 21.8% and 28.0%, respectively.

Management Changes

Related Party Transactions

• ECD has related party transactions consisting of payments for services provided by companies owned by certain family members of the shareholders.
• Payments to TransportCo, a company owned by a family member of the shareholders, for transportation services were $247,1923 and $196,425 in 2022 and 2023, respectively.
• Payments to Wallace USA, a company owned by Scott Wallace and his wife, for administrative services were $51,996 in 2022.

Stakeholder Impact

• Shareholders will experience dilution as a result of the conversion of the Convertible Note and exercise of outstanding warrants held by the Lender.
• The market price of the Company Common Stock may drop significantly due to the resales of shares of the Company Common Stock issued to ECD Securityholders and other significant stockholders.
• The Company does not expect that the Company will pay any cash dividends on the Company Common Stock in the foreseeable future.

Next Steps

• ECD is diligently working to complete its Form 10-Q for the quarter ended September 30, 2024, and expects to complete and file the Form 10-Q for the quarter ended September 30, 2024 with the SEC to regain compliance with the Listing Rule prior to the expiration of the 60 day period.
• ECD is currently waiting for Nasdaqs response to the January 31, 2025 letter.
• The Company will need to continue to monitor the closing bid price of its common stock to ensure it is at least $1 for a minimum of ten consecutive business days to regain compliance with Nasdaq rules.

Key Dates

Keywords

restatement, financial statements, internal control, Nasdaq, compliance, acquisition, convertible notes, retail, automotive, ECD