Confederate Motors, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Confederate Motors, Inc.	f10q0911ex31i_confederate.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Confederate Motors, Inc.	f10q0911ex31ii_confederate.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - Confederate Motors, Inc.	f10q0911ex32ii_confederate.htm
EXCEL - IDEA: XBRL DOCUMENT - Confederate Motors, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - Confederate Motors, Inc.	f10q0911ex32i_confederate.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

FORM 10-Q

_______________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______.

CONFEDERATE MOTORS, INC.

(Exact name of registrant as specified in Charter)

DELAWARE		000-52500		26-4182621
(State or other jurisdiction of incorporation or organization)		(Commission File No.)		(IRS Employee Identification No.)

2222 5th Avenue South

Birmingham, Alabama 35233

(Address of Principal Executive Offices)

(205) 324-9888

(Issuer’s Telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes o No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2011: 13,254,998 shares of Common Stock.

CONFEDERATE MOTORS, INC.

FORM 10-Q

September 30, 2011

INDEX

PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Control and Procedures	17

PART II-- OTHER INFORMATION

Item 6.

Exhibits

SIGNATURES

-2-

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONFEDERATE MOTORS, INC.

Condensed Consolidated Balance Sheets

	(Unaudited)
	September 30,			December 31,
	2011			2010
Assets

Current assets
Cash and cash equivalents	$	212,856		$	266,327
Inventory		316,466			433,006
Prepaid inventory		15,600			15,600
Prepaid expenses		631,933			-
Due from related party		-			3,750
Total current assets		1,176,855			718,683

Property and equipment, net		11,806			27,336

Total assets	$	1,188,661		$	746,019

Liabilities and Stockholders' Deficit

Current liabilities
Accounts payable	$	94,331		$	142,920
Accrued interest payable		7,501			7,501
Accrued payroll tax liability		190,669			204,669
Deferred revenue		632,309			828,419
Warranty reserve		8,600			8,600
Other accrued expenses		12,568			22,394
Registration rights liability		251,250			251,250
Current portion of notes payable		27,642			32,784
Current portion of capital leases		6,150			18,299
Current portion of deferred exclusive agency fee		60,000			60,000
Total current liabilities		1,291,020			1,576,836

Notes payable, less current portion		24,045			44,064

Capital leases, less current portion		-			3,885

Deferred exclusive agency fee		15,000			60,000

Stockholders' deficit
Common Stock, $0.001 par value 200,000,000 shares authorized; 13,254,998 shares outstanding in 2011 and 12,954,998 shares outstanding in 2010		13,254			12,954
Preferred Stock, $0.001 par value 20,000,000 share authorized; -0- shares outstanding in 2011 and 2010		-			-
Additional paid-in capital		9,712,178			8,723,096
Accumulated deficit		(9,866,836	)		(9,674,816	)
Total stockholders’ deficit		(141,404	)		(938,766	)
Total liabilities and stockholders’ deficit	$	1,188,661		$	746,019

The accompanying notes are an integral part of these unaudited condensed financial statements.

-3-

CONFEDERATE MOTORS, INC.

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2011			2010			2011			2010

Sales	$	280,858		$	451,302		$	1,575,856		$	1,618,854

Cost of goods sold		(168,482	)		(266,640	)		(886,726	)		(1,037,490	)

Gross profit		112,376			184,662			689,130			581,364

Selling, general and administrative expenses		338,874			268,892			921,064			921,908

Loss from operations		(226,498	)		(84,230	)		(231,934	)		(340,544	)

Other income (expense)
Other income		15,000			15,000			45,000			45,000
Interest expense		(1,400	)		(851	)		(5,087	)		(6,896	)
		13,600			14,149			39,913			38,104

Net income (loss) before income taxes	$	(212,898	)	$	(70,081	)	$	(192,021	)	$	(302,440	)

Net income (loss) before income taxes per common share – basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

Weighted average shares outstanding – basic and diluted		13,124,553			12,954,998			13,012,131			12,954,998

The accompanying notes are an integral part of these unaudited condensed financial statements.

-4-

CONFEDERATE MOTORS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended

	September 30,			September 30,
	2011			2010
Operating activities
Net income (loss)	$	(192,021	)	$	(302,440	)
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation		15,530			26,403
Deferred exclusive agency fee		(45,000	)		(45,000	)
Options issued for services		57,449
Change in operating assets and liabilities
Inventory		116,540			297,383
Prepaid inventory		-			67,847
Accounts payable		(48,589	)		(4,126	)
Accrued payroll tax liability		(14,000	)		32,528
Other accrued expenses		(9,824	)		(17,085	)
Deferred revenue		(196,110	)		(97,420	)
Net cash used by operating activities		(316,025	)		(41,910	)

Investing activities
Due from related party		3,750			(3,750	)
Net cash used by investing activities		3,750			(3,750	)

Financing activities
Repayment of notes payable		(25,162	)		(40,607	)
Repayment of capital leases		(16,034	)
Proceeds from issuance of stock		300,000			(18,701	)
Net cash provided (used) by financing activities		258,804			(59,308	)

Net increase (decrease) in cash and cash equivalents		(53,471	)		(104,968	)

Cash and cash equivalents at the beginning of period		266,327			365,035

Cash and cash equivalents at end of period	$	212,856		$	260,067

Supplemental disclosures of cash flow information:
Non cash investing & financing activities
Options issued for services	$	689,382		$	-
Cash paid during the period for:
Interest	$	5,087		$	6,896
Income taxes	$	-		$	-

The accompanying notes are an integral part of these unaudited condensed financial statements.

-5-

Confederate Motors, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2011

(unaudited)

NOTE 1 – Summary of Significant Accounting Policies

Nature of Business

Confederate Motors, Inc. (the “Company”) is a manufacturer of American handcrafted street motorcycles. The Company currently offers one model: the P120 Fighter. The C3 Hellcat model is in development and being readied for production in the near future. The Confederate Brand was founded in 1991. The Company has been operational since 2003 and is headquartered in Birmingham, Alabama.

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.

The unaudited interim financial statements should be read in conjunction with the Company’s 2010 Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended December 31, 2010 and 2009. The interim results for the period ended September 30, 2011 are not necessarily indicative of results for the full fiscal year.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 reported amounts of revenues and expenses during the reporting period. Management believes that the estimates utilized in preparing the Company’s financial statements are reasonable and prudent; however, actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include Confederate Motors, Inc., and its wholly owned subsidiary, Confederate Acquisitions Corp. (collectively, the “Company”). All intercompany accounts have been eliminated in consolidation.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition and rapid technological change and is in a state of fluctuation as a result of the credit crisis occurring in the United States. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.

See Note 7 for a full discussion of commitments, contingencies and other uncertainties.

Cash and Cash Equivalents

The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash depository accounts which at times, may exceed federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. These amounts represent actual account balances held by the financial institution at the end of the period, and unlike the balance reported in the financial statements, the account balances do not reflect timing delays inherent in reconciling items such as outstanding checks and deposits in transit.

-6-

Inventory

Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory consists of parts inventory, work in process (WIP), finished goods inventory, apparel and direct labor associated with finished goods.

	9/30/2011		12/31/2010
Parts	$	175,830	$	174,735
Work in process		-		47,831
Motorcycle finished goods		125,798		168,649
Apparel inventory		14,838		41,791
Total Inventory	$	316,466	$	433,006

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Maintenance, repairs, and minor renovations are charged to expense as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is included in the results of operations. The Company provides for depreciation of property and equipment using the straight-line method over the estimated useful lives or the term of the lease, as appropriate. The estimated useful lives are as follows: vehicles, 5 years; furniture and fixtures, 3 to 5 years; equipment, 3 to 5 years.

Revenue Recognition

Revenues from the sale of motorcycles and equipment are recognized when products are delivered or shipped. Advance payments from customers are typically required to secure the order and are shown as deferred revenue in the accompanying balance sheets and are non-refundable. The Company recognizes revenue from repair services in the same month the service is provided. Cash payments received from customers prior to delivery of the motorcycle are recorded as deferred revenue on the Balance Sheet. Deferred revenue was $632,309 at September 30, 2011 and $828,419 at December 31, 2010.

Earnings per Share

In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

The Company had the following potential common stock equivalents at September 30, 2011:

Common stock warrants			105,000
Common stock options			2,000,000
Total common stock equivalents			2,105,000

Since the Company reflected no net income in the third quarter, the effect of considering any common stock equivalents, if outstanding, would have been negligible. A separate computation of diluted earnings (loss) per share is not presented.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company would recognize interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2011 and December 31, 2010, respectively, the Company did not record any liabilities for uncertain tax positions.

-7-

Advertising Costs

Advertising costs relate to the Company’s efforts to promote its products and brands. Advertising is expensed as incurred. For the quarter periods ended September 30, 2011 and 2010, advertising expense was $4,314 and $11,581 respectively. Year to date advertising expense totaled $19,190 and $64,689 for 2011 and 2010, respectively.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, general and administrative expenses in the accompanying statements of operations. Research and development (R&D) costs totaled $52,347 and $40,350 for the quarter periods ended September 30, 2011 and 2010, respectively. Year to date R&D costs totaled $119,841 and $105,496 for 2011 and 2010, respectively.

Shipping and Handling Costs

The Company records shipping and handling costs billed to the customer and shipping and handling expenses in cost of sales.

Fair Value Measurements

We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.

The levels of fair value hierarchy are as follows:

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access;

Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and

Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

There are no fair value measurements as of September 30, 2011 and December 31, 2010.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The results of these reclassifications did not materially affect financial position, results of operations or cash flows.

NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

	September 30,			December 31,
	2011			2010
Vehicles	$	36,628		$	36,628
Furniture and fixtures		11,734			11,734
Equipment		119,068			119,068
Leasehold improvements		39,886			39,886
		207,316			207,316
Less accumulated depreciation		(195,510	)		(179,980	)
	$	11,806		$	27,336

-8-

NOTE 3 – NOTES PAYABLE

Notes payable consisted of the following as of:

	September 30,		December 31,
	2011		2010
Government agency note payable due August 12, 2013,
prime plus 2.75 % rate of interest (6.00% and 6.00% at
September 30, 2011 and December 31, 2010, respectively), principal
and interest payable monthly, unsecured	$	44,532	$	59,065

Bank note payable due July 18, 2012, 7.95% fixed rate of
interest, principal and interest payable monthly, secured
by Company vehicle		7,155		13,202

Note payable due February 15, 2011, 3.50% fixed
rate of interest, principal and interest payable monthly,
unsecured		-		4,581
		51,687		76,848
Less current portion		27,642		32,784
	$	24,045	$	44,064

NOTE 4 – CAPITAL LEASES

The capitalized cost and accumulated depreciation of the computers and equipment under capital lease totaled $108,804 and $103,103 (net) respectively, at September 30, 2011.

At September 30, 2011, future minimum payments due under the capital lease agreements are as follows:

Oct 1 through December 31, 2011	$	2,382
2012		3,971
Future minimum lease payments		6,353
Less amount representing interest		203
Present value of minimum lease payments		6,150
Less current portion		6,150
Long-term capital leases	$	-

-9-

NOTE 5 – STOCKHOLDERS’ EQUITY

Sale of Common Stock

On August 9, 2011, we raised $300,000 through the sale of 300,000 shares of common stock to an accredited investor,

Warrants

During the twelve months ended December 31, 2009, the Company issued 105,000 stock purchase warrants to purchase the Company’s common stock at an exercise price of $1.50. The Company valued these warrants utilizing a Black-Scholes option pricing model utilizing the following assumptions: fair market value per share -$1.50, exercise -$1.50, expected volatility -115%, risk free interest rate -1.73%. The fair value of $127,050 was recorded to additional paid in capital.

The following is a summary of the Company’s warrant activity:

	Warrants		Weighted Average Exercise Price

Exercisable – December 31, 2008		-	$	-
Granted		105,000	$	1.50
Exercised		-		-
Forfeited		-		-
Outstanding – December 31, 2009		105,000	$	1.50
Exercisable – December 31, 2009		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – December 31, 2010		105,000	$	1.50
Exercisable – December 31, 2010		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – March 31, 2011		105,000	$	1.50
Exercisable – March 31, 2011		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – June 30, 2011		105,000	$	1.50
Exercisable – June 30, 2011		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – September 30, 2011		105,000	$	1.50
Exercisable – September 30, 2011		105,000	$	1.50

Warrants Outstanding							Warrants Exercisable
Range of Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	1.50		105,000	2.25 years	$	1.50		105,000	$	1.50

At September 30, 2011 and December 31, 2010, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.

Stock Options

On August 9, 2011 the Company entered into a Management Consulting Agreement with Confederate Strategic Partner Fund, LLC (hereinafter referred to as “Service Provider”). In consideration for services provided by the Service Provider to the Company, the Company granted to the Service Provider an option to purchase up to 2,000,000 shares of common stock of the Company at $1.50 per share. The options vest immediately and expire two years from the Effective Date.

The Company valued these options utilizing a Black-Scholes option pricing model utilizing the following assumptions: fair market value per share -$1.40, exercise -$1.50, expected volatility -68.9%, risk free interest rate -0.19%. The fair value of $689,382 was recorded to additional paid in capital.

-10-

The following is a summary of the Company’s options activity:

	Options		Weighted Average Exercise Price

Exercisable – June 30, 2011		-	$	-
Granted		2,000,000	$	1.50
Exercised		-		-
Forfeited		-		-
Outstanding – September 30, 2011		2,000,000	$	1.50
Exercisable – September 30, 2011		2,000,000	$	1.50

Options Outstanding							Options Exercisable
Range of Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	1.50		2,000,000	1.83 years	$	1.50		2,000,000	$	1.50

Registration Rights Penalty

In connection with the issuance of common stock and convertible debt, which converted into common stock in 2009, these equity holders were entitled to liquidated damages, which provide for a payment in cash equal to a maximum of 10% of the total offering price for all equity proceeds raised. The convertible note holders were entitled to liquidated damages which provide for a payment in cash equal to a maximum of 15% of the total offering price for all equity proceeds raised. The Company was required to file an S-1 registration statement 120 days after the offering closed. The closing date of the offering was February 12, 2009; therefore the 120th day was June 12, 2009. Furthermore, the Company was required to have this S-1 registration declared effective within 150 days (July 12, 2009). The Company never filed a registration statement.

The Company has evaluated the registration rights provision and has determined the probability of incurring liquidated damages. The Company recorded the full penalty.

Liquidated damages are as follows:

Equity subject to registration rights penalty	$	2,175,000
Maximum penalty		10	%
Convertible debt subject to registration rights penalty	$	225,000
Maximum penalty		15	%
Registration Rights Penalty	$	251,250

NOTE 6 – RELATED PARTY TRANSACTIONS

CM Design, LLC (“CM Design”), a Louisiana company owned by Pamela Miller (life partner of Matthew Chambers, Chairman, CEO), has a sublease agreement to rent a facility in New Orleans. There is no binding agreement between CM Design and the Company related to this lease. Matthew Chambers is the CEO of CM Design and Confederate. It is the intention of Confederate to assume the lease under CM Design.

Pamela Miller (life partner of Matthew Chambers, Chairman, CEO), handles patent and trademark filings/renewals and administrative support for the Company. There is no formal contract between the Company and Pamela Miller. Her compensation was $3,000 and $3,000 for the quarters ended September 30, 2011 and 2010, respectively. Year to date compensation was $9,000 and $9,000 for the nine months ending September 30, 2011 and 2010. Additionally, Pamela Miller is the guarantor for the majority of the loans and leases and the corporate credit card.

The Company has an employment agreement with the CEO.

NOTE 7 – COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES

Contingencies and Uncertainties

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. With the exception of the two lawsuits discussed in more detail below, the Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

-11-

The Company has two pending legal actions. The first action – Confederate Motors, Inc. v. Francois-Xavier Terny, et al is a complaint for declaratory judgment and breach of contract which is necessary to permanently resolve some internal strife regarding the Chairman’s appointment power and the detrimental actions of a former Director. This is an action for money damages and reclamation of outstanding shares of the corporation. The Defendant in the above referenced matter has filed a counterclaim for monetary damages. Management believes the Company will prevail on the merits and the potential liability is remote. The defendant is seeking an uncertain amount of damages related to the loss of investment capital and loss of share value.

The second action is a dispute over advertising fees relating to a motorcycle exhibition in which Confederate products appeared. This action is styled Advanstar Communications v. Confederate Motors, Inc. The plaintiff is seeking money damages for services rendered. Management is pursuing a settlement of this matter. The potential liability of $14,750 to the Company has been accrued.

Operating Lease

The Company currently occupies a leased building in Birmingham, AL. The Company signed an amendment in October 2010 to extend the lease term to October 31, 2013. The Company may terminate the lease on or after April 30, 2011 with 180 days’ prior written notice. The monthly base rental for the extension period is $4,320, $4,450, and $4,580 for the years 2011, 2012 and 2013. From November 1, 2010 through January 31, 2011 the rent is half the normal base rental.

Rent expense paid under the operating lease obligation totaled $14,158 and $26,033 for the quarters ended September 30, 2011 and 2010, respectively.

The Company intends to assume the sublease agreement entered into by CM Design (as discussed in Note 6 – RELATED PARTY TRANSACTIONS) to rent a facility in New Orleans and has accrued rent per the sublease agreement.

Commitments

Confederate has also engaged S&S Cycle as the supplier of the engines with an initial purchase order for 40 units.

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB established the Accounting Standards Codification (“Codification” or “ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

Statement of Financial Accounting Standards (“SFAS”) No. 165 (ASC Topic 855), “Subsequent Events,” SFAS No. 166 (ASC Topic 810), “Accounting for Transfers of Financial Assets-an Amendment of FASB Statement No. 140,” SFAS No. 167 (ASC Topic 810), “Amendments to FASB Interpretation No. 46(R),” and SFAS No. 168 (ASC Topic 105), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162” were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financial statements would not have been significant.

Accounting Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures – Overall, ASU No. 2009-13 (ASC Topic 605), Multiple Deliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU’s No. 2009-2 through ASU No. 2011-09 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

NOTE 9 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed giving effect to all potential dilutive common stock, including convertible debentures and common stock warrants. For all periods presented, convertible debentures and common stock warrants were not included in the computation of diluted loss per share because the effect would be anti-dilutive. These items could be dilutive in the future.

NOTE 10 – DEFERRED EXCLUSIVE AGENCY FEE

A distribution agreement, starting on January 1, 2008, was signed in 2007 with a group based in Dubai to distribute Confederate branded motorcycles in the Middle East region. During 2008, a $300,000 fee was received for the exclusive selling rights within the Middle East region. The contract is for 5 years ending on December 31, 2012. The fee is being amortized to other income over the life of the agreement.

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NOTE 11 – CONCENTRATION OF CREDIT RISK

At September 30, 2011 the Company had monies in bank accounts not exceeding the federally insured limits. The Federal Deposit Insurance Corporation (FDIC) insures deposit account balances to at least $250,000 per insured bank.

NOTE 12 – ACCRUED PAYROLL TAX LIABILITIES

In March 2010, the Company identified additional payroll tax liabilities related to individuals, including our CEO and CFO paid incorrectly as independent contractors in prior periods. The Company has accrued for the payroll tax liabilities including penalties and interest. The Company is making scheduled payments to the IRS to resolve the liability.

NOTE 13 – GOING CONCERN CONSIDERATIONS

Management has evaluated the Company’s ability to continue as a going concern. The following considerations suggest that the Company will continue in business for the foreseeable future. The Company has minimal debt obligations of $51,687 in notes payable and $6,150 in lease payments which results in negligible debt service payments. We are currently not engaged in any discussions that could result in additional borrowings.

The Company has a significant backlog of orders; as of the date of this report the Company had 53 orders which represents 9-12 months of production backlog. The Company projects an additional 50 to 100 orders with the unveiling of the C3 Hellcat pre-production prototype in the near future. Accordingly, management is of the opinion that the substantial doubt regarding the Company’s ability to continue as a going concern has been mitigated.

NOTE 14 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the filing date of this document and determined that there are no other items to disclose.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the section entitled “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.” Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this report.

Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this report.

Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following:

·	actual or anticipated fluctuations in our quarterly and annual operating results;

·	decreased demand for our products resulting from changes in consumer preferences;

·	product and services announcements by us or our competitors;

·	loss of any of our key executives;

·	regulatory announcements, proceedings or changes;

·	competitive product developments;

·	intellectual property and legal developments;

·	mergers or strategic alliances in the motorcycle industry;

·	any business combination we may propose or complete;

·	any financing transactions we may propose or complete; or

·	broader industry and market trends unrelated to its performance.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company’s ability to (i) continue to realize production efficiencies and manage operating costs including materials, labor and overhead; (ii) manage production capacity and production changes; (iii) manage supply chain issues; (iv) provide products, services and experiences that are successful in the marketplace; (v) develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace; (vi) continue to develop the capabilities of its distributor network; (vii) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations; (viii) manage access to reliable sources of capital and adjust to fluctuations in the cost of capital; (ix) anticipate consumer confidence in the economy; (x) retain and attract talented employees; (xi) detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, increased warranty costs or litigation;

The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent distributors to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company.

In addition, the Company’s independent distributors may experience difficulties in operating their businesses and selling our products.

Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” “the Company”, “CM” and “our company” refer to Confederate Motors, Inc., a Delaware corporation.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

We produce premium, heavyweight (651+cc) motorcycles. The Company manufactures the P120 Fighter. A third generation Hellcat (“C3”) is in the development stage.

Overview and Outlook

Net revenue for the quarterly period ended September 30, 2011 was $280,858 compared to $451,302 for the quarterly period ended September 30, 2010. The Company’s quarterly financial performance reflected a decrease in shipments due to a temporary allocation of production labor for prototype and pre-production motorcycle assembly of the new C3 Hellcat model. Full production assembly for the new model is expected to begin January 2012. Year to date net revenue was $1,575,856 compared to $1,618,854 for the periods ending September 30, 2011 and 2010, respectively. Net loss for the quarter ended September 30, 2011 was $212,898 compared to a net loss of $70,081 for the quarter ended September 30, 2010. Year to date net loss was $192,021 compared to $302,440 for the periods ending September 30, 2011 and 2010, respectively.

Cash flow from operating activities was negative $316,025 for the nine months ended September 30, 2011 compared to a negative cash flow of $41,910 for the nine months ended September 30, 2010. Net cash flow from investing activities was $3,750 and $(3,750) for the first nine months of 2011 and 2010, respectively. Net cash flow from financing activities was $258,804 and $(59,308) for the first nine months of 2011 and 2010, respectively.

We believe that the near-term global economic environment will be challenging for the business and we will continue to make prudent decisions to manage through this uncertain environment. At the same time, we are optimistic about the Company’s long-term business prospects and plans to continue to expand production and global distribution. The operational focus for third quarter 2011 was spent on the development of the new model. We maintain a sales backlog for which the revenue will be recognized in later periods.

Cost of Goods Sold

Cost of goods sold was $168,482 for the quarterly period ended September 30, 2011 compared to $266,640 for the quarterly period ended September 30, 2010. Cost of goods sold was lower due to a decrease in motorcycle shipments. Cost of goods sold was $886,726 and $1,037,490 for the first nine months of 2011 and 2010, respectively.

Gross Profit

Gross profit was $112,376 for the quarterly period ended September 30, 2011, compared to $184,662 for the quarterly period ended September 30, 2010. Gross profit as a percentage of revenue was 40.0% from 40.9% for the quarterly periods ending September 30, 2011 and 2010, respectively. Gross profit was lower due to a decrease in motorcycle shipments. Year to date gross profit was $689,130 and $581,364 for 2011 and 2010, respectively. Year to date gross profit as a percentage of revenue was 43.7% and 35.9% for 2011 and 2010, respectively.

Selling, general and administrative expenses

Selling, general and administrative costs (SG and A), including non-cash consulting expense was $338,874 for the quarterly period ended September 30, 2011, compared to $268,892 for the quarterly period ended September 30, 2010. The SG and A expenses increased over the prior quarter primarily due to non-cash consulting expense of $57,449 related to stock options. Year to date SG and A expenses were $921,064 and $904,282 for the first nine months of 2011 and 2010, respectively.

Results of Operations for the quarter ended and nine months ended September 30, 2011 compared to quarter ended and nine months ended September 30, 2010

	Quarter ended						Nine months ended
	September 30			September 30			September 30			September 30
(in whole dollars)	2011			2010			2011			2010
Revenue from motorcycles & related products	$	280,858		$	451,302		$	1,575,856		$	1,618,854
Gross Profit	$	112,376		$	184,662		$	689,130		$	581,364
Operating Expense	$	338,874		$	268,892		$	921,064		$	921,908
Other Income (Expense)	$	13,600		$	14,149		$	39,913		$	38,104
Net Income (Loss)	$	(212,898	)	$	(70,081	)	$	(192,021	)	$	(302,440	)
Earnings (Loss) per Share		(0.02	)		(0.01	)	$	(0.01	)	$	(0.02	)

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Plan of Operation

Strengthen our position in our core market

We intend to strengthen and grow our niche position in our target market of high net worth customers. To this end we are introducing the C3 Hellcat, which management believes is tougher, stronger, lighter and more efficient than our previous designs.

We intend to develop and introduce new products to appeal to the changing needs of our target clients and to bring new clients to the Confederate brand. We believe we can expand our traditional market niche by combining hot rod street credibility, avant-guard American design and quality hand craftsmanship. We believe that the aesthetics of our new third generation architecture simplified to a slightly more conventional level will both solidify and grow our present target audience and open our Confederate brand to high net worth individuals.

Strengthen our Distribution Network

We believe our U.S. sales deployment strategy will create the most proximate relationship between our target client and our Confederate team. We plan to open a small servicing center, retail environment, and design boutique in a large metropolitan market but no definitive plans have been made. This facility will serve as a template for expansion as demand for our motorcycles increases.

Develop our Internet Business

As our current and only web presence, confederate.com encompasses a wealth of information on our brand and products. Activity on our website has increased from approximately 14,000 unique visitors per month in 2005 to approximately 50,000 per month in 2011. These statistics show a marked increase in traffic and point to an improvement in quality and relevance of referrals to our site. Going forward our plan is to spread and better organize and classify information about our products and brand by separating information across a total of three web presences, in order to pull in more web traffic and widen our sales demographic. The goal of this diversification is not just intended to increase motorcycle sales but specifically to create an entirely new revenue stream in apparel, parts, and accessories.

We anticipate that confederate.com will be a more streamlined and informative site where the motorcycle consumer will be able to review specs, details, and product photos. This site will essentially serve as a “nuts and bolts” information source on Confederate motorcycles.

Product Research and Development

We have developed a third generation of our Hellcat line known as the C3 Hellcat. This design incorporates improved chassis and power train rigidity. To meet the engine design objective, we have developed a new unitized power train casing, which combines the motor and transmission as a single stressed member.

A strategic alliance has been formed with S&S Cycle and Confederate on the development of the engine for the C3 Hellcat. Confederate has also engaged S&S Cycle as the supplier of the engines with an initial purchase order for 40 units.

Financing

Based on our current cash position, we may need additional financing to fund inventory purchases to fulfill our backlog orders. We anticipate obtaining additional needed financing through the proceeds from additional private placement of equity securities.

Liquidity and Capital Resources

At September 30, 2011, we had cash of $212,856.

To the extent we are successful in rolling out our product line and increasing demand for our motorcycles, we plan to use our working capital to fund continued operations. Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” (“ASC 820”) to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on our consolidated financial position or results of operations.

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Critical Accounting Policies

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 1 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would affect consolidated results of operations, financial position or liquidity for the periods presented in this report.

Significant amounts of our shares of common stock have been issued as payment to employees and non-employees for services. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in our consolidated financial statements for certain of our assets and expenses. For historic fiscal years when there was not an observable active, liquid market for our common stock, the valuation of the shares issued in a non-cash share payment transaction relies on observation of arms-length transactions where cash was received for our shares, before and after the non-cash share payment date.

Off-Balance Sheet Arrangements

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we have elected not to provide the disclosure required by this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of September 30, 2011. Based on this evaluation, as a result of the material weaknesses in internal controls over financial reporting as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2011, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

5. OTHER INFORMATION

ITEM 6. EXHIBITS

31.1		Rule 13a-14 Certification by Principal Executive Officer

31.2		Rule 13a-14 Certification by Chief Financial Officer

32.1		Section 1350 Certification of Principal Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CONFEDERATE MOTORS, INC.

Date: November 14, 2011	By:	/s/ Joseph Mitchell
		Joseph Mitchell, CFO Principal Financial Officer

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Confederate Motors, Inc. - FORM 10-Q - November 14, 2011

Attached files

Confederate Motors, Inc. Reports