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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

  

FORM 1O-Q

 

 

 

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

Commission File No. 000-51632

 

 

  

VIPER POWERSPORTS INC.

(Exact name of registrant as specified in its charter)

 

Nevada 41-1200215
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

2458 W. Tech Lane, Auburn Alabama 36832
(Address of principal executive offices) (Zip Code)

 

(334) 887-4445

(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 Securities Exchange Act of 1934 during the past 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. Yes  x No ¨

 

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

 

Large Accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act). Yes ¨   No x

 

The number of shares of common stock outstanding was 52,182,639 as of September 30, 2012

 

Transitional Small Business Disclosure Format (check one): Yes x   No ¨   

 

 
 

 

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION  
Item 1. Financial Statements   3
Item 2. Management’s Discussion and Analysis   10
Item 3. Controls and Procedures   17
       
PART II: OTHER INFORMATION  
Item 6. Exhibits   18
       
SIGNATURE:   19
       
INDEX TO EXHIBITS   20
Exhibit 31.1    
Exhibit 31.2    
Exhibit 32.1    
Exhibit 101.INS    
Exhibit 101.SCH    
Exhibit 101.CAL    
Exhibit 101.DEF    
Exhibit 101.LAB    
Exhibit 101.PRE    

 

2
 

 

PART 1: FINANCIAL INFORMATION

Item 1:  Financial Statements

Viper Powersports Inc.

Consolidated Balance Sheets

(Unaudited)

 

   September 30, 2012   December 31, 2011 
       (audited) 
ASSETS          
Current assets:          
Cash  $41,051   $27,896 
Accounts receivable   196,724    8,803 
Inventory and supplies   938,128    523,174 
Prepaid expenses and other   279,862    101,602 
Total current assets   1,455,765    661,475 
Fixed assets:          
Office and computer equipment   96,733    96,733 
Manufacturing and development equipment   543,720    242,835 
Vehicles   248,937    248,937 
Leasehold improvements   63,363    63,363 
    952,753    651,868 
Accumulated depreciation   (254,262)   (140,715)
Total fixed assets   698,491    511,153 
Other assets:          
Rental deposit and other   14,200    13,400 
Intangibles   387,940    0 
Deferred financing cost   2,253,885    0 
           
Total assets  $4,810,281   $1,186,028 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $243,751   $222,319 
Accrued liabilities   208,438    205,091 
Notes payable   0    233,621 
Notes payable – related party, net of discount   282,000    175,111 
Current portion of long-term liabilities   100,000    100,000 
Total current liabilities   834,189    936,142 
Long-term liability          
Long-term note payable   3,313,783    170,000 
Total long-term liabilities   3,313,783    170,000 
           
Total liabilities   4,147,972    1,106,142 
Stockholders’ equity:          
Preferred stock, $.001 par value; authorized 20,000,000 shares; 0  and 1,386,469 shares issued and outstanding , respectively   0    1,386 
Common stock, $.001 par value; authorized 100,000,000 shares; 52,182,639  and 28,692,252 shares issued and outstanding, respectively   52,183    28,692 
Additional paid-in capital   45,800,849    40,812,394 
Accumulated deficit   (45,190,723)   (40,762,586)
Total stockholders’ equity   662,309    79,886 
           
Total liabilities and stockholders’ equity  $4,810,281   $1,186,028 

 

See accompanying notes to the consolidated financial statements

 

3
 

 

Viper Powersports Inc.

Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
                 
Revenue  $370,274   $166,166   $655,073   $204,901 
Cost of revenue   345,008    162,787    622,126    208,992 
Gross profit   25,266    3,379    32,947    (4,091)
                     
Operating expense:                    
Research and development costs   93,756    14,983    172,441    19,139 
Selling, general and administrative   748,665    1,478,424    2,691,172    2,621,550 
                     
Total operating expense   842,421    1,493,407    2,863,613    2,640,689 
                     
Loss from operations   (817,155)   (1,490,028)   (2,830,666)   (2,644,780)
                     
Other (expenses) income:                    
Interest expense   (117,643)   (5,324)   (436,971)   (40,744)
Accretion of debt discount   0    0    (461,088)   (83,304)
Financing cost, debt discounts   (218,118)   0    (729,768)   (183,566)
Gain on extinguishment of debt   0    0    30,356    0 
Beneficial conversion feature on loan   0    0    0    (211,730)
Other income (expense)   0    0    0    1,463 
 
Total other (expense) income
   (335,761)   (5,324)   (1,597,471)   (517,881)
                     
Net loss   (1,152,916)   (1,495,352)   (4,428,137)   (3,162,661)
                     
Less: Deemed dividend of preferred stock   0    0    0    327,794 
Net loss attributed to common shareholders  $(1,152,916)  $(1,495,352)  $(4,428,137)  $(3,490,455)
                     
Net loss per common share:                    
Basic and diluted  $(0.03)  $(0.07)  $(0.09)  $(0.17)
                     
                    
Weighted average shares common stock outstanding   52,165,788    19,979,737    43,102,543    19,021,687 

 

See accompanying notes to the consolidated financial statements.

 

4
 

 

Viper Powersports Inc.

Statement of Cash Flows

(Unaudited)

 

   Nine Months Ended
September 30,
 
   2012   2011 
Cash Flows Used in Operating Activities:          
Net loss  $(4,428,137)  $(3,162,661)
Expenses not requiring an outlay of cash:          
Depreciation   140,607    55,568 
Common stock and warrants issued for compensation and services   613,242    1,159,515 
Beneficial conversion feature on convertible loan   0    211,730 
Accretion of debt discount   461,088    83,304 
Financing costs related to debt discount   729,768    183,566 
Gain on extinguishment of debt   (30,356)   0 
Non cash interest   188,701    0 
Common stock issued to convert accrued interest   0    3,164 
Changes to operating assets and liabilities:          
Decrease (increase) in accounts receivable   (187,921)   (6,303)
Decrease (increase) in inventory and supplies   (414,954)   29,776 
Decrease (increase) in prepaids and other   (179,060)   (53,943)
Increase (decrease) in accounts payable   21,432    68,231 
Increase (decrease) in accrued liabilities   3,347    (70,795)
           
Cash flows used in operating activities   (3,082,243)   (1,498,848)
           
Cash Flows Used in Investing Activities:          
Purchase of intellectual property   (415,000)   0 
Purchase of fixed assets   (300,885)   (220,796)
           
Cash flows used in investing activities   (715,885)   (220,796)
           
Cash Flows from Financing Activities:          
Net proceeds from sale of preferred stock   0    599,849 
Net proceeds from sale of common stock   443,500    510,543 
Proceeds from notes payable   3,238,783    690,000 
Payments on notes payable   (65,000)   (74,000)
Payments on stockholder loans   (287,000)   0 
Payments on loan costs   0    (55,333)
Proceeds from loans from stockholders, related parties   481,000    50,000 
Cash flows from financing activities   3,811,283    1,721,059 
           
Net increase in cash   13,155    1,415 
Cash at beginning of period   27,896    15,579 
           
Cash at end of period  $41,051   $16,994 
Supplemental Non-Cash Financing Activities and Cash Flow Information:          
Preferred stock issued for debt  $0   $425,000 
Common stock issued for debt and expenses  $170,832   $325,000 
Stock warrants issued with short-term loans  $0   $75,000 
Interest converted  $0   $35,419 
Deemed dividend on preferred stock  $0   $327,794 

See accompanying notes to the consolidated financial statements

 

5
 

 

Viper Powersports Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

 

A. Basis of Presentation

 

The consolidated balance sheet as of September 30, 2012, the consolidated statements of operations for the three months and nine months ended September 30, 2012 and 2011 and the consolidated statements of cash flows for the three months and nine months ended September 30, 2012 and 2011 have been prepared by Viper Powersports Inc., (the ”Company”) without audit. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, as of September 30, 2012 and results of operations and cash flows for the three months and nine months ended September 30, 2012 and 2011 have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2011.

 

For comparison, the Company’s Form 10-Q for the quarter ended September 30, 2011 was restated. When comparative data is used in this statement, the Company is referencing the restated Form 10-Q/A

 

B. Going Concern

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has a positive working capital position of $621,424 as of September 30, 2012. However, future current cash and cash available may not be sufficient to fund operations beyond a short period of time. These conditions create uncertainty as to the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

C. Common Stock Transactions

 

During the three months ended March 31, 2012, the Company issued 666,666 shares of common stock for $100,000 in cash less $31,718 of cost recorded in general and administrative.

 

During the three months ended March 31, 2012, 1,019,801 Preferred Shares have been converted into 3,824,255 common shares.

 

During 2011, the Company issued 1,386,469 Convertible Preferred Shares at a price of $0.75. Based on the last five trading days of December 2011, a conversion price of $0.20 was set. The conversion rate was 3.75 Common Shares for one (1) Preferred Share.

 

During the three months ended June 30, 2012, the Company issued 2,333,334 shares of common stock to thirteen accredited investors for $350,000 in cash less $29,169 of cost recorded in general and administrative.

 

During the three months ended June 30, 2012, the Company issued 500,000 shares of common stock to two accredited investors for $75,000 for conversion of short-term notes.

 

During the three months period ended June 30, 2012, 366,667 Preferred Shares have been converted into 1,375,001 common shares. During 2011, the Company issued 1,386,469 Convertible Preferred Shares at a price of $0.75. Based on the last five trading days of December 2011, a conversion price of $0.20 was set. The conversion rate was 3.75 Common Shares for one (1) Preferred Share.

 

During the three months period ended June 30, 2012, the Company issued 2,426,668 shares of unregistered common stock to five accredited investors in consideration for their conversion of debt owed to them by the Company in the total amount of $364,000.

 

6
 

 

Viper Powersports Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

 

D. Common Stock Transaction for Services

 

During the three months ended March 31, 2012, the Company issued 500,000 shares of common stock to one accredited investor for $135,000 of services recorded as an expense in general and administrative. The market closing price on this date was used to value the stock issued for services.

 

During the three months ended June 30, 2012, the Company issued 532,000 shares of common stock to three accredited investors for $149,640 of services recorded as an expense in general and administration. The market closing price on this date was used to value the stock issued for services.

 

As an inducement to Precious Capital LLC to make the loan (see note F below) to Viper Motorcycle Company, the Company issued a total of 9,694,128 unregistered shares of its common stock to Precious Capital LLC, which common shares were offered and sold by the Company in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

 

As an inducement to three accredited investors to convert their notes, the Company issued 1,255,000 shares of common stock for a value of $414,150.

 

During the three months ended September 30, 2012, the Company issued 383,333 shares of common stock to two accredited investors for $80,500 of services recorded as an expense in general and administration. The market closing price on this date was used to value the stock issued for services.

 

E. Warrants for Services

 

During the three months ended March 31, 2012, the Company issued 100,000 warrants for shares of common stock for $27,971 of services recorded as an expense in general and administration. The Company valued the warrants issued using the Black-Scholes model.

 

During the three months period ended June 30, 2012, the Company issued 1,359,550 warrants for shares of common stock for $313,133 of services recorded as an expense in general and administration. The Company valued the warrants issued using the Black-Scholes model.

 

F. Loans

 

The Company entered into two 180-day loan agreements for $100,000 each from January 1, 2012 through March 31, 2012. These loans are convertible and carry a 12.0% interest rate. Each agreement also required the Company to issue 650,000 warrants to purchase the applicable number of shares of common stock at $.15 per share. The Company valued the warrants issued using the Black-Scholes model. The relative fair value method was used to allocate the proceeds between the warrants and the loans, resulting in a debt discount, which is then accreted over the life of the loans. Any remaining unamortized debt discount at the time of conversion has been accreted as an expense. These loans were converted in April 2012.

 

On March 15, 2012, the Company repaid the Convertible Promissory Note to Asher Enterprises, Inc. with a principal amount of $65,000 with accrued interest and prepayment option fees. The discounted carrying value on the Balance Sheet was $33,622.

 

The Company entered into three (3) short-term loan agreements for a total of $214,000 with related parties from January 1, 2012 through March 31, 2012. The instruments are non-interest bearing.

 

On March 22, 2012, the Company received $25,000 from an accredited investor from a private placement. As of March 31, 2012, the shares were not issued and were classified as a payable. The loan was converted into share during the second quarter of 2012.

 

On April 24, 2012, Viper Motorcycle Company (“VMC”), as Borrower and being a wholly owned subsidiary of registrant Viper Powersports Inc., entered into a Loan and Security Agreement (the “Loan Agreement”) with Precious Capital LLC , of New York City, as Lender. The Loan Agreement provides funding through advances to VMC under a line of credit not to exceed $6,000,000, with interest on outstanding principal payable at an annual rate of 15% per annum. All outstanding principal of this loan and any accrued interest is due to Lender in full, thirty-six (36) months from the date of the Loan Agreement. The outstanding principal of this loan may be prepaid by VMC, in whole or in part, at any time.

 

7
 

 

·Upon closing this loan, VMC received an initial loan advance of $2,500,000. The Loan Agreement required the funds from this initial advance to be used by VMC as follows: payment of outstanding debt of $280,000 including $80,000 owed to a director of the Company; payment of $640,000 to acquire the assets of Precision Metal Fab Racing, a manufacturer and marketer of high performance motorcycle components based in suburban Minneapolis; prepaid payment of loan interest to the Lender of $375,000; payment of $330,000 to complete acquiring engine development IP technology from Ilmor; payment not to exceed $450,000 for manufacturing equipment and tooling; payment of $180,000 for loan brokerage commissions; payment not to exceed $128,000 for motorcycle components inventory and other immediate operational expenditures; and the balance for miscellaneous permitted expenditures including payment of professional and other expenses of VMC and the Lender related to this loan transaction and its closing.
·Under the terms of the Loan Agreement, any further advances to VMC beyond the initial $2,500,000 shall be in the Lender’s sole and absolute discretion, and no advance may be requested by VMC after April 24, 2014. The loan terms also require that at no time shall the outstanding balance of this loan exceed a “Balancing Formula” as defined in the Loan Agreement, which formula approximates 60% of the values of certain defined tangible and intangible assets of VMC and the Company.
·To provide the required collateral for this loan, both VMC and the Company entered into various security, pledge and guaranty agreements to guarantee payment to the Lender and secure the Lender with all tangible and intangible assets of VMC and the Company as set forth in the Loan Agreement and its supporting documents, including the Company’s 100% ownership of VMC. In addition, the future payment to the Lender of all outstanding principal and accrued interest of this loan was guaranteed unconditionally by the Chief Executive Officer and Chief Financial Officer of the Company.
·The Loan Agreement also contains numerous representations, warranties and covenants of VMC, detailed terms for the opening and operation of certain banking Special Deposit Accounts as required by the Lender, default provisions and other standard loan contract provisions.
·As an inducement to the Lender to make this loan to VMC, the Company issued a total of 9,694,128 unregistered shares of its common stock to the Lender, which common shares were offered and sold by the Company in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. The cost of this issuance was capitalized to deferred financing costs and will be amortized on a straight-line basis over the life of the loan as additional interest.
·The Loan Agreement also provides that none of the common stock of the Company owned by the Lender or by the Chief Executive Officer and Chief Financial Officer of the Company can be sold or otherwise disposed of during the three-year term of this loan.

 

On July 10, 2012, per the April 24, 2012, Loan Agreement with Precious Capital LLC, VMC was advanced $345,000 under the same terms.

 

On August 22, 2012, per the April 24, 2012, Loan Agreement with Precious Capital LLC, VMC was advanced $195,000 under the same terms.

 

On September 10, 2012, per the April 24, 2012, Loan Agreement with Precious Capital LLC, VMC was advanced $160,000 under the same terms.

 

8
 

 

Viper Powersports Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

 

G. Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined by using first-in, first-out method (FIFO). Demonstration motorcycles are stated at manufacturing cost with reserves recorded to reflect their net realizable value. The Company reviews inventory for obsolescence and excess quantities to determine that items deemed obsolete or in excess are appropriately reserved. Inventory components at September 30, 2012 are as follows:

 

September 30, 2012  VMC   PMFR   Total 
Raw material  $0   $10,000   $10,000 
Build components   592,957    0    592,957 
Finished goods   78,412    256,759    335,171 
    671,369    266,759   $938,128 

 

H. Subsidiary purchase

 

On April 24, 2012, the Company established a subsidiary, PMFR, Inc. (“PMFR”). The subsidiary then purchased assets from Precision Metal Fab Racing, a sole proprietor for $640,000 in cash. The acquisition of fixed assets, inventory and intangible was recorded as following:

 

Fixed assets  (estimated life of 5 years)  $300,000 
Intangible (customer list) (estimated useful life of 5 years)   85,000 
Inventory   215,000 
Total purchases  $600,000 
      
Finder’s fee   40,000 
Total purchase price  $640,000 

 

I. Intangibles

 

Under the Ilmor/Viper Contract, Ilmor had assumed all design, development, testing, quality control and manufacturing with respect to an upgraded Ilmor-designed Viper V-Twin engine. Ilmor has completed design and development operations and is now producing models of this engine based on specifications jointly developed by Ilmor and Viper. Under a payment schedule extending through November 2012, the Company was to pay Ilmor a total of $745,000 for the design, development and testing of this V-Twin engine. On April 24, 2012 Viper paid Ilmor the final $330,000 installment for the development cost. The Company will amortize this intangible over the next 60 months.

 

J. Subsequent Events

 

The Company has evaluated subsequent events from September 30, 2012 through the date the original financial statements were issued and determined that there are the following events to disclose:

 

Loans

 

On October 10 2012, per the April 24, 2012, Loan Agreement with Precious Capital LLC, VMC was advanced $1,725,000 under the same terms.

 

The Company has made a pre-payment of $1,000,000 to Ilmor for the purchase of future engines and components.  This amount will be carried a prepaid other on future financial statements.

 

9
 

 

Item 2: Management’s Discussion and Analysis

 

The following discussion should be read and considered along with our consolidated financial statements and related notes included in this 1O-Q. These financial statements were prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ substantially from those anticipated in these forward-looking statements as a result of various factors including those set forth in the “Risk Factors” section of our Form 10-K filing for December 31, 2011.

 

Business Development Overview

 

Viper Powersports Inc., formerly ECCO Capital Corporation (“ECCO”), was incorporated in Nevada in 1980. ECCO mergered with Viper Motorcycle Company(“VMC”) in 2005 through a stock exchange acquisition, incident to which it changed its name to Viper Powersports Inc.

 

Effective March 31, 2005, Viper Powersports Inc. acquired all of the outstanding capital stock of VMC, a Minnesota corporation, resulting in VMC becoming a wholly-owned subsidiary of Viper Powersports Inc. For accounting and operational purposes, this acquisition was a recapitalization conducted as a reverse acquisition of Viper Powersports Inc. with VMC being regarded as the acquirer. The stock exchange for this reverse acquisition was affected on a one-for-one basis, resulting in the stockholders of VMC exchanging all of their outstanding capital stock for an equal and like amount of capital stock of Viper Powersports Inc. This resulted in the former shareholders of VMC acquiring approximately 94% of the resulting combined entity.

 

Viper Performance Inc. was incorporated by us in March 2005 as a wholly-owned Minnesota corporation. We organized and incorporated Viper Performance Inc. for the purpose of receiving and holding engine development technology

PMFR, Inc. was incorporated by us in April 2012 as a wholly-owned Minnesota corporation. It was organized for the acquisition of Precision Metal Fab Racing’s assets. The subsidiary was formed to produce high quality chassis and suspension and other components and parts, many of which are CAD designed and CNC machined from high-grade billet aluminum stock.

 

As used herein, the terms “we”, “us”, “our”, and “the Company” refer to Viper Powersports Inc. and its two wholly-owned subsidiaries, unless the context indicates otherwise.

 

Since our inception, we have been in the business of designing, developing and commencing commercial marketing and production of premium custom V-Twin motorcycles. Our motorcycles are distributed and sold under our Viper brand through a nationwide network of independent motorcycle dealers. Marketing of our motorcycles is targeted toward the upscale market niche of motorcycle enthusiasts who prefer luxury products and are willing to pay a higher price for enhanced performance, innovative styling and a distinctive brand. We believe there is a consistently strong demand for upscale or luxury motorcycle products like our American-styled classic Viper cruisers and our premium V-Twin engines. For example, the prestigious upscale Robb Report magazine publishes a Robb Report Motorcycling magazine bi-monthly, which is targeted exclusively to luxury motorcycle products.

 

We have completed the development and extensive testing of proprietary V-Twin engines including actual performance testing of the engines on our various motorcycles models, and we have been very satisfied with their performance while powering our motorcycles during all kinds of street and highway running conditions. Our proprietary V-Twin engines were designed and developed by Melling Consultancy Design (MCD), a leading professional engine design and development firm based in England.

 

After undergoing an extensive engine emissions testing program for an entire year conducted by a leading independent test laboratory, our proprietary V-Twin engines satisfactorily passed and complied with all noise and pollution emissions requirements of both the federal Environmental Protection Agency (EPA) and the more stringent emissions requirements of the California Air Resources Board (CARB). Satisfying these standards constitutes a touchstone achievement for the Company that we believe places us in a commanding competitive position in the upscale custom motorcycle market.

 

We commenced commercial marketing, very limited production and commercial shipment of Viper motorcycles prior to our move to Auburn, Alabama. With the completed relocation to Auburn the Company has started substantial stocking of inventory and commenced production of its 2012 motorcycles.

 

Strategic Engine Development Joint Venture

 

In January 2010, the Company’s subsidiary, VMC, entered into a three-year Motorcycle Engine Manufacture and Supply Agreement with Ilmor Engineering Inc. (the “Ilmor/VMC Contract”). Ilmor Engineering Inc. (“Ilmor”) has been engaged for over 20 years in the design, development and manufacture of high-performance engines, and Ilmor’s extensive precision engineering and manufacturing facilities are located in suburban Detroit, Michigan. The Company is very pleased to have completed this strategic and valuable Ilmor/VMC Contract, since Ilmor is widely recognized as one of the most successful race-engine design and manufacturers.

 

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Under a previous written contract entered into by Ilmor and VMC in 2009, Ilmor began assembling all V-Twin engines used by VMC and since then Ilmor has conducted all of the Company’s engine product assembly. The initial 2009 contract also contained a product development segment whereby Ilmor evaluated our V-Twin engine to determine whether the parties should engage in a future joint venture to develop and produce an upgraded model of the VMC engine. Ilmor’s evaluation of our V-Twin engine through the initial contract was favorable, and accordingly resulted in the current Ilmor/VMC Contract, which provides for the exclusive manufacture and supply by Ilmor of a VMC engine designed by Ilmor.

 

The Company has approved and is well satisfied with the most improved and upgraded Ilmor-designed VMC engine, and accordingly has ordered and obtained initial commercial shipments of these engines. Ilmor agrees to manufacture and supply all V-Twin requirements of VMC and in turn the Company must purchase all its engines exclusively from Ilmor. Ilmor will bear the cost and expense of all tooling, parts and components to manufacture and supply VMC engines until finished engines are invoiced and shipped to the Company. So long as VMC satisfies certain minimum annual engine purchase requirements, Ilmor shall not develop, manufacture or sell a similar V-Twin engine for itself or any third party.

 

These Ilmor-designed VCM engines are labeled with an Ilmor brand, for which the Company has been granted a non-exclusive paid-up license to use the Ilmor Mark in connection with sale and distribution of Viper engines. All intellectual property rights related to any Ilmor Marks, however, continue to be owned exclusively by Ilmor. Engine pricing to be paid to Ilmor by VMC will be determined annually based on the actual Bill of Materials for components, labor and assembly costs incurred by Ilmor, plus a reasonable mark-up percentage.

 

On October 8, 2012, VMC and Ilmor entered in to an amended and updated agreement known as the Motorcycle Engine Manufacture and Supply Agreement (“the Ilmor/VMC Updated Contract”).

 

The Ilmor/VMC Updated Contract replaces and updates the earlier agreement made between the parties. The updated agreement has been expanded to a term of five (5) years. In addition, VMC has made a pre-payment to Ilmor of $1,000,000 for the purchase of future engine and components. Under the terms of the Ilmor/VMC Updated Contract, Ilmor will use “best efforts” to improve the costs of engine components in a shared savings cost reduction program, which, the Company believes, will result in a substantial cost benefit pass through unto VMC.

 

Plan of Operation

 

Our long-term business strategy or goal is to become a leading developer and supplier of premium V-Twin heavyweight motorcycles, V-Twin engines, and ancillary motorcycle aftermarket products. In implementing this strategy, we intend to execute the following matters for the next twelve months:

 

Continue commercializing the Diamondback & Mamba

Our primary focus during the next twelve months is to complete implementing and improving production operations for our motorcycle products to be manufactured by us effectively on a commercial scale. We have completed our production assembly set-up including shelving, railings and individual station equipment necessary for efficient factory production operations. We also have obtained all vendors, suppliers or subcontract third parties needed for obtaining components, parts and raw materials for our motorcycles and having them painted after assembly, and we will continue to identify and obtain alternate sources for material components.

 

Continue Design and Development

We will complete development and testing of our Mamba model and a Viper three-wheeled “trike” in order to offer the Mamba commercially as soon as possible in early 2013 and the “trike” soon thereafter.

 

Expansion of Distribution Network

We will continue to identify and recruit qualified independent motorcycle dealers to become VMC dealers until we achieve our goal of having a nationwide network of VMC dealers. We will only select full-service dealers which we determine possess a successful V-Twin motorcycle sales history, a solid financial condition, a good reputation in the industry, and a definite desire to sell and promote VMC products. We have engaged with future international distributors for Europe and Australia.

 

Expansion of Sales and Marketing Activities

We will continue and expand upon our marketing activities which are primarily focused toward supporting our dealer network and building Viper brand awareness. We will participate in leading consumer and dealer trade shows, rallies and other motorcycle events. We also will engage in ongoing advertising and promotional activities to develop and enhance the visibility of our Viper brand image.

 

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Market and Sell Ancillary Viper Product

We intend to commence marketing and sales of a variety of ancillary products under our Viper brand, particularly in the large custom cruiser aftermarket. We expect our primary aftermarket sales will be our line of powerful Viper V-Twin engines, and by the middle of 2013 we anticipate obtaining substantial revenues from Viper engine sales in this active aftermarket. We also will outsource production of ancillary Viper items from third-party suppliers including various motorcycle parts and accessories, apparel, and other Viper branded merchandise. For example, we have obtained a source to provide us with a line of Viper branded apparel. Our ancillary Viper products will be sold through multiple marketing channels including Viper dealers, independent aftermarket catalogs and our website.

 

Market and Sell PMFR Product

The Company, through its newly acquired subsidiary PMFR, Inc., purchased the assets and business of Precision Metal Fab Racing on April 24, 2012. During the next twelve months, we will commence marketing and sales of a variety of premium motorcycle products under the PMFR brands. These include frameworks, front ends, brake systems, handlebars, triple trees, various chrome or polished wheels, mounts, swing arms and foot pegs utilized in the custom motorcycle market. In addition, PMFR will continue to produce and sell it specialized components associated with various racing configurations.

 

Location of manufacturing operations

Viper Motorcycle Company is located in Auburn, Alabama. The 63,000 sq ft world class production facility is situated on 13 acres. The plant is large enough to produce up to 1,000 units per year and can be expanded to a maximum footprint of 163,000 square feet.

 

Recent Activities

 

In July 2011, the Company completed the relocation of its entire headquarters and manufacturing operations from Hopkins, Minnesota to Auburn, Alabama. With this move completed the Company is leasing and occupying a modern state-of-the-art facility in Auburn which is currently being upgraded and customized to suit all of our motorcycle development, marketing, production and administrative functions. This Auburn facility includes 63,000 square feet with ample future expansion capability.

 

On April 24, 2012, the Company incorporated its subsidiary PMFR, Inc. This subsidiary will manufacture high performance racing and custom motorcycle components and accessories. The PMFR purchase included an established customer base that will continue to be a profitable business. In addition, the Company plans to reduce its internal cost of purchasing by utilizing PMFR’s excess production capacity.

 

Results of Operations

 

Revenues

 

Beginning in 2012, the Company began the full production and sale of motorcycles Future revenues will continue to increase from the sale of Viper premium motorcycles as we expand our dealer network. In addition, we expected material sales of our proprietary engines in the aftermarket by the second quarter of 2013.

 

Our subsidiary PMRF, Inc. will continue to produce racing and after-market parts for both external sale and internal consumption.

 

We believe our future revenue stream will be most significantly affected by customer demand for Viper motorcycles, performance of our proprietary V-Twin engines, our ability to timely manufacture our motorcycle products in response to dealer and customer orders, recruitment and retention of dealers and distributors who actively promote and sell our products.

 

Operating Expenses

 

Research and development expenses consist primarily of salaries and other compensation for development personnel, contract engineering costs for outsourced design or development, supplies and equipment related to design and prototype development activities, and costs of regulatory compliance or certifications.

 

Selling, general and administrative expenses consist primarily of salaries and other compensation for our management, marketing and administrative personnel, facility rent and maintenance, advertising and promotional costs including trade shows and motorcycle rallies, sales brochures and other marketing materials, dealer recruitment and support costs, development of accounting systems, consulting and professional fees, financing costs, public relations efforts and administrative overhead costs.

 

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Comparison of quarter ended September 30, 2012 and September 30, 2011.

 

Revenues

 

There was $370,274 of motorcycle and parts revenue for the third quarter of 2012 as compared to $166,166 for the same period of 2011. There were six bike sales during this quarter of 2012 compared to five bike sales during the same quarter of 2011. During this period of 2012, the Company significantly increase it wholesale price of motorcycles.

 

 Research and Development Expenses

 

Research and development for the quarter reported was $93,756 compared to $14,983 for the same period in 2011. This increase was due to increased development expenses related to current and future models as the Company moved into full commercial production.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses decreased to $748,665 for the third quarter of 2012 from $1,478,424 for the same quarter of 2011. Our 2011 selling and general administrative expenses were higher primarily due to costs associated with our relocation to Auburn, AL in the summer of 2011.

 

Loss from operations

 

Operational loss for the third quarter of 2012 was $817,155 compared to $1,490,028 for the same quarter of 2011. This decreased loss in the third quarter of 2011 was due primarily to our 2011 selling and general administrative expenses being higher due to costs associated with our relocation to Auburn, AL.

 

Interest expense

 

Interest expense for the third quarter of 2012 was $335,761 compared to $5,324 for the same quarter of 2011. This increase during the third quarter of 2012 was due to interest related to the new long-term debt facility with Precious Capital LLC..

 

No income tax benefit was recorded regarding our net loss for the third quarters of 2012 and 2011; since we could not determine that it was more likely than not that any tax benefit would be realized in the future.

 

Comparison of the nine months ended September 30, 2012 and September 30, 2011.

 

Revenues and Gross Profit

 

There was $655,073 of motorcycle and parts revenue for the first nine months of 2012 as compared to $204,901 for the same period of 2011. There were eleven motorcycles sold the first nine months of 2012 compared to five motorcycles sales in 2011.

 

 Research and Development Expenses

 

Research and development for the first nine months of 2012 was $172,441 compared to $19,139 for the same period of 2011. This increase was due to increased development expense as the Company moved to finalize and produce its new model.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the first nine months of 2012 were $2,691,172 compared to $2,621,550 for the same period in 2011. Our 2012 selling and general administrative expenses included substantial expenses incurred in acquiring the new operating loan. The 2011 selling and general administration included substantial expenses related to the relocation to Auburn and increased personnel cost at the new facility.

 

Loss from operations

 

Operational loss for the first nine months of 2012 was $2,830,666 compared to $2,644,780 for same period in 2011. This increase of the loss for the same period in 2011 was due to primarily to expenses incurred in acquiring the new operating loan. The 2011 selling and general administration reflect the expenses of related to the relocation to Auburn and increases in personnel cost.

 

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 Interest expense

 

Interest expense for the first nine months of 2012 was $655,089 compared to $40,744 for the same period of 2011. This increase during the same period of 2011 was due to new long-term debt of the Company.

 

Other expenses

The Company recognized accretion and financing charges during the first nine months of 2012 of $461,088 and $729,768 compared to $83,304 and $183,566 during the same period of 2011. These charges were the results of the conversion of loan instruments into equity.

 

No income tax benefit was recorded regarding our net loss for the first nine months of 2012 and 2011; since we could not determine that it was more likely than not that any tax benefit would be realized in the future.

 

We currently employ 16 persons including our management, production, engineering, marketing and administrative personnel. We expect to hire 2-3 assembly and administrative personnel during the next twelve months to support our anticipated commercial production and sales of Viper cruisers. Other than these additional anticipated personnel, we do not anticipate needing any additional personnel during the next twelve months. None of our employees belong to a labor union, and we consider our relationship with our employees to be good.

 

Liquidity and Capital Resources

 

As of September 30, 2012, we had cash resources of $41,051, total liabilities of $4,148,972 and a positive working capital position of $621,576.

 

Future Liquidity

 

Based on our current cash position, we have concerns about our ability to fund our ongoing operations. We anticipate obtaining additional needed financing through the proceeds from additional private placement of equity securities.

 

If we are unable to complete proposed private equity placements or to obtain substantial additional funding through another source, we most likely would need to curtail significantly, or even cease, our ongoing and planned operations. Our future liquidity and capital requirements will be influenced materially by various factors including the extent and duration of our future losses, the level and timing of future sales and expenses, market acceptance of our motorcycle products, regulatory and market developments in our industry, and general economic conditions.

 

The report of our independent registered accounting firm for our audited financial statements for the year ended December 31, 2011, states that there is substantial doubt about the ability of our business to continue as a going concern.

 

Cash Flow Information

 

Net cash consumed by operating activities was $3,082,243 during the nine months ended September 30, 2012 compared to consuming cash in the amount of $1,498,848 for the same period in 2011. This increase is primarily associated with the financing cost from the new long-term debt and substantial increased inventory.

 

Net cash used from investing activities for the nine months of 2012 of $715,885 as compared to $220,796 used during the same period in 2011. This increased cash use in 2012 is associated with the purchase of assets of PMFR and the final engine development payment to Ilmor Engineering.

 

Cash generated from financing activities for the nine months ended September 30, 2012 was $3,811,283 compared to $1,721,059 for the same period in 2011. This substantial increase is associated with a new long-term loan entered into during 2012.

 

Business Seasonality

 

Sales of motorcycles in the United States are affected materially by a pattern of seasonality experienced in the industry which results in lower sales during winter months in colder regions of the country. Accordingly, we anticipate that our sales will be greater during spring, summer and early fall months than during late fall and winter periods. We also expect our revenues and operating results could vary materially from quarter to quarter due to industry seasonality.

 

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Recent Accounting Pronouncements

 

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this ASU is not expected to have a material impact on the Company’s disclosures to the consolidated financial statements.

 

In July 2012, FASB issued ASU No. 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. ASU No. 2012-02 will be effective for annual and interim impairment tests performed after September 15, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s disclosures to the consolidated financial statements.

 

No other recently issued pronouncements are expected to have a material impact on the Company’s financial reporting.

 

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

 

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Forward-Looking Statements

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Statements expressing expectations regarding our future and projections we make relating to products, sales, revenues and earnings are typical of such statements. All forward-looking statements are subject to the risks and uncertainties inherent in attempting to predict the future. Our actual results may differ materially from those projected, stated or implied in our forward-looking statements as a result of many factors, including, but not limited to, our overall industry environment, customer and dealer acceptance of our products, effectiveness of our dealer network, failure to develop or commercialize new products, delay in the introduction of products, regulatory certification matters, production and or quality control problems, warranty and/or product liability matters, competitive pressures, inability to raise sufficient working capital, general economic conditions and our financial condition.

 

Our forward-looking statements speak only as of the date they are made by us. We undertake no obligation to update or revise any such statements to reflect new circumstances or unanticipated events as they occur, and you are urged to review and consider all disclosures we make in this and other reports that discuss risk factors germane to our business, including those risk factors in our Form 10-K for the period ended December 31, 2011.

. 

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Item 3. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

As of September 30, 2012, management assessed the effectiveness of our internal control over financial reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company's Principal Executive Officer and Chief Financial Officer and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America and includes those policies and procedures that:

i)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
ii)Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors;
iii)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below.

This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) inadequate segregation of duties consistent with control objectives; and (2) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer in connection with the review of our financial statements as of September 30, 2012.

 

Management believes that the material weaknesses set forth above did not have an effect on our financial results.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter of the period covered by this report 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

 

Item 6. Exhibits

 

See Index of Exhibits.

 

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SIGNATURE

 

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 duty authorized.

 

 

    VIPER POWERSPORTS INC.
    By: 
/s/ Timothy C. Kling
      Timothy C. Kling
Principal Financial Officer

 

November 10, 2012

Auburn, Alabama

 

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VIPER POWERSPORTS INC.

INDEX TO EXHIBITS

 

Form 10-Q for    
Quarter Ended September 30, 2012   Commission File No. 000-51632

 

Exhibit  
Number Description
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF Definition Linkbase Document
101.LAB Label Linkbase Document
101.PRE Presentation Linkbase Document

  

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