Confederate Motors, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Confederate Motors, Inc.	Financial_Report.xls
EX-32.1 - Confederate Motors, Inc.	f10q_ex32i.htm
EX-31.1 - Confederate Motors, Inc.	f10q_ex31i.htm
EX-31.2 - Confederate Motors, Inc.	f10q_ex31ii.htm
EX-32.2 - Confederate Motors, Inc.	f10q_ex32ii.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, 2012

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

CONFEDERATE MOTORS, INC.

DELAWARE		000-52500		26-4182621
(State or other jurisdiction ofincorporation or organization)		(Commission File No.)		(IRS Employer 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 o No x

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2012: 13,354,998 shares of Common Stock.

CONFEDERATE MOTORS, INC.

FORM 10-Q

September 30, 2012

INDEX

PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II-- OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 6.	Exhibits	20

SIGNATURES		21

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONFEDERATE MOTORS, INC.

Condensed Consolidated Balance Sheets

	(Unaudited)
	September 30,			December 31,
	2012			2011
Assets
Current assets
Cash and cash equivalents	$	85,153		$	77,773
Inventory		530,996			528,662
Prepaid inventory		9,643			11,950
Prepaid expenses		331,861			545,761
Note Receivable		75,000			-
Total current assets		1,032,653			1,164,146

Property and equipment, net		3,894			7,836

Total assets	$	1,036,547		$	1,171,982

Liabilities and Stockholders' Deficit

Current liabilities
Accounts payable	$	232,278		$	167,163
Accrued interest payable		7,502			7,502
Accrued salaries		96,000			101,000
Accrued payroll tax liability		68,745			82,669
Deferred revenue		859,921			832,333
Warranty reserve		8,600			8,600
Other accrued expenses		28,224			24,308
Registration rights liability		251,250			251,250
Current portion of notes payable		24,047			32,306
Current portion of capital leases		3,435			3,885
Current portion of deferred exclusive agency fee		15,000			60,000
Total current liabilities		1,595,002			1,571,016

Notes payable, less current portion		-			12,234

Stockholders' deficit
Preferred Stock, $0.001 par value 20,000,000 shares authorized; -0- shares outstanding in 2012 and 2011		-			-
Common Stock, $0.001 par value 200,000,000 shares authorized; 13,354,998 shares outstanding in 2012 and 13,254,998 shares outstanding in 2011		13,354			13,254
Additional paid-in capital		9,753,078			9,712,178
Accumulated deficit		(10,324,887	)		(10,136,700	)
Total stockholders’ deficit		(558,455	)		(411,268	)
Total liabilities and stockholders’ deficit	$	1,036,547		$	1,171,982

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

CONFEDERATE MOTORS, INC.

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2012			2011			2012			2011

Sales	$	544,055		$	280,858		$	2,016,367		$	1,575,856

Cost of goods sold		(446,047	)		(168,482	)		(1,416,769	)		(886,726	)

Gross profit		98,008			112,376			599,598			689,130

Selling, general and administrative expenses		297,317			338,874			929,437			921,064

Loss from operations		(199,309	)		(226,498	)		(329,839	)		(231,934	)

Other income (expense)
Other income		114,851			15,000			144,319			45,000
Interest expense		(1,360	)		(1,400	)		(2,667	)		(5,087	)
		113,491			13,600			141,652			39,913

Net income (loss) before income taxes		(85,818	)		(212,898	)		(188,187	)		(192,021	)
Income tax expense		-			-			-			-
Net income (loss)	$	(85,818	)	$	(212,898	)	$	(188,187	)	$	(192,021	)

Net income (loss) before income taxes per common share
Basic and diluted	$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.01	)
Weighted average shares outstanding
Basic and diluted		13,350,650			13,124,553			13,287,115			13,012,131

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

CONFEDERATE MOTORS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
	September 30,			September 30,
	2012			2011
Operating activities
Net income (loss)	$	(188,187	)	$	(192,021	)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation		8,066			15,530
Deferred exclusive agency fee		(45,000	)		(45,000	)
Options issued for services		258,158			57,449
Change in operating assets and liabilities
Inventory		(2,334	)		116,540
Prepaid inventory		2,307			-
Prepaid expenses		(44,258	)		-
Accounts payable		65,115			(48,589	)
Accrued salaries		(5,000	)		-
Accrued payroll tax liability		(13,924	)		(14,000	)
Other accrued expenses		3,916			(9,824	)
Deferred revenue		27,588			(196,110	)
Note Receivable		(75,000	)		-

Net cash provided (used) by operating activities	$	(8,554	)	$	(316,025	)

Investing activities
Due from related party		-			3,750
Equipment		(4,123	)		-
Net cash provided (used) by investing activities		(4,123	)		3,750

Financing activities
Repayment of notes payable		(20,493	)		(25,162	)
Repayment of capital leases		(450	)		(16,034	)
Proceeds from issuance of stock		41,000			300,000
Net cash provided (used) by financing activities	$	20,057		$	258,804

Net increase (decrease) in cash and cash equivalents		7,380			(53,471	)

Cash and cash equivalents at the beginning of period		77,773			266,327

Cash and cash equivalents at end of period	$	85,153		$	212,856

Supplemental disclosures of cash flow information:
Non cash investing & financing activities
Options issued for services		-			689,382
Cash paid during the period for:
Interest	$	2,667		$	5,087
Income taxes	$	-		$	-

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

Confederate Motors, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2012

(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 X132 Hellcat. The X132 Hellcat model has been in production since the beginning of 2012. On September 27, 2012 the Company sold the design and manufacturing rights to the Fighter model to a third party. The Company still advertises the R131 Fighter on its website as available for sale. 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 2011 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, 2011 and 2010. The interim results for the period ended September 30, 2012 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 recent economic downturn in the United States and around the world. 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.

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 inventory and manufacturing overhead associated with WIP and finished goods.

	9/30/2012		12/31/2011
Parts	$	361,517	$	261,657
Work in process		114,139		23,854
Motorcycle finished goods		43,790		229,568
Apparel inventory		11,550		13,583
Total Inventory	$	530,996	$	528,662

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 expensed 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 $859,921 at September 30, 2012 and $832,333 at December 31, 2011.

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, 2012:

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 anti-dilutive. 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. Income tax periods 2009, 2010 and 2011 are open for examination by taxing authorities.

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, 2012 and December 31, 2011, respectively, the Company did not record any liabilities for uncertain tax positions.

Advertising Costs

Advertising costs relate to the Company’s efforts to promote its products and brands. Advertising is expensed as incurred. For the quarter ended September 30, 2012 and 2011, advertising expense was $11,920 and $4,314 respectively. Year-to-date advertising expense totaled $40,336 and $19,190 for 2012 and for 2011, 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 $12,108 and $52,347 for the quarter ended September 30, 2012 and 2011, respectively. Year-to-date R&D expense totaled $79,158 and $119,841 for 2012 and 2011, 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 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, 2012 and December 31, 2011.

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,
	2012			2011
Vehicles	$	36,628		$	36,628
Furniture and fixtures		11,734			11,734
Equipment		123,191			119,068
Leasehold improvements		39,886			39,886
		211,439			207,316
Less accumulated depreciation		(207,545	)		(199,480	)
	$	3,894		$	7,836

NOTE 3 – NOTES PAYABLE

Notes payable consisted of the following as of:

	September 30,		December 31,
	2012		2011
Government agency note payable due August 12, 2013,
prime plus 2.75 % rate of interest (6.00% and 6.00% at
September 30, 2012 and December 31, 2011, respectively), principal
and interest payable monthly, unsecured	$	24,047	$	39,482

Bank note payable due July 18, 2012, 7.95% fixed rate of
interest, principal and interest payable monthly, secured
by Company vehicle		-		5,058
		24,047		44,540
Less current portion		24,047		32,306
	$	-	$	12,234

NOTE 4 – CAPITAL LEASES

The capitalized cost and accumulated depreciation of the computers and equipment under capital lease totaled $112,927 and $109,033 (net) respectively, at September 30, 2012.

At September 30, 2012, future minimum payments due under the capital lease agreements are as follows:

October 1 through December 31, 2012	$	1,031
2013		2,749
Future minimum lease payments		3,780
Less amount representing interest		345
Present value of minimum lease payments		3,435
Less current portion		3,435
Long-term capital leases	$	-

NOTE 5 – STOCKHOLDERS’ EQUITY

Sale of Common Stock

In July 2012, the Company raised $41,000 through the sale of 100,000 shares of common stock to accredited investors.

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 with an exercise term of five years. The Company valued these warrants utilizing a Black-Scholes option pricing model utilizing the following assumptions: fair market value per share -$1.50, exercise price -$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 – 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
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – December 31, 2011		105,000	$	1.50
Exercisable – December 31, 2011		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – March 31, 2012		105,000	$	1.50
Exercisable – March 31, 2012		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – June 30, 2012		105,000	$	1.50
Exercisable – June 30, 2012		105,000	$	1.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – September 30, 2012		105,000	$	1.50
Exercisable – September 30, 2012		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	1.33 years	$	1.50		105,000	$	1.50

At September 30, 2012 and December 31, 2011, 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 price -$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 and prepaid expenses. The amount recorded is being amortized to expense on a straight-line basis over 24 months.

	Options		Weighted Average Exercise Price

Exercisable – December 31, 2011		2,000,000	$	1.50
Granted
Exercised
Forfeited
Outstanding – March 31, 2012		2,000,000	$	1.50
Exercisable – March 31, 2012		2,000,000	$	1.50

Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – June 30, 2012		2,000,000	$	1.50
Exercisable – June 30, 2012		2,000,000	$	1.50

Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding – September 30, 2012		2,000,000	$	1.50
Exercisable – September 30, 2012		2,000,000	$	1.50

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

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	0.94 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 the 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

Pamela Miller (life partner of Matthew Chambers, Chairman, CEO), handles patent and trade name 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, 2012 and 2011, respectively. Year-to-date compensation was $11,000 and $9,000 for the nine months ended September 30, 2012 and 2011. Additionally, Pamela Miller is the guarantor for the majority of the loans and leases, vendor open accounts and the corporate credit card.

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 lawsuit 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.

The Company has one pending legal action – Confederate Motors, Inc. v. Francois-Xavier Terny, et al. The action is pending in the Federal District Court for the District of Massachusetts. The docket number is 1:11 CV 10213JGD. The action was instituted by the corporation as a complaint for declaratory relief seeking to clarify the Chairman's authority to make appointments to the board which was then being challenged by the defendant. The action also has a count for breach of contract relating to the same defendant arising out of a consulting agreement. The action was deemed necessary to resolve the issue surrounding appointments to the board. The defendant has brought a counter claim with several counts seeking an advancement of defense costs, money damages and other relief. Management believes the Company has a meritorious claim and strong defense to the counterclaim.

The Company is currently in negotiations to settle this litigation and believes a settlement may be reached in the near future.

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.

Rent expense paid under the operating lease obligation totaled $14,548 and $14,158 for the quarters ended September 30, 2012 and 2011, respectively.

At September 30, 2012, future minimum payments due under the operating lease agreements are as follows:

October 1 through December 31, 2012	$	14,938
2013		49,792
Future minimum lease payments	$	64,730

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

Various ASU’s up through ASU No. 2012-07 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 common stock options and common stock warrants. For the comparative periods presented, the common stock warrants were included in calculating diluted earnings per share. However, the common stock warrants and common stock options were not included in the computation of the per share loss for the current periods 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.

NOTE 11 – CONCENTRATION OF CREDIT RISK

At September 30, 2012 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 – NOTE RECEIVABLE

On September 27, 2012 the Company sold the design and manufacturing rights to the Fighter model to a third party. The sales price was $100,000 of which $25,000 was received at the time of the sale. The remaining $75,000 was made payable within one year. In addition, the Company entered into a royalty agreement whereby the buyer pays a royalty fee if the motorcycle is sold under the trade name “Confederate” and/or “Fighter”. The agreement provides for a commission on sales originated by the Company.

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 $24,047 in notes payable 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 backlog of orders; as of the date of this report the Company has 30 orders which represent 6 months of production backlog. The Company projects a significant number of new orders with the unveiling of the X132 Hellcat LWB in the near future. Company also may seek additional funding through the sale of equity or debt securities. 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 entered into settlement negations with Mr. Terny in regard to the litigation disclosed in Note 7. An installment payment of $12,500 related to the notes receivable referenced in Note 12 was received in October.

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 our 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; and (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.

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

We produce premium, heavyweight (651+cc) motorcycles. The Company manufactures the third generation Hellcat (“X132”).

Overview and Outlook

Net revenue for the quarterly period ended September 30, 2012 was $544,055 compared to $280,858 for the quarterly period ended September 30, 2011. The Company’s quarterly financial performance reflected a slight increase in shipments. Year-to-date net revenue was $2,016,367 compared to $1,575,856 for the periods ended September 30, 2012 and 2011, respectively. Net loss for the quarter ended September 30, 2012 was $85,818 compared to a net loss of $212,898 for the quarter ended September 30, 2011. Year-to-date net loss was $188,187 compared to $192,021 net loss for the periods ended September 30, 2012 and 2011, respectively.

Cash flow from operating activities was a negative $8,554 for the nine months ended September 30, 2012 compared to a negative cash flow from operating activities of $316,025 for the nine months ended September 30, 2011. The difference was primarily due to an increase in stock option expense. Cash flow from investing activities was negative $4,123 compared to a positive $3,750 for the nine months ended September 30, 2012 and 2011, respectively. Net cash flow provided by financing activities was $20,057 and $258,804 for the first nine months of 2012 and 2011, respectively. In 2011, the Company raised $300,000 from the sale of stock.

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 2012 was spent on the production of the X132 Hellcat. We maintain a sales backlog for which the revenue will be recognized in later periods.

Cost of Goods Sold

Cost of goods sold was $446,047 for the quarterly period ended September 30, 2012 compared to $168,482 for the quarterly period ended September 30, 2011. Cost of goods sold was higher mainly due to an increase in motorcycle shipments. In addition, cost of goods sold included a write-off of inventory related to the sale of the Fighter design and manufacturing rights. Cost of goods sold was $1,416,769 and $886,726 for the first nine months of 2012 and 2011, respectively.

Gross Profit

Gross profit was $98,008 for the quarterly period ended September 30, 2012, compared to $112,376 for the quarterly period ended September 30, 2011. Gross profit as a percentage of revenue was 18% and 40% for the quarterly periods ended September 30, 2012 and 2011, respectively. Gross profit was lower due to lower profit margins realized on the new product, the X132 Hellcat, which has a lower sales price than the Fighter. Year-to-date gross profit was $599,598 and $689,130 for 2012 and 2011, respectively. Year-to-date gross profit as a percentage of revenue was 29.7% and 43.7% for 2012 and 2011, respectively.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative costs (SG and A) was $297,317 for the quarterly period ended September 30, 2012, compared to $338,874 in 2011. The third quarter 2012 SG and A expense includes a non-cash stock option expense of $86,173. Third quarter 2011 SG and A expense includes a non-cash expense of $57,449 related to stock options. Excluding the effect of stock option expense, SG and A expenses decreased 24.9% over the prior year due to decreases in salaries, benefits. Year-to-date SG and A expenses were $929,437 and $921,064 for the first nine months of 2012 and 2011, respectively.

Research and Development Costs

Research and development costs are expensed as incurred and are included in operating expenses in the accompanying statements of operations. Research and development costs totaled $12,108 and $52,347 for the quarters ended September 30, 2012 and 2011, respectively. Research and development expenditures were $79,158 and $119,841 for the first nine months of 2012 and 2011, respectively. R&D expense was lower due to a decrease in salaries.

Results of Operations for the quarter and nine months ended September 30, 2012 compared to the quarter and nine months ended September 30, 2011

	Quarter ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
(in whole dollars)	2012			2011			2012			2011
Revenue from motorcycles & related products	$	544,055		$	280,858		$	2,016,367		$	1,575,856
Gross Profit	$	98,008		$	112,376		$	599,598		$	689,130
Operating Expense	$	297,317		$	338,874		$	929,437		$	921,064
Other Income (Expense)	$	113,491		$	13,600		$	141,652		$	39,913
Net Income (Loss)	$	(85,818	)	$	(212,898	)	$	(188,187	)	$	(192,021	)
Earnings (Loss) per Share	$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.01	)

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 have introduced the X132 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 36,000 per month in 2012. Management believes these statistics 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 accessory sales.

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 be intended to serve as a “nuts and bolts” information source on Confederate motorcycles.

Marketing Activities and Brand Development

We believe the Confederate motorcycle brand is perceived to be one of the most authentic in the motoring industry. This belief is predicated upon the absolute consistency of the brand message since its launch in the December issue of Motorcyclist Magazine in 1993. The brand exists to communicate a cerebral and spiritual rebel initiative inspired by fierce American pure objective individuality through the creation of uncompromised handcrafted motoring works of art.

Media

We do not invest substantially in paid advertising. We believe that our motorcycles are aspirational products that create a significant demand “pull”. The primary source of publicity comes from articles written about Confederate in a broad range of motorcycle publications and the luxury goods press. Articles and broadcast segments featuring Confederate have appeared in The Wall Street Journal, Forbes, The New York Times, Fast Company, The Robb Report, The Men’s Journal, DuPont Registry, GQ, Maxim, Popular Science Ralph Lauren Magazine, I.D.(which deemed the Wraith the “Worlds Sexiest Motorcycle”) and have recently been featured in the Discovery Network’s series “World’s Most Expensive Rides”. In addition, management believes that Confederate enthusiasts, including Hollywood celebrities, music stars and international athletes add to the overall brand exposure.

Manufacturing and Suppliers

Our manufacturing operations consist of in-house production of certain components and parts, assembly of motorcycle components and conducting quality control of finished motorcycles. Certain motorcycle components specific to our bikes are outsourced for production to our specifications to various vendors, including engines, machined frame components, transmission gears, belt drives, fenders, fuel tanks, and seats. Other key components are purchased off-the-shelf from various independent suppliers mostly located in the United States, including brake and suspension systems, drive belts, ignition starters, wheels, tires, lights and batteries. Components manufactured by us in-house include electrical harnesses and wiring and welded motorcycle frames, and exhaust.

We have designed our quality control procedures and standards to include inspection of incoming components and adherence to specific work-in-process standards during motorcycle assembly. Finished motorcycles are subjected to performance testing under running conditions and to final quality inspection.

Liquidity and Capital Resources

At September 30, 2012, we had cash of $85,153.

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

The Financial Accounting Standards Board (FASB) has issued various ASUs through No. 2012-07 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.

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, 2012. 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 March 30, 2012 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 Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is currently in negotiations to settle this litigation and believes a settlement may be reached in the near future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 6, 2012, we commenced our non-public offering of up to 1,000,000 shares of common stock at $.41 per share to be sold pursuant to Rule 506 of Regulation D promulgated by the Securities and Exchange Commission (the “SEC”) to U.S. investors and pursuant to Regulation S promulgated by the SEC to non-U.S. persons. In July 2012 we sold 100,000 of the shares in the offering to two investors for gross proceeds of $41,000. These shares were sold without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5) and/or Section 4(a)(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering. Each of the two investors in this offering was an accredited investor as defined in Regulation D. Each investor delivered appropriate investment representations with respect to these sales and consented to the imposition of restrictive legends upon the stock certificates representing the shares. Each investor was afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the transaction. No underwriting discounts or commissions were paid in connection with this offering. The shares sold in this offering were not and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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

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, 2012	By:	/s/ Joseph Mitchell
		Joseph Mitchell, CFO Principal Financial Officer

Confederate Motors, Inc. - FORM 10-Q - November 14, 2012

Attached files

Confederate Motors, Inc. Reports