CMOT Curtiss Motorcycles Company Inc (PK)

Confederate Motors, Inc.

(Exact name of registrant as specified in its charter)

Delaware		26-4182621
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)
2222 5th Avenue South, Birmingham, AL		35233
(Address of principal executive offices)		(Zip Code)

PART I

ITEM 1.  BUSINESS

Historical Development

We are a publicly held company incorporated in the State of Delaware in May of 2005.  On February 12, 2009, we entered into an Agreement and Plan of Merger and Reorganization by which we acquired all of the outstanding stock of Confederate Motor Company, Inc., a Louisiana corporation (“CMCI”).  CMCI was thereafter the operating subsidiary of our company. 

 

Industry Overview

The premium heavyweight (651+cc) street motorcycle industry is a niche market targeting high net worth individuals.  In the past, the motorcycle industry has been subject to significant changes in demand due to changing social and economic conditions affecting discretionary consumer income, such as employment levels, business conditions, taxation rates, fuel costs, interest rates and other factors. The factors underlying such changes in demand are beyond our control, and demand for our products may be adversely affected by a sustained economic downturn, which could have a further negative impact on our business, prospects, results of operations, or financial condition.

Our Motorcycle Business

We are engaged in the design and assembly of premium, heavyweight motorcycles geared for high net worth customers. The Company currently offers one model, known as the X132 Hellcat.  The X132 Hellcat began production in January 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.   Our design and assembly operations are based in Birmingham, Alabama.  Rather than making capital investments in manufacturing equipment, the Company’s operations are limited to assembly of the motorcycles from outsourced parts resulting in a relatively low fixed cost structure.  All motorcycles are designed and assembled under the direction of our CEO and founder, H. Matthew Chambers.

It is the foundational philosophy of the Confederate brand that our motorcycle lines reflect the heritage of the American hot rod motorcycle tradition.  Our original Hellcat line was inspired by the post WWII fighter pilot who, upon return from service in the military, promptly bought an American V-Twin motorcycle, stripped it to its barest essentials and tuned the motor to the farthest extent possible without compromising reliability.  This formula, along with Bauhaus (Design based on principles of functionalism and truth to materials) influenced minimalist avant-garde approach has consistently been applied to our motorcycle lines.

Our X132 Hellcat Motorcycle Line

We offer a third generation of our Hellcat line known as the X132 Hellcat.  This design incorporates absolute chassis and power train rigidity along with complete resistance to core fatigue.  For this model we have developed a new unitized power train casing, which is precision carved from a 400 pound block of 6061 aircraft grade aluminum which management believes provides superior structural integrity at low weight.  The new casing encapsulates a big-boned, large diameter chassis/power train mounting system based on experience gained from twenty years of Hellcat design.

A strategic alliance between S&S Cycle and Confederate has yielded a new motor providing maximum off-idle broadband torque delivery.  In order to increase low RPM torque, we have fused our patented power train system to the new motor.  This system is designed to maintain specific crankshaft to output shaft alignment, irrespective of the suddenness or the volume of torque application.

 

Motorcycle Related Products

In addition to our motorcycles, we offer a select variety of wearing apparel and other related accessories displaying the Confederate name.  These products are marketed through our online website.

 

 

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Our Business Strategy

 

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 it 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-garde 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,  www.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  www.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.

For calendar year 2013, we intend to launch a print advertising campaign to showcase the Hellcat as our unique vision of the perfected American roadster.

 

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.

 

 

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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, 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.

 

Competition

 

The market for premium heavyweight motorcycles is highly competitive. Our principal competitors are custom motorcycle manufacturers, and, to a more limited extent, Harley-Davidson of the United States and three European manufacturers (Ducati, Triumph and BMW). Most of our competitors have substantially greater financial resources, are more diversified and have significantly higher sales volumes (allowing for greater economies of scale) and market share than us.

 

Insurance

The nature of our retail business exposes us to a low degree of risk of liability.  Of primary concerns are product and design flaws which may expose us to claims by customers or third parties for product liability, personal injury or property damage. We manage our exposure with general and product liability coverage obtained through independent insurance companies.

Seasonality

The high performance street motorcycle industry is generally not subject to the normal ebbs and flows associated with general commerce.  There is a slight increase in sales corresponding to the beginning of spring riding season.

Research and Development

During the year ended December 31, 2012, we spent $209,592 on research and development related to development of new motorcycle models.  During the year ended December 31, 2011, we spent $184,165 on research and development of new motorcycle models.  We anticipate continuing these research and development activities on an ongoing basis.

Trademarks and Trade Names

We hold or have applied for several federal trade names used in our business, including “Hellcat,” “Confederate,” “Fighter,” “Bohemian,” “Speedster,” “D'Orleans,” “El Bandito,” “Rake,” “Renovatio,” “Curtiss,” “Copperhead,” and “Art of Rebellion.”  We also hold a patent (U.S. Patent No. 5,857,538 issued on January 12, 1999) for the frame rigidity of our motorcycles.  We also have website URLs for “Confederate.com” and “Workandcycle.com.”

 

 

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Government Regulation

Vehicles intended for use on public roadways must satisfy regulations implemented by the United States Department of Transportation (“DOT”) and by the corresponding agencies in other countries.  Our vehicles and our manufacturing and repair facility are also subject to environmental regulations.

We plan to submit the X132 Hellcat to the various applicable governmental agencies for certification requirements and standards at the end of 2013.  For this purpose, we have retained a leading certified motorcycle testing lab.  We expect to incur costs of approximately $50,000 to comply with motorcycle safety and emissions requirements.  As new laws and regulations are adopted, we will assess their effects on current and future Confederate motorcycle products.

Employees

At April 5, 2013, we had a total of 10 full time employees, consisting of 5 personnel in production and procurement and 5 personnel in management, design, sales and marketing.  None of our employees belongs to a labor union, and we consider our relationship with our employees to be good.

 

ITEM 1A.  RISK FACTORS

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

ITEM 1B.  UNRESOLVED STAFF COMMENTS

We are not an accelerated filer, a large accelerated filer or a well-known seasoned issuer and therefore have elected not to provide the information required by this item.

 

ITEM 2.  PROPERTIES

Our principal offices are located at 2222 5th Avenue South, Birmingham, Alabama.  We lease our headquarters and manufacturing facility at this address in Birmingham, Alabama under a lease ending October 31, 2013. Our Birmingham facility consists of about 8,000 square feet.  Monthly lease payments are $4,580.  We do not own any real estate.

ITEM 3.  LEGAL PROCEEDINGS

We have one legal action – Confederate Motors, Inc. v. Francois-Xavier Terny, et al, which was pending in 2011. The case was settled in 2012 with a mutual settlement agreement.  The settlement agreement calls for scheduled payments by the Company totaling $350,000 in exchange for 805,000 shares held by Mr. Terny.

ITEM 4.  MINE SAFETY DISCLOSURES

Because the Company is not engaged in mining operations, no disclosure is required pursuant to this item.

 

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the OTCQB and our trading symbol is “CFED”.  We do not believe that a material number of our shares of common stock trade on a regular basis. The table below sets forth for the periods indicated the quarterly high and low bid prices as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

 

	Quarter		High				Low
For the Fiscal Year Ended December 31, 2011	First		$	1.01			$	1.01
	Second		$	1.01			$	1.01
	Third		$	1.71			$	0.75
	Fourth		$	1.80			$	0.18
For the Fiscal Year Ended December 31, 2012	First		$	0.35			$	0.18
	Second		$	0.40			$	0.20
	Third		$	0.21			$	0.20
	Fourth		$	0.40			$	0.21

 

Our common stock is considered to be penny stock under rules promulgated by the Securities and Exchange Commission. Under these rules, broker-dealers participating in transactions in our common stock must first deliver a risk disclosure document which describes risks associated with penny stocks, broker-dealers’ duties, customers’ rights and remedies, market and other  information, and make a suitability determination approving the customer for the purchase of such stock, based on their financial situation, investment experience and objectives.  Broker-dealers must also disclose these restrictions to the customer in writing, as well as provide monthly account statements and obtain specific written consent of each customer.  With these restrictions and the associated paper work involved, it is likely that there will be a decrease in the willingness of broker-dealers to make a market for our common stock. This could also lead to a decrease in the ability of someone to purchase or sell our common stock and increase the cost of such transactions.

Holders

As of April 5, 2013, we had approximately 57 holders of our common stock.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.  We have appointed American Registrar and Transfer Company, Salt Lake City, Utah, to act as the transfer agent of our common stock.

Dividends

Since inception we have not paid any cash dividends on our common stock.  We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock.  Although we intend to retain our earnings, if any, to finance the growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future.  Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.

Unregistered Sales of Securities

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

In December 2012, the Company raised $50,000 through the sale of 116,279 shares of common stock to an accredited investor.

The investors were accredited investors at the time of the issuances.  The shares were issued 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.  No selling commissions were paid in connection with the sale of the shares.

 

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Issuer Purchases of Equity Securities

Period		(a) Total number of shares (or units) purchased				(b) Average price paid per share (or unit)				(c) Total number of shares (or units) purchased as part of publicly announced plans or programs				(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
October 1-31, 2012			0				-				-				-
November 1-30, 2012			805,000	(1)		$	.43				805,000				0
December 1-31, 2012			0				-				-				-
Total			805,000								805,000				0

(1) On November 26, 2012, the Company entered into a Mutual Settlement Agreement & General Release (the “Settlement Agreement”) with Francois Xavier Terny.  The purpose of the Settlement Agreement was to settle the outstanding dispute and settle all claims between the parties.  Under the Settlement Agreement, the Company agreed to make scheduled payments to Mr. Terny totaling $350,000 in exchange for 805,000 shares held by Mr. Terny.  The Company agreed to pay Mr. Terny $50,000 upon the execution of the Settlement Agreement.  An additional $25,000 was required to be paid to Mr. Terny on or before December 31, 2012 and the final payment of $275,000 was required to be paid on or before March 31, 2013.

ITEM 6.  SELECTED FINANCIAL DATA

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

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto as filed with this report.

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

Overview and Outlook

Net revenue for 2012 was $2,561,260 compared to $1,933,612 for 2011. The Company’s year end financial performance reflected an increase in motorcycle shipments.  Net loss was $509,680 in 2012 compared to a net loss of $461,884 in 2011. Net loss for 2012 includes a non-cash stock option expense of $344,691.

 

Cash flow from operating activities was $16,549 in 2012 compared to a negative cash flow of $441,697 in 2011.  Net cash flow from investing activities was $0 and $3,750 for 2012 and 2011, respectively. Net cash flow from financing activities was $34,594 and $249,393 for 2012 and 2011, respectively.

 

We believe that the near-term global economic environment will be challenging for the business and we will continue to make prudent decisions to manage through this uncertain environment. At the same time, we are optimistic about the Company’s long-term business prospects and plans to continue to expand production and global distribution. The operational focus for 2012 was spent on production of the Hellcat series. A significant amount of time was also spent making engineering improvements to the new model as well as the strategic repositioning of the direct sales model to a hybrid model of direct domestic sales combined with international distribution and dealer networks. We also established distribution partners in China and Russia. We maintain a sales backlog for which the revenue will be recognized in later periods. 

 

 

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Cost of Goods Sold

Cost of goods sold was $1,777,795 in 2012 compared to $1,238,466 in 2011. The increase in cost of goods sold was primarily due to an increase in motorcycle shipments.

Gross Profit

Gross profit was $783,465 in 2012 compared to $695,146 in 2011. Gross profit was higher due to an increase in motorcycle shipments. Gross profit percentage declined to 30.6% of revenue from 35.9% the prior year due to lower average selling price.

 

Operating Expenses

Selling, general and administrative expenses

 

Selling, general and administrative costs (“SG and A”) was $1,280,252 in 2012 compared to $1,127,927 in 2011. The 2012 and 2011 SG and A expense include stock option expense of $344,691 and $143,621, respectively.  Excluding the effect of stock option expense, SG and A expenses decreased 5% over the prior year primarily due to lower Sales and Public Relations salary in 2012.

Research and Development Costs

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying statements of operations. Research and development costs totaled $209,592 and $184,165 for the years ended 2012 and 2011, respectively.

 

Results of Operations for the year ended December 31, 2012 Compared to the year ended December 31, 2011

 

		Year Ended
		December 31, 2012				December 31, 2011
Revenue from motorcycles & related products		$	2,561,260			$	1,933,612
Gross Profit		$	783,465			$	695,146
Operating Expense		$	1,489,844			$	1,312,092
Other Income (Expense)		$	196,699			$	155,062
Net Income (Loss)		$	(509,680	)		$	(461,884	)
Earnings (Loss) per Share		$	(0.04	)		$	(0.04	)

 

Cautionary Statements

 

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

Our ability to sell our motorcycles and related products and services and to meet our financial expectations also depends on the ability of our independent distributors to sell our motorcycles and related products and services to retail customers. We depend on the capability and financial capacity of our independent distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from us.

 

 

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

Liquidity and Capital Resources

 

At December 31, 2012, we had cash of $128,916.

 

The Company increased it’s cash position by $51,143 over the prior year.  The increase was a result of $91,000 proceeds from issuance of stock.  Cash flow from operations improved to $16,549 from a loss of $441,697 in 2011.  The improvement was partially a result of lower inventory balance which the Company will need to replenish with a capital raise from a planned stock offering.

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 expansion.  Over the next 12 months, we will focus production on the X132 Hellcat.   The Company has a significant backlog of orders; as of the date of this report the Company has 30 orders which represent 4-6 months of production backlog.   The projected capital expenditure for inventory to increase production is approximately $350,000.  We intend to raise the capital through the sale and issuance of our capital stock.  

Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders.

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

Various ASU’s up through ASU No. 2013-05 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 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

 

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Russell E. Anderson, CPA Russ Bradshaw, CPA William R. Denney, CPA Sandra Chen, CPA		REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To The Board of Directors and Stockholders of Confederate Motors, Inc.   We have audited the accompanying consolidated balance sheets of Confederate Motors, Inc. (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
5296 S. Commerce Dr Suite 300 Salt Lake City, Utah 84107 USA (T) 801.281.4700 (F) 801.281.4701 Suite A, 5/F Max Share Center 373 Kings Road North Point Hong Kong (T) 852.21.555.333 (F) 852.21.165.222 abcpas.net		In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Confederate Motors, Inc. as of December 31, 2012 and 2011, and the results of its consolidated operations and its consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.   /s/ Anderson Bradshaw PLLC   Anderson Bradshaw PLLC Salt Lake City, Utah April 11, 2013

 

 

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CONFEDERATE MOTORS, INC.

Consolidated Balance Sheets

December 31, 2012 and 2011

		December 31,				December 31,
		2012				2011
Assets
Current assets
Cash and cash equivalents		$	128,916			$	77,773
Inventory			345,632				528,662
Prepaid expenses			201,070				545,761
Prepaid inventory			11,015				11,950
Notes receivable			62,500				-
Total current assets			749,133				1,164,146
Property and equipment, net			3,550				7,836
Total assets		$	752,683			$	1,171,982
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable		$	201,320			$	167,163
Accrued interest payable			7,502				7,502
Accrued salaries			201,000				101,000
Accrued payroll tax liability			67,245				82,669
Deferred revenue			817,582				832,333
Deferred sales commission and royalty			49,982				-
Warranty reserve			8,600				8,600
Other accrued expenses			21,708				24,308
Registration rights liability			175,500				251,250
Payable to be settled in stock			50,000				-
Settlement payable			275,000				-
Current portion of notes payable			18,737				32,306
Current portion of capital leases			2,405				3,885
Current portion of deferred exclusive agency fee			-				60,000
Total current liabilities			1,896,581				1,571,016
Notes payable, less current portion			-				12,234
Stockholders' deficit
Common Stock, $0.001 par value 200,000,000 shares authorized; 13,471,277 and 13,254,998 shares outstanding at December 31, 2012 and 2011, respectively			13,470				13,254
Additional paid-in capital			9,802,962				9,712,178
Treasury shares			(313,950	)			-
Accumulated deficit			(10,646,380	)			(10,136,700	)
Total stockholders’ deficit			(1,143,898	)			(411,268	)
Total liabilities and stockholders’ deficit		$	752,683			$	1,171,982

 

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

 

 

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CONFEDERATE MOTORS, INC.

Consolidated Statements of Operations

Years ended December 31, 2012 and 2011

 

		2012				2011
Sales		$	2,561,260			$	1,933,612
Cost of goods sold			(1,777,795	)			(1,238,466	)
Gross profit			783,465				695,146
Operating expenses:
Research and development			209,592				184,165
Selling, general and administrative expenses			1,280,252				1,127,927
Total operating expenses			1,489,844				1,312,092
Loss from operations			(706,379	)			(616,946	)
Other income (expense)
Gain from extinguishment of debt			-				101,000
Gain on litigation settlement			39,700
Other income			160,000				60,000
Interest, net			(3,001	)			(5,938	)
Total other income			196,699				155,062
Net loss		$	(509,680	)		$	(461,884	)
Net income (loss) per common share - basic and diluted		$	(0.04	)		$	(0.04	)
Weighted average number of shares outstanding - basic and diluted			13,304,178				13,073,344

 

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

 

 

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CONFEDERATE MOTORS, INC.

Consolidated Statement of Stockholders’ Deficit

Years ended December 31, 2012 and 2011

 

		Common Stock Shares				Common Stock				Treasury Stock				Additional Paid-In Capital				Accumulated Deficit				Total  Stockholders' Deficit
Balance at December 31, 2010			12,954,998			$	12,954			$	-			$	8,723,096			$	(9,674,816	)		$	(938,766	)
Issuance of common stock for cash			300,000				300								299,700								300,000
Stock options issued for services															689,382								689,382
Net loss																			(461,884	)			(461,884	)
Balance at December 31, 2011			13,254,998			$	13,254			$	-			$	9,712,178			$	(10,136,700	)		$	(411,268	)
Issuance of common stock for cash			216,279				216								90,784								91,000
Treasury stock											(313,950	)											(313,950	)
Net loss																			(509,680	)			(509,680	)
Balance at December 31, 2012			13,471,277			$	13,470			$	(313,950	)		$	9,802,962			$	(10,646,380	)		$	(1,143,898	)

 

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

 

 

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CONFEDERATE MOTORS, INC.

Consolidated Statements of Cash Flows

Years ended December 31, 2012 and 2011

 

		2012				2011
Operating activities
Net Loss		$	(509,680)			$	(461,884	)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation			8,409				19,500
Options issued for services			344,691				143,621
Deferred exclusive agency fee			(60,000	)			(60,000	)
Write-off of inventory			42,483				-
Gain on litigation settlement			(39,700	)			-
Gain on sale of assets			(62,500	)			-
Change in operating assets and liabilities
Inventory			140,547				(95,656	)
Prepaid inventory			935				3,650
Accounts payable			34,157				24,243
Accrued salaries			100,000				101,000
Accrued payroll tax liability			(15,424	)			(122,000	)
Other accrued expenses			(2,600	)			1,915
Deferred revenue			(14,751	)			3,914
Deferred sales commission and royalty			49,982				-
Net cash provided (used) by operating activities			16,549				(441,697	)
Investing activities
Due from related party			-				3,750
Net cash used by investing activities			-				3,750
Financing activities
Repayment of notes payable			(25,803	)			(32,308	)
Repayment of capital leases			(5,603	)			(18,299	)
Payments for treasury shares			(25,000	)			-
Proceeds from issuance of stock, net of stock issuance costs			91,000				300,000
Net cash provided by financing activities			34,594				249,393
Net increase (decrease) in cash and cash equivalents			51,143				(188,554	)
Cash and cash equivalents at the beginning of year			77,773				266,327
Cash and cash equivalents at end of year		$	128,916			$	77,773
Supplemental disclosures of cash flow information:
Non cash investing & financing activities
Options issued for services		$	-			$	689,382
Equipment obtained with capital lease		$	4,123			$	-
Treasury stock		$	313,950			$	-
Cash paid during the year for:
Interest expense		$	3,001			$	5,938
Income tax		$	-			$	-

 

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

 

 

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Confederate Motors, Inc.

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

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 started production in January 2012. The Confederate Brand was founded in 1991. The Company has been operational since 2003 and is headquartered in Birmingham, Alabama.

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 Confederate Motor Company, Inc. (collectively, the “Company”).  All intercompany accounts have been eliminated in consolidation.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition and rapid technological change and is in a state of fluctuation as a result of the credit crisis occurring in the United States.  The Company's operations are subject to significant risks 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 and direct labor associated with finished goods.

 

		12/31/12				12/31/11
Parts		$	183,069			$	261,657
Work in process			86,433				23,854
Motorcycle finished goods			67,611				229,568
Apparel Inventory			8,519				13,583
Total Inventory		$	345,632			$	528,662

  

 

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Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Maintenance, repairs, and minor renovations are charged to expense as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective account 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.  Sales, use and other excise taxes are not recognized in revenue.  Cash payments received from customers prior to delivery of the motorcycle are recorded as deferred revenue on the Balance Sheet.  Deferred revenue was $817,582 at December 31, 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 December 31, 2012:

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

Since the Company reflected a net loss in 2012 and 2011, respectively, the effect of considering any common stock equivalents 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.

 

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

 

 

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Advertising Costs

Advertising is expensed as incurred.  For 2012 and 2011, advertising expense was $62,067 and $31,014, 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 December 31, 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.

 

 

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NOTE 2 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of:

		December 31,				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			207,889				199,480
		$	3,550			$	7,836

 

NOTE 3 – NOTES PAYABLE

Notes payable consisted of the following as of:

 

		December 31,				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
December 31, 2012 and 2011, respectively), principal
and interest payable monthly, unsecured		$	18,737			$	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
			18,737				44,540
Less current portion			18,737				32,306
		$	-			$	12,234

Principal Maturities of Notes Payable
2013		$	18,737
		$	18,737

 

NOTE 4 – CAPITAL LEASES

The capitalized cost and accumulated amortization of the computers and equipment acquired under capital leases totaled $123,191 and $119,641, respectively at December 31, 2012.   The capitalized cost and accumulated amortization of the computers and equipment acquired under capital leases totaled $108,807 and $105,241, respectively at December 31, 2011.  Amortization expense is included in depreciation expense.

At December 31, 2012, future minimum payments due under the capital lease agreements are as follows:

 

2013
Future minimum lease payments			2,642
Less amount representing interest			237
Present value of minimum lease payments			2,405
Less current portion			2,405
Long-term capital leases		$	-

 

 

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NOTE 5 – STOCKHOLDERS’ EQUITY

 

Sale of Common Stock

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

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

In December 2012, the Company raised $50,000 through the sale of 116,279 shares of common stock to an accredited investor

Warrants

During the twelve months ended December 31, 2009, the Company issued 105,000 stock purchase warrants to purchase the Company’s common stock at an exercise price of $1.50. These warrants expire on January 30, 2014.  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 - December 31, 2010			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 – December 31, 2012			105,000			$	1.50
Exercisable – December 31, 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

1.08 years

$ 1.50

105,000

$ 1.50

At December 31, 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 on August 9, 2013.

 

 

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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.

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

 

		Options				Weighted Average Exercise Price
Exercisable – June 30, 2011			-			$	-
Granted			2,000,000				1.50
Exercised
Forfeited
Outstanding – December 31, 2011			2,000,000				1.50
Exercisable – December 31, 2011			2,000,000				1.50
Granted			-			$	-
Exercised			-				-
Forfeited			-				-
Outstanding – December 31, 2012			2,000,000			$	1.50
Exercisable – December 31, 2012			2,000,000			$	1.50

 

Options Outstanding												Options Exercisable
Range of Exercise Price			Number Outstanding			Weighted Average Remaining Contractual Life (in Years)			Weighted Average Exercise Price			Number Exercisable			Weighted Average Exercise Price
$ 1.50			2,000,000			0.61			$ 1.50			2,000,000			$ 1.50

 

Registration Rights Penalty

In connection with the issuance of common stock and convertible debt, which converted into common stock in 2009, these equity holders were entitled to liquidated damages, which provide for a payment in cash equal to a maximum of 10% of the total offering price for all equity proceeds raised.  The convertible note holders were entitled to liquidated damages which provide for a payment in cash equal to a maximum of 15% of the total offering price for all equity proceeds raised. The Company was required to file an S-1 registration statement 120 days after the offering closed.  The closing date of the offering was February 12, 2009; therefore the 120th day was June 12, 2009.  Furthermore, the Company was required to have this S-1 registration declared effective within 150 days (July 12, 2009). The Company never filed a registration statement.  In 2012, the Company entered into a settlement agreement with a shareholder for cash in exchange for shares, which reduced the equity subject to registration rights penalty. See Note 7 for disclosure of the settlement agreement.

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		$	1,417,500
Maximum penalty			10	%
Convertible debt subject to registration rights penalty		$	225,000
Maximum penalty			15	%
Registration Rights Penalty		$	175,500

 

 

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NOTE 6 – RELATED PARTY TRANSACTIONS

Pamela Miller (life partner of Matthew Chambers, Chairman, CEO), handles patent and tradename filings/renewals and administrative support for the Company.  There is no formal contract between the Company and Pamela Miller.  Her compensation was $14,000 and $13,500 for the years ended December 31, 2012 and 2011, respectively.  Additionally, Pamela Miller is the guarantor for the majority of the loans and leases, vendor open accounts and the corporate credit card.

 

The Company has an employment agreement with its CEO.

NOTE 7 – COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES:

Contingencies and Uncertainties

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. With the exception of the one 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.

 

We have one legal action – Confederate Motors, Inc. v. Francois-Xavier Terny, et al, which was pending in 2011.

 

On November 26, 2012, the Company entered into a Mutual Settlement Agreement & General Release (the “Settlement Agreement”) with Francois Xavier Terny.  The purpose of the Settlement Agreement was to settle the outstanding dispute and settle all claims between the parties.  Under the Settlement Agreement, the Company agreed to make scheduled payments to Mr. Terny totaling $350,000 in exchange for 805,000 shares held by Mr. Terny.  The Company agreed to pay Mr. Terny $50,000 upon the execution of the Settlement Agreement.  An additional $25,000 was required to be paid to Mr. Terny on or before December 31, 2012 and the final payment of $275,000 was required to be paid on or before March 31, 2013. The payment is delinquent.

The Company’s basis in the treasury shares is $313,950.  The Company used the market value on November 26, 2012, the date of settlement, to value the shares.

 

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 a 180 days prior written notice.  The monthly base rental for the extension period is $4,320, $4,450, and $4,580 for the years 2011, 2012 and 2013.  From November 1, 2010 through January 31, 2011 the rent was half the normal base rental.  The minimum rental payments for 2013 is $45,800.

Rent expense paid under the operating lease obligation totaled $58,450 and $54,753 for the years ended December 31, 2012 and 2011, respectively.

The Company assumed a sublease agreement to rent a facility in New Orleans.  The short term lease expired on September 2011 and the Company has accrued for the remaining rent obligation.

 

Liquidity

Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders. The Company believes the motorcycle operations will continue to be primarily funded through cash flows generated by operations.

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

 

Various ASU’s up through ASU No. 2013-05 that 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.

 

 

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NOTE 9 – EARNINGS (LOSS) PER SHARE

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

NOTE 10 – NOTES RECEIVABLE

On September 27, 2012, the Company sold the design and manufacturing rights to the discontinued Fighter model to a third party for $100,000. The full asset purchase price was recorded as other income.  In conjunction with the sale an initial payment of $25,000 was received and a promissory note for the balance was issued.  The term of the promissory note is one year with an interest rate of 7%  The promissory note calls for 2 installment payments of $12,500 each and a final payment of $50,000 due on September 30, 2013.

NOTE 11 – 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 12 – CONCENTRATION OF CREDIT RISK

At December 31, 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 $250,000 per insured bank. 

NOTE 13 – INCOME TAXES

 

The Company adopted the provisions of uncertain tax positions as addressed in ASC 740-10-65-1. As a result of the implementation of ASC 740-10-65-1, the Company recognized approximately no increase in the liability for unrecognized tax benefits.

The Company has no tax position at December 31, 2012 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2012. The Company’s utilization of any net operating loss carry forward may be unlikely as a result of its intended activities.

The Company recognized deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. The Company will establish a valuation allowance to reflect the likelihood of realization of deferred tax assets.  Tax years 2009, 2010 and 2011 are still open for examination by the taxing authorities.

 

The valuation allowance at December 31, 2012 was approximately $2,263,863. The net change in valuation allowance during the year ended December 31, 2012 was an increase of approximately $196,280. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2012.

 

 

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The Company has a net operating loss carryforward for tax purposes totaling approximately $5,383,570 at December 31, 2012, expiring through 2032. There is a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). Temporary differences, which give rise to a net deferred tax asset, are as follows:

 

		Year Ended December 31,
		2012				2011
Non-current deferred tax assets:
Net operating loss carryforward		$	(2,111,975	)		$	(2,007,318	)
Stock based compensation		$	(135,222	)		$	(56,342	)
Inventory obsolescence		$	(16,666	)		$	(3,923	)
Total deferred tax assets		$	(2,263,863	)		$	(2,067,583	)
Valuation allowance		$	2,263,863			$	2,067,583
Net deferred tax assets		$	-			$	-

   

The actual tax benefit differs from the expected tax benefit for the year ended December 31, 2012 and the year ended December 31, 2011 (computed by applying the U.S. Federal Corporate tax rate of 35% to income before taxes and 6.5% for State income taxes, a blended rate of 39.23%) as follows:

 

		Year Ended December 31,
		2012				2011
Computed "expected" tax expense (benefit) - Federal – net of State benefit		$	(178,388	)		$	(161,659	)
Computed "expected" tax expense (benefit) - State -		$	(21,560	)		$	(19,538	)
Penalties and fines and meals and entertainment		$	3,668			$	3,923
Change in valuation allowance		$	196,280			$	177,274
Actual tax expense  (benefit)		$	-			$	-

 

NOTE 14 – ACCRUED PAYROLL TAX LIABILITIES

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

 

NOTE 15 – 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 $18,737 in notes payable and $2,405 in lease obligations which results in negligible debt service payments.  We are currently not engaged in any discussions that could result in additional borrowings.

 

The Company has a significant backlog of orders; as of the date of this report the Company has 30 orders which represent 4-6 months of production backlog.  The Company projects an additional 50 to 100 orders with the unveiling of the F4 Hellcat at year end.  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 16 – SUBSEQUENT EVENTS

 

On February 22, 2013, the Company offered for sale 3,600,000 shares of Common Stock at $0.25 per share.  As of the date of this report, the Company has received subscription commitments for 3,340,000 shares, 840,000 of which will be used to pay Matthew Chambers, CEO, for wages owed to him.  Funds received in the amount of $120,000 have been placed in the trust account.

 

A payment on settlement payable of $275,000 was due on March 31, 2013. The payment is delinquent.

 

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Disclosure in response to this item is incorporated by reference to Item 4.01 of Form 8-K dated August 6, 2012, and filed with the Commission on August 7, 2012.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our principal executive officer, H. Matthew Chambers, and our principal financial officer, Joseph P. Mitchell, have concluded, based on their evaluation, that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining internal control over financial reporting. Internal Control Over Financial Reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our 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 generally accepted accounting principles and includes those policies and procedures that:

1.	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

2.

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and

 

3.	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012, based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on this assessment, management concluded that as of December 31, 2012, it had material weaknesses in its internal control procedures, therefore the company's internal controls were not effective.

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.  We have concluded that our internal control over financial reporting was not effective as of December 31, 2012.

The Company’s assessment identified certain material weaknesses which are set forth below:

 

Entity Level Controls

We have insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented.  Specifically, decisions made by the board to be carried out by management should be documented and communicated on a timely basis to reduce the likelihood of any misunderstandings regarding key decisions affecting our operations and management.

 

 

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We currently have insufficient resources which may restrict our ability to gather, analyze and report information relative to the financial statements in a timely manner, including insufficient documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. In addition, the limited size of the accounting department makes it impractical to achieve an optimum segregation of duties.

Functional Controls and Segregation of Duties

We have an inadequate segregation of duties consistent with control objectives. Our management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties.  Management intends to reassess this matter during the current fiscal year to determine whether improvement in segregation of duties is feasible.

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size.  Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for our business operations.

We are committed to improving our financial organization. As part of this commitment, we will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us.

 

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.  We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, including:

 

(1)	Adding personnel with the depth of knowledge and time commitment to provide a greater level of review for corporate activities;

 

(2)	Continuing to update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes; and

 

(3)	Soliciting independent directors to enhance corporate governance and Board composition.

 

We intend to consider the results of our remediation efforts and related testing as part of our assessment of the effectiveness of our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

The Company entered into an employment agreement with H. Matthew Chambers with an effective date of February 15, 2012.  More information about the employment agreement is below.

On November 26, 2012, the Company entered into a Mutual Settlement Agreement & General Release (the “Settlement Agreement”) with Francois Xavier Terny.  The purpose of the Settlement Agreement was to settle the outstanding dispute and settle all claims between the parties.  Under the Settlement Agreement, the Company agreed to make scheduled payments to Mr. Terny totaling $350,000 in exchange for 805,000 shares held by Mr. Terny.  The Company agreed to pay Mr. Terny $50,000 upon the execution of the Settlement Agreement.  An additional $25,000 was required to be paid to Mr. Terny on or before December 31, 2012 and the final payment of $275,000 was required to be paid on or before March 31, 2013.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers; Term of Office

The following table contains information with respect to our directors and executive officers:

NAME	AGE	POSITION	CLASS OF DIRECTOR	DIRECTOR SINCE
H. Matthew Chambers	59	Chairman, President and Chief Executive Officer	III	2009
Paolo Chiaia	54	Director	II	2010
Patrick Aisher	43	Director	I	2012
Joseph P. Mitchell	44	Executive Vice President and Chief Financial Officer	--	--

Our Certificate of Incorporation provides that our directors are divided into three classes, Class I, Class II and Class III, with each class to have as equal a number of members as reasonably possible. The term of office of the Class II director was set to expire at the annual meeting of stockholders in 2012; however, during 2012, the Company did not hold an annual meeting of stockholders. The term of office of the Class III directors is set to expire at the annual meeting of stockholders in 2013, if a meeting is held.  At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting are to be elected for a one-year term.  If the number of directors is changed, any increase or decrease will be apportioned among the classes by the Board of Directors so as to maintain the number of directors in each class as nearly equal as is reasonably possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class will hold office for a term that will coincide with the remaining term of that class.  In no case will a decrease in the number of directors shorten the term of any incumbent director, even though such decrease may result in an inequality of the classes until the expiration of such term.  A director will hold office until the annual meeting of stockholders in the year in which his or her term expires and until his or her successor is elected and qualified subject, however, to prior death, resignation, retirement or removal from office.

H. Matthew Chambers  has served as President and CEO of our operating subsidiary, Confederate Motor Company, Inc., since its inception in 1991, and as our President and CEO since February 12, 2009.  From 1978 until 1991 he was engaged in the practice of law in the areas of real estate and personal injury.  Mr. Chambers won the largest verdict of his career in a police brutality case. The verdict represented the largest ever granted in the state of Louisiana against a sheriff’s parish agency.  He received his bachelor of arts in business administration from Louisiana State University in 1975, and his juris doctorate degree from LSU in 1978.  He devotes all of his business time to our company.

 

Paolo Chiaia  served as a member of our Board of Directors from February 12, 2009, until August 2009 and became a member again in 2010.  Since 2004 he has been a member of the board of directors of Finanzattiva Sim (securities broker), BPUPRAMERICA SGR (Asset Management Company joint venture between BPU with Prudential), IWBank (major player in online trading), and Centrobanca (in charge for Investment Banking activities).

 

Paolo served as a senior executive from 1999 to 2004 at Gruppo Banca Popolare di Bergamo (10th largest Italian Banking Group) where he was in charge of the capital markets activities of the Group. The department deals with securities and derivatives trading, both listed and over the counter, debt capital market, equity capital market, M&A. In 1998 he was head of the sales team covering Italian clients with reference to all financial products: fixed income, foreign exchange, emerging markets and corporate bonds.

 

 

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From 1993 to 1999 Paolo served as a broker at JP Morgan in charge of both Italian and foreign institutional clients. From 1987 to 1993 he worked for Montedison (Italian Chemical Group) in the Treasury department in charge of FX and Interest Rate risk management, both for the Holding Company and for the Italian and foreign subsidiaries. Paolo graduated with top marks from Bocconi University in 1986.

Patrick Markus Aisher was appointed as a member of our Board of Directors on August 28, 2012.  Mr. Aisher is a British-Austrian businessman who attended universities in Canada and the United Kingdom.  Since 1992, Mr. Aisher has specialized in starting and investing in engineering technology firms, and has successfully assisted a number of companies in growing to substantial international businesses with turnover of between $5,000,000 and $20,000,000.  He is a Director of Hong Kong-based Kinled Holding, which owns shares in a portfolio of more than 20 technology, medical, property, and luxury-goods companies.  He is also a director of a number of private Swiss and HK-based investment funds that focus on engineering and medical devices, as well as a Charity in the UK that supports the under-privileged and unwell.

Joseph P. Mitchell  has served as Chief Financial Officer and our Executive Vice-President since February 12, 2009.  From 2006 until 2009 he served as CFO for Confederate Motor Company, Inc.  From 2004 until 2006 he was employed by HealthSouth Corporation, a provider of rehabilitative health care, ambulatory surgery, and diagnostic imaging services in the U.S.  During his time at HealthSouth, he held various senior management positions, including Director of Business Development, Audit Director and Assistant Controller, and was instrumental in the company being re-listed on the NYSE.  From 2000 until 2004 Mr. Mitchell served as Corporate Governance Manager and Financial Reporting Manager for Dell Financial Services, a joint venture between Dell Inc., a leading online computer systems company, and CIT Group Inc., a leading commercial and consumer finance company.  During his employment with Dell, he led a team in implementing financial and internal controls for SEC compliance.  Mr. Mitchell received his bachelor’s degree in accounting from the University of Alabama in 1991.  He received an MBA from the University of Alabama Birmingham in 1996.  He is a licensed CPA in the State of Alabama.  He devotes all of his business time to our company.

 

Director Qualifications

We believe that our directors have the highest professional and personal ethics and values, consistent with our longstanding values and standards.  They have broad experience at the policy-making level in business or banking.  They are committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience.  Their service on other boards of public companies is limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties for us.  Each director must represent the interests of all stockholders.  When considering potential director candidates, the Board of Directors also considers the candidate’s character, judgment, diversity, age and skills, including financial literacy and experience in the context of our needs and the needs of the Board of Directors.

The board appointed Mr. Chiaia to provide insight into the Italian market and furnish financial oversight, and Mr. Chambers because of his 20+ years of experience in the motorcycle industry.

Family Relationships

There are no family relationships between any of the officers or directors of the Company.

Involvement in Certain Legal Proceedings

During the past ten years there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any of our directors or executive officers.

We are not aware of any legal proceedings in which any director, officer or affiliate of our company, any owner of record or beneficially of more than five percent of any class of our voting securities, or any associate of any such director, officer, or affiliate of our company, or security holder is a party adverse to us or our subsidiary or has a material interest adverse to us or our subsidiary.

 

 

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Conflicts of Interest

Certain potential conflicts of interest are inherent in the relationships between our officers and directors, and us.

From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.

Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.

 

With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.

Our policies and procedures regarding transactions involving potential conflicts of interest are not in writing.  We understand that it will be difficult to enforce our policies and procedures and will rely and trust our officers and directors to follow our policies and procedures.  We will implement our policies and procedures by requiring the officer or director who is not in compliance with our policies and procedures to remove himself and the other officers and directors will decide how to implement the policies and procedures, accordingly.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

The following table identifies each person who, at any time during the fiscal year ended December 31, 2012, was a director, officer, or beneficial owner of more than 10% of our common stock that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year:

Number of

Transactions Not

Number of Late

Reported on a

Reports Not

Name

Reports

Timely Basis

Filed

Paolo Chiaia

1

1

1

Nazir Mohammed Parker

1

1

1

Corporate Governance

We are committed to having sound corporate governance principles. We believe that such principles are essential to running our business efficiently and to maintaining our integrity in the marketplace. Our Board of Directors has three directors, but does not have any standing committees.  Our Certificate of Incorporation requires that we have a minimum of five directors and we currently have two vacancies which we intend to fill next year.

 

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Audit Committee Financial Expert

Our Board of Directors has determined that we do not have an audit committee financial expert.  We do not have an audit committee financial expert because we believe the cost related to retaining a financial expert at this time is prohibitive.  Furthermore, because we are only beginning our commercial operations, at the present time, we believe the services of a financial expert are not warranted.

Indemnification of Directors and Officers

The Tenth Article of our Certificate of Incorporation generally eliminates the personal liability of our directors for monetary damages for breaches of fiduciary duty as a director, except for liability for any breach of their duty of loyalty to us or our stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payments of dividends or unlawful stock repurchases or redemptions and for any transaction from which the director derived an improper personal benefit. Our Certificate of Incorporation also requires us to indemnify our directors, and allows us to indemnify our officers, employees and agents, to the fullest extent permitted by the Delaware General Corporation Law.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the above statutory provisions or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Committees and Nominating Process

We have no standing audit or compensation committees.  We also do not have a standing nominating committee; recommendations for candidates to stand for election as directors are made by the Board of Directors.  We have not adopted a policy which permits security holders to recommend candidates for election as directors or a process for stockholders to send communications to the Board of Directors.  There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

 

Leadership Structure

Mr. Chambers serves as our Chief Executive Officer as Chairman of our Board of Directors.  The Board attempts to ensure that thorough, open and honest discussions take place at all Board meetings, and that all of the directors are sufficiently informed about each matter that arises so that appropriate action may be taken.

Management is responsible for the day-to-day management of risks confronting our businesses, but our Board has broad oversight responsibility for our risk management programs, including enterprise strategic risk oversight.  Our Board as a whole oversees risks related to our corporate and business strategies, operations and enterprise risk management.  In performing its oversight role, our Board is responsible for satisfying itself that the risk management processes designed and implemented by our management are functioning, and that necessary steps are taken to foster a culture of risk-adjusted decision-making within our organization.

Code of Ethics

In 2010, we adopted a Code of Ethics which applies to our CEO, CFO and members of our finance department; however, we have not posted the Code of Ethics on our corporate website ( www.confederate.com ).  We shall also provide any person without charge, upon request, a copy of the Code of Ethics.  Requests may be directed to Confederate Motors, Inc., 2222 5 th Avenue South, Birmingham, Alabama 35233, attention Joseph Mitchell.

 

 

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ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation

The following table sets forth information concerning the annual compensation awarded to, earned by, or paid to the named executive officers for all services rendered in all capacities to our company and its subsidiaries for the years ended December 31, 2012 and 2011:

SUMMARY COMPENSATION TABLE

 

Name & Principal Position		Year		Salary (1)				Bonus (1)				Total
H. Matthew Chambers, CEO		2012		$	180,000			$	45,000			$	225,000
		2011		$	110,000			$	-0-			$	110,000
Joseph P. Mitchell, CFO		2012		$	120,000			$	-0-			$	120,000
		2011		$	113,000			$	-0-			$	113,000

___________________

(1)  Mr. Chambers did not receive his full salary and guaranteed bonus per his employment agreement for 2012.  The Company has accrued the underpaid base salary and guaranteed bonus in the amount of $105,000.

 

Employment Agreement

The Company has entered into an employment agreement with H. Matthew Chambers with an effective date of February 15, 2012.  The term of the employment agreement is five years. The term will automatically extend in one-year increments unless we notify the executive in that year that his employment agreement will not be extended.

The employment agreement provides for annual base salary of $180,000 and a guaranteed 25% bonus.  The annual base salary will be reviewed each year by our board of directors (or compensation committee, if we then have one), but cannot be decreased from the amount in effect in the previous year. The employment agreement also makes the executive eligible for annual bonuses determined by our board of directors (or compensation committee, if any).  The employment agreement also provides that he is eligible to participate in our equity incentive plans and other employee benefit programs.

The employment agreement imposes on the employee post-termination non-competition, non-solicitation and confidentiality obligations.  Under the agreement, the officer will agree not to compete with our business in the United States, subject to certain limited exceptions, for a period of two years after termination of his employment (provided that the agreement is terminated other than for good reason by the officer or without cause by us).  The officer will further agree, for a period of three years after termination of his employment, to refrain from inducing, or attempting to induce, any of our customers or employees to curtail or terminate their relationship or employment with us, as applicable. The officer also agrees to maintain the confidentiality of all confidential or proprietary information of our company, and assign any inventions to us that he acquired or developed during his relationship with us.

 

The employment agreement provides for payments and benefits upon termination of employment in addition to those previously accrued.  If the executive is terminated due to death or disability, the executive will receive (in addition to items previously accrued):

●	instead of a bonus (other than accrued and unpaid guaranteed bonus) for that year, a lump sum cash payment equal to the average annual bonus in recent years (calculated as described below), prorated to reflect the part of the year completed before termination; and

●	in case of disability, continued health, medical and life insurance coverage until age 65.

 

 

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If we terminate the executive’s employment without cause, including after a change in control, or if the executive terminates employment for good reason, the executive will receive (in addition to items previously accrued):

●	a lump sum cash payment equal to (1) the sum of his then-current annual base salary, plus his then-current guaranteed cash bonus, plus the average annual bonus in recent years (calculated as described below), multiplied by 3;

●

instead of a bonus (other than accrued and unpaid guaranteed bonus) for that year, a lump sum cash payment equal to his average annual bonus in recent years (calculated as described below), which, unless the termination occurs within the period beginning on the date of a change in control and ending two years after a change in control, will be prorated to reflect the part of the year completed before termination; and

●	continued health, medical and life insurance coverage for one year.

In each case, the average annual bonus in recent years is calculated by using the most recent (up to three) calendar years in which the executive worked for us for the entire year. If the executive was not eligible for, or did not receive, a bonus during any of those years, then we deem the average annual bonus to be equal to the target annual bonus for the year of termination. When calculating the average annual bonus, any guaranteed cash bonus is disregarded.

If payments under the employment agreement are subject to the golden parachute excise tax, we must pay an additional gross-up amount so that his after-tax benefits are the same as if no excise tax had applied.

 

Equity Awards

As of December 31, 2012, there were no unexercised options, stock that had not vested, or equity incentive plan awards for Mr. Chambers or Mr. Mitchell.

Compensation of Directors

No compensation was paid to our directors, excluding the named executive officers set forth in the Summary Compensation Table above, for the last fiscal year ended December 31, 2012.

 

We have adopted a policy not to compensate our directors for attending meetings of the Board of Directors or meetings of a committee of the board of directors.  All directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director and committee meetings.

 

 

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information concerning the ownership of our common stock as of April 5, 2013, of (i) each person who is known to us to be the beneficial owner of more than 5 percent of our common stock, without regard to any limitations on conversion or exercise of convertible securities or warrants; (ii) all directors, named executive officers, and executive officers; and (iii) our directors, named executive officers, and executive officers as a group:

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership (1)				Percent of Class (2)
H. Matthew Chambers 2222 5th Ave. South Birmingham, AL 35233			2,633,220	(3)			19.5	%
Joseph P. Mitchell 2222 5th Ave. South Birmingham, AL 35233			316,985				2.4	%
Paolo Chiaia 2222 5th Ave. South Birmingham, AL 35233			207,262				1.5	%
Patrick Aisher 2222 5 th Avenue South Birmingham, AL 35233			50,000				0.4	%
Named Executive Officers, Executive Officers and Directors as a Group (4 Persons)			3,207,467				23.8	%
Barclays Capital Inc. (4) 70 Hudson St. Jersey City, NJ 07302			681,299				5.1	%
Nazir Mohammed Parker (5) Oldenway Limited I Oldenway Limited II Bahrain World Trade Center 37th Floor East Tower Kingdom Bahrain			2,479,826				18.4	%
RSC Affiliated Businesses, LLC (6) 2222 5th Ave. South Birmingham, AL 35233			2,633,220				19.5	%
Francois-Xavier Terny (7) 420 East 64th St. Apt W-4D New York, NY 10065			805,000				6.0	%

_____________

(1)	This table is based upon information supplied by officers, directors and principal stockholders and is believed to be accurate.  Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options, warrants, or other conversion privileges currently exercisable or convertible, or exercisable or convertible within 60 days of April 5, 2013, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.  Where more than one person has a beneficial ownership interest in the same shares, the sharing of beneficial ownership of these shares is designated in the footnotes to this table.
(2)	At April 5, 2013, we had 13,471,277 shares outstanding.
(3)	Consists of shares owned by RSC Affiliated Businesses, LLC, a company controlled by Mr. Chambers and for which he has the power to vote and invest the shares.
(4)	The number of shares designated in this table as beneficially owned by this shareholder is based solely upon the stockholder records of the company.  We have no information as to the individual or individuals who hold voting or investment power over these shares.
(5)	Includes 1,239,913 shares held by Oldenway I and 1,239,913 shares held by Oldenway II.  Mr. Parker has the voting and investment power over all of these shares.
(6)	This entity shares beneficial ownership of these shares with H. Matthew Chambers and the shares are included with the shares beneficially owned by him above in this table.
(7)	The number of shares designated in this table as beneficially owned by this shareholder is based solely upon the stockholder records of the company.  We have no information as to any other party or parties who hold voting or investment power over these shares.

 

 

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Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth as of the most recent fiscal year ended December 31, 2012, certain information with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuance:

		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) and (b)) (c)
Equity compensation plans approved by security holders			0			$	0		0
Equity compensation plans not approved by security holders			2,105,000	(2)		$	1.50		305,000	(1)
Total			2,105,000						305,000

 

(1)	We have a 2008 Incentive Plan which permits us to grant option and share awards. The plan has 1,105,000 shares authorized for grants, of which we issued 800,000 shares during 2009.
(2)	These numbers represent 105,000 warrants issued in 2009 and 2,000,000 options issued in August 2011.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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 $14,000 and $13,500 for the years ended December 31, 2012 and 2011, respectively.  Additionally, Pamela Miller is the guarantor for the majority of the loans and leases, vendor open accounts and the corporate credit card.

As disclosed above, the Company has entered into an employment agreement with H. Matthew Chambers with an effective date of February 15, 2012.

Director Independence

Our common stock is not listed on a national securities exchange or on an inter-dealer quotation system which has requirements that directors be independent. We have adopted an independence standard that states that a person will be considered an independent director if he or she is not an officer of the Company and is, in the view of the Company’s board of directors, free of any relationship that would interfere with the exercise of independent judgment. Our board of directors has determined that Mr. Chiaia and Mr. Aisher are independent directors.

 

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ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees Paid

Audit fees  are comprised of amounts billed for the audit of our annual financial statements, review of our quarterly financial statements and other fees that are normally provided in connection with statutory and regulatory filings or engagements. The aggregate fees billed for the fiscal years ended December 31, 2012 and 2011 by our independent registered public accounting firm were as follows:

Fiscal Year		Amount
2012		$	40,100
2011		$	38,000

Audit related fees  are comprised of amounts billed for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements, other than those previously reported as audit fees. We were not billed any such fees.

Tax fees  are comprised of amounts billed for the preparation of our federal and state tax returns. We were not billed any such fees.

All other fees  represent amounts billed for products or services provided by our independent registered public accounting firm, of which there were none. We were not billed any such fees.

 

Audit Committee

Our Board of Directors, which constitutes our audit committee, has considered whether the non-audit services provided by our auditors to us are compatible with maintaining the independence of our auditors and concluded that the independence of our auditors is not compromised by the provision of such services.  Our Board of Directors pre-approves all auditing services and permitted non-audit services, including the fees and terms of those services, to be performed for us by our independent auditor prior to engagement.

PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statements Index

Report of Independent Registered Public Accounting firm

Consolidated Balance Sheets, December 31, 2012 and 2011

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011

Consolidated Statement of Stockholders’ Deficit for the years ended December 31, 2012 and 2011

Consolidated Statements of Cash Flows, for the years ended December 31, 2012 and 2011

Notes to Consolidated Financial Statements for the years ended December 31, 2012 and 2011

 

 

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Exhibits

 

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Agreement and Plan of Merger dated February 12, 2009	8-K	000-52500	2.1	2/12/09
3.1	Amended and Restated Certificate of Incorporation					X
3.2	Certificate of Merger filed March 13, 2009	10-K	000-52500	3.2	4/1/11
3.3	Bylaws	10-K	000-52500	3.3	4/1/11
4.1 & 10.1	2008 Stock Incentive Plan *	8-K	000-52500	10.1	2/12/09
4.2	Securities Purchase Agreement dated January 30, 2009	8-K	000-52500	4.1	2/12/09
4.2	Registration Rights Agreement dated February 12, 2009	8-K	000-52500	4.2	2/12/09
10.2	Employment Agreement with H. Matthew Chambers *	8-K	000-52500	10.2	2/12/09
10.3	Employment Agreement with H. Matthew Chambers effective February 15, 2012 *					X
10.4	Employment Agreement with Joseph Mitchell *	8-K	000-52500	10.3	2/12/09
10.5	Terny Settlement Agreement					X
10.6	Promissory Note dated September 27, 2012					X
14.1	Code of Ethics	8-K	000-52500	14.1	2/12/09
16.1	Letter from CVB Dated August 6, 2012 Regarding Change in Certifying Accountant	8-K	000-52500	16.1	8/7/12
21.1	List of Subsidiaries	10-K	000-52500	21.1	4/1/11
31.1	Rule 13a-14(a) Certification by Principal Executive Officer					X
31.2	Rule 13a-14(a) Certification by Principal Financial Officer					X
32.1	Section 1350 Certification of Principal Executive Officer					X
32.2	Section 1350 Certification of Principal Financial Officer					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

 

* Management contract on compensatory plan or arrangement required to be filed as an exhibit.

[SIGNATURE PAGE FOLLOWS]

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: April 16, 2013	By:	/s/ H. Matthew Chambers
		H. Matthew Chambers, Chief Executive Officer (Principal Executive Officer)
Date: April 16, 2013	By:	/s/ Joseph P. Mitchell
		Joseph P. Mitchell, Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ H. Matthew Chambers
H. Matthew Chambers		Director & Chief Executive Officer (Principal Executive Officer)		April 16, 2013
/s/ P aolo Chiaia
Paolo Chiaia		Director		April 16, 2013
/s/ Patrick Aisher
Patrick Aisher		Director		April 16, 2013

 

 

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