Notes to Consolidated Financial Statements
December 31, 2013 and 2012
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 two production models (the X132 Hellcat) and two preproduction models (the Hellcat Roadster and the Pierre Tereblanch P51 Fighter). 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 recent economic downturn in the United States and around the world. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
See Note 7 for a full discussion of commitments, contingencies and other uncertainties.
Cash and Cash Equivalents
The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash depository accounts which at times, may exceed federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. These amounts represent actual account balances held by the financial institution at the end of the period, and unlike the balance reported in the financial statements, the account balances do not reflect timing delays inherent in reconciling items such as outstanding checks and deposits in transit.
Inventory
Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory consists of parts inventory, work in process (WIP), finished goods inventory, apparel and direct labor associated with finished goods.
|
|
12/31/13
|
|
|
12/31/12
|
|
Parts
|
|
$
|
188,867
|
|
|
$
|
183,069
|
|
Work in process
|
|
|
82,515
|
|
|
|
86,433
|
|
Motorcycle finished goods
|
|
|
99,510
|
|
|
|
67,611
|
|
Apparel Inventory
|
|
|
3,639
|
|
|
|
8,519
|
|
Total Inventory
|
|
$
|
374,531
|
|
|
$
|
345,632
|
|
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Maintenance, repairs, and minor renovations are expensed as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is included in the results of operations. The Company provides for depreciation of property and equipment using the straight-line method over the estimated useful lives or the term of the lease, as appropriate. The estimated useful lives are as follows: vehicles, 5 years; furniture and fixtures, 3 to 5 years; equipment, 3 to 5 years.
Revenue Recognition
Revenues from the sale of motorcycles and equipment are recognized when products are delivered or shipped. Advance payments from customers are typically required to secure the order and are shown as deferred revenue in the accompanying balance sheets and are non-refundable. The Company recognizes revenue from repair services in the same month the service is provided. 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 $792,208 at December 31, 2013 and $817,582 at December 31, 2012.
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, 2013:
Common stock warrants
|
|
|
105,000
|
|
Total common stock equivalents
|
|
|
105,000
|
|
Since the Company reflected a net loss in 2013 and 2012, 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, 2013 and 2012, respectively, the Company did not record any liabilities for uncertain tax positions.
Advertising Costs
Advertising is expensed as incurred. For 2013 and 2012, advertising expense was $23,743 and $62,067, respectively.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, general and administrative expenses in the accompanying statements of operations. Research and development (R&D) costs totaled $189,731 and $209,592 for the years ended December 31, 2013 and 2012, 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, 2013.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The results of these reclassifications did not materially affect financial position, results of operations or cash flows.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Vehicles
|
|
$
|
36,628
|
|
|
$
|
36,628
|
|
Furniture and fixtures
|
|
|
11,734
|
|
|
|
11,734
|
|
Equipment
|
|
|
80,434
|
|
|
|
123,191
|
|
Leasehold improvements
|
|
|
25,273
|
|
|
|
39,886
|
|
|
|
|
154,069
|
|
|
|
211,439
|
|
Less accumulated depreciation
|
|
|
(126,619)
|
|
|
|
(207,889)
|
|
|
|
$
|
27,450
|
|
|
$
|
3,550
|
|
NOTE 3 – NOTES PAYABLE
Notes payable consisted of the following as of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
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
|
|
|
|
|
-
|
|
|
|
18,737
|
|
Less current portion
|
|
|
-
|
|
|
|
18,737
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Principal Maturities of Notes Payable
|
|
|
|
2014
|
|
$
|
-
|
|
|
|
|
|
|
|
|
$
|
-
|
|
NOTE 4 – CAPITAL LEASES
The Company currently has no capital leases.
NOTE 5 – STOCKHOLDERS’ EQUITY
Sale of Common Stock
In July 2012, the Company raised $41,000 through the sale of 100,000 shares of common stock to accredited investors.
In December 2012, the Company raised $50,000 through the sale of 116,279 shares of common stock to an accredited investor.
In January 2013, the Company converted a payable of $50,000 to 116,279 shares of common stock to an accredited investor.
On May 31, 2013, the Company completed a prior nonpublic offering of its common stock commenced on or about February 22, 2013. The Company received subscriptions from three investors, including H. Matthew Chambers, our Chief Executive Officer and a director, for $810,000 representing a total of 3,240,000 shares issuable at the original offering price of $0.25 per share. On July 25, 2013, the Board retroactively reduced the purchase price in this offering to $0.125 per share for a total of 6,480,000 shares. As of the date of this report, the Company had received subscription payments of $486,761.50, with a balance of $113,238.50 remaining unpaid. The balance of the subscription amounts is currently due and payable.
On July 31, 2013 the Company offered for sale 6,234,412 shares of Common Stock at $0.1604 per share. As of the date of this report, the Company has received a subscription commitment for 6,234,412 shares. In February 2014, the Company received $500,000 and issued 3,117,206 shares. The remaining 50% shall be paid to the Company on a future date mutually agreed by the investor and the Company.
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
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31, 2013
|
|
|
105,000
|
|
|
$
|
1.50
|
|
Exercisable – December 31, 2013
|
|
|
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
|
|
|
|
0.01 years
|
|
|
|
$1.50
|
|
|
|
105,000
|
|
|
|
$1.50
|
|
At December 31, 2013 and December 31, 2012, 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 vested immediately and expired on August 9, 2013.
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
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
2,000,000
|
|
|
|
-
|
|
Outstanding – December 31, 2013
|
|
|
-
|
|
|
$
|
1.50
|
|
Exercisable – December 31, 2013
|
|
|
-
|
|
|
$
|
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
|
|
|
0
|
|
|
0.0
|
|
|
$1.50
|
|
|
0
|
|
|
$1.50
|
|
Registration Rights Penalty
In connection with the issuance of common stock and convertible debt, which converted into common stock in 2009, the equity holders were entitled to liquidated damages, which provide for a payment in cash equal to a maximum of 10% of the total offering price for all equity proceeds raised. The convertible note holders were entitled to liquidated damages which provide for a payment in cash equal to a maximum of 15% of the total offering price for all equity proceeds raised. The Company was required to file an S-1 registration statement 120 days after the offering closed. The closing date of the offering was February 12, 2009; therefore, the 120th day was June 12, 2009. Furthermore, the Company was required to have the S-1 registration declared effective within 150 days (July 12, 2009). The Company never filed a registration statement. 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.
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
|
|
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 $29,314 and $14,000 for the years ended December 31, 2013 and 2012, 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 lawsuit discussed in more detail below, the Company is currently not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
We have one legal action – Confederate Motors, Inc. v. Francois-Xavier Terny, et al.
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 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 September 30, 2013. On April 4, 2013, counsel for Francois-Xavier Terny filed a stipulated judgment in connection with the final payment under the Mutual Settlement Agreement & General Release between the Company and Mr. Terny. Management believes the judgment may be defective and is seeking legal clarification concerning same.
A payment of $275,000 on the settlement with Francois Xavier Terny was due on September 30, 2013. The Company paid $50,000 to Mr. Terny’s designee on July 17, 2013 and $25,000 to Mr. Terny’s designee on November 25, 2013. As of the date of this report the Company still has a balance due of $200,000 recorded in the books.
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 has engaged a new lease for a 24,179 square foot office and warehouse located in Birmingham, Alabama. The former lease expired on November 1, 2013. The lease was executed on October 21, 2013 with commencement on November 1, 2013. The Company sub-leased the premise for the term of ten years with the option of an additional ten years provided 180 days prior written notice is given. The monthly base rental is $7,059.67 for the first year with a 2% increase each year after. The Company has prepaid the December 2013 rent and the security deposit; equal to the first month’s rent. The lessor waived the November 2013 rent as an incentive to enter into the lease.
Rent expense paid under the previous operating lease obligation totaled $9,958 for the quarter ending December 31, 2013. Rent expense under the new operating lease totaled $7,060. Combined rent expense for the quarter ending December 31, 2013 is $17,018At December 31, 2013, future minimum payments due under the operating lease agreements are as follows:
Future minimum lease payments
2014
|
|
$
|
63,822
|
|
2015
|
|
$
|
86,700
|
|
2016
|
|
$
|
88,434
|
|
2017
|
|
$
|
90,204
|
|
2018
|
|
$
|
92,006
|
|
2019
|
|
$
|
93,824
|
|
Thereafter
|
|
$
|
377,246
|
|
|
|
$
|
892,236
|
|
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. 2014-07 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.
NOTE 9 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed giving effect to all potential dilutive common stock, including common stock options and common stock warrants. For the comparative periods presented, the common stock warrants were included in calculating diluted earnings per share. However, the common stock warrants and common stock options were not included in the computation of the per share loss for the current periods because the effect would be anti-dilutive. These items could be dilutive in the future.
NOTE 10 – 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 two installment payments of $12,500 each and a final payment of $50,000 due on September 30, 2013.
As of the date of this report two installments have been received, through prepayment credits and certified funds, and no interest has been paid. As of December 31, 2013, interest has accrued to $5,910. One customers order has changed and two order, previously credited were cancelled. Commissions withheld as payment of the note, $20,500, have been reversed during the 3
rd
Quarter 2013. Accumulated fees for 2013 are $2,000. Additionally, CM had to provide warranty work and missing parts to customers charging $2,333 to notes receivable. Finally, two orders were placed without providing CM a commission or royalty, the Company will calculate our commission and royalty due in 2014. One sale in the 3
rd
quarter for $70,520 was credited to notes receivable. T
he current balance due CM is $10,223.
NOTE 11 – CONCENTRATION OF CREDIT RISK
At December 31, 2013,
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 12 – 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, 2013 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, 2013. 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 2010, 2011 and 2012 are still open for examination by the taxing authorities.
The valuation allowance at December 31, 2013 was approximately $2,537,534. The net change in valuation allowance during the year ended December 31, 2013 was an increase of approximately $273,671. 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, 2013.
The Company has a net operating loss carryforward for tax purposes totaling approximately $5,772,390 at December 31, 2013, expiring through 2033. 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,
|
|
|
|
2013
|
|
|
2012
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
(2,467,298
|
)
|
|
$
|
(2,111,975
|
)
|
Stock based compensation
|
|
$
|
(50,000
|
)
|
|
$
|
(135,222
|
)
|
Inventory obsolescence
|
|
$
|
(20,236
|
)
|
|
$
|
(16,666
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
(2,537,534,
|
)
|
|
$
|
(2,263,863
|
)
|
Valuation allowance
|
|
$
|
2,537,534
|
|
|
$
|
2,263,863
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The actual tax benefit differs from the expected tax benefit for the year ended December 31, 2013 and the year ended December 31, 2012 (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,
|
|
|
|
2013
|
|
|
2012
|
|
Computed "expected" tax expense (benefit) - Federal – net of State benefit
|
|
$
|
(233,034
|
)
|
|
$
|
(178,388
|
)
|
Computed "expected" tax expense (benefit) - State -
|
|
$
|
(42,278
|
)
|
|
$
|
(21,560
|
)
|
Penalties and fines and meals and entertainment
|
|
$
|
1,641
|
|
|
$
|
3,668
|
|
Change in valuation allowance
|
|
$
|
273,671
|
|
|
$
|
196,280
|
|
Actual tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 13 – 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 14 – 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, except as set forth below
,
We are currently not engaged in any discussions that could result in additional borrowings.
At December 31, 2012, the Company owed a remaining balance of $275,000 in the Settlement Agreement with Mr. Terny. (See above, Note 7—Commitments, Contingencies and Uncertainties.) Although delinquent, the Company continues to make payments to Mr. Terny and/or his designee as funding becomes available. The Company paid $50,000 during the third quarter 2013 and $25,000 during the fourth quarter 2013. As of the date of this report, our current obligation to Mr. Terny is $200,000.
At December 31, 2013, the Company had a remaining registration rights liability of $175,500. (See above, Note 5—Stockholders’ Equity.) No demands have been made in the past for repayment of this penalty. In the event demands for payment are made in the future, management intends to seek a negotiated settlement with the holders of the penalty rights and to satisfy the obligation through the issuance of equity shares or an installment payment plan from operating revenues or equity offerings.
At December 31, 2013, the Company maintains a backlog of orders represented by deferred revenue totaling $746,107. This account is a revolving account with funding added as new orders are placed and relieved to revenue as motorcycles are shipped. As of the date of this report the Company has the needed inventory to begin relieving these funds as revenue.
At December 31, 2013, the Company continues to accrue wages due Matt Chambers in the amount of $275,000. $210,000 will be relieved once the February 2013 stock offering is closed.
Strengthening its ability to continue operations, the Company has a significant backlog of orders; as of the date of this report the Company has 32 orders which represent four months of production and approximately $1.6 million in revenue. Assuming the Company’s average gross profit margin of 30%, the Company will earn $480,000 in gross profit. The Company projects an additional 50 to 100 orders with the unveiling of the Hellcat Roadster and the Limited Edition Pierre Terblanche P-51 Fighter at the 2013 year end.
Additionally, the Company will begin producing 2 bikes per week and expects to produce 75 motorcycles this year representing an additional $988,000 in gross profit.
NOTE 15 – SUBSEQUENT EVENTS
On July 31, 2013 the Company offered for sale 6,234,412 shares of Common Stock at $0.1604 per share. As of the date of this report, the Company has received a subscription commitment for 6,234,412 shares. In February 2014, the Company received $500,000 and issued 3,117,206 shares. The remaining 50% shall be paid to the Company on a future date mutually agreed by the Investor and the Company.
On April 14, 2014, management determined that previously waived compensation to Matt Chambers in the amount of $171,250 would be paid in the current year by issuing shares of common stock. The compensation relates to the years 2009 through 2011. The transaction has been treated as a change in accounting estimate and will therefore be accounted for as compensation expense in 2014.