Fearless Yachts, LLC
A Development Stage Company
Notes to Financial Statements
September 30, 2006
Note 1. ORGANIZATION AND OPERATIONS
Fearless Yachts, LLC (the “Company”), a Missouri company, is engaged in the designing and marketing of luxury performance powerboats and yachts. The Company is a development stage company. Fearless Yachts, LLC was formed on February 14, 2006.
PBC, LLC, a Missouri company, was formed February 23, 2004 to design and develop luxury performance boats and yachts. This partnership was dissolved and all assets and liabilities were transferred to PB Holdings, LLC, a Florida company, which was formed September 7, 2005. PH Holdings was managed by Gary Fears as majority shareholder. The period February 23, 2004 (date of inception) to December 31, 2004 is referred to as the year ending December 31, 2004 in the financial statements presented.
Due to changes in ownership, PB Holdings, LLC was dissolved and Fearless Yachts, LLC was formed February 14, 2006.
These financial statements are prepared in accordance with accounting principles applicable to a going concern. The Company is in the development stage and has not yet, as yet, achieved commercial production. At present, management devotes significant time to raise sufficient funds to fund its development operations. The ability of the Company to continue as a going concern with respect to its planned principal business activity is dependent upon its successful efforts to raise additional equity or debt financing.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's 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 the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fixed Assets
Fixed assets are recorded at cost. They will be depreciated using the straight-line method over the estimated useful lives of the related assets of 3-7 years, when they are put into service.
Advertising Costs
The Company expenses marketing, promotion, and advertising costs as incurred.
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Fearless Yachts, LLC
A Development Stage Company
Notes to Financial Statements
September 30, 2006
Note 3. BRIDGE LOANS PAYABLES AND WARRANTS
The bridge loans payable are, 10% Senior Secured Promissory Notes, totaling $930,707 with outstanding principal due and payable in accordance with the following: July 27, 2006 or upon closing of the Qualified Financing. The bridge loan bears interest at 10% per annum with interest added to the principal balance. If the notes are not repaid by July 27, 2006, interest accrues at 18%. The fees of 13% and a one-time agency fee of $25,000 has been expensed as additional interest over the life of the note.
All purchasers under the Securities Purchase Agreement also acquired a warrant to purchase membership interests of the Company. The percentage of Interests for which the warrant is exercisable and the exercise price which shall be determined immediately after the close of the “Qualified Offering” that results in gross proceeds to the Company of at least $5,000,000
The warrants have a Registration Rights provision for liquidated damages:
| | a. | EITF Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’” addresses financial instruments (such as stock purchase warrants), which are accounted for under EITF 00-19 that may be issued at the same time and in contemplation of a registration rights agreement that includes a liquidated damages clause. |
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| | b. | EITF 05-4 discussed (a) whether a registration rights penalty meets the definition of a derivative and (b) whether the registration rights agreement and the underlying financial instrument should be considered as a combined freestanding instrument or as separate freestanding instruments. However, as of the September 15, 2005 meeting of the EITF, discussion of this Issue was postponed. |
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| | c. | Therefore, at this time, the liquidating damages feature does not have to be separately valued, however this is an open issue and the accounting may change (the liquidated damages feature being accounted for as an embedded derivative), and the company will account for this feature at that time. |
Due to the contingencies inherent in the fixing of the exercise price of the warrants and the nature of the Company’s operations at this time, the fair value attributable to these warrants upon their issuance is zero.
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Fearless Yachts, LLC
A Development Stage Company
Notes to Financial Statements
September 30, 2006
The provision for the warrant exercise price being reset if the company raises money at a lower price than the exercise price may create a situation that will require the fair value of the modification (fair immediately before the reset vs. the fair value upon reset) to be charged to the income statement.
Note 4. EQUITY
Membership equity is based upon the Operating Agreement made and adopted in April, 2006. In addition, Gary Fears, Managing Member, has converted his promissory note in the amount of $886,624 to equity under the terms and conditions set forth by the funding agreement entered into by the Company.
During 2006 the Company sold membership interests for $14,300.
Note 5. INCOME TAXES
No provisions for federal and state income taxes are made in the financial statements as these taxes are the responsibility of the member under this form of organization.
Note 6. COMMITMENTS AND CONTINGENCES
On March 14, 2006, the Company entered into an agreement with Porsche Design Studio. Under the terms of the agreement, Porsche Design Studio has agreed to design, on an exclusive basis, high-speed motorboats and yachts up to 150' in length. Under the terms, the Company agrees to pay Porsche Design Studio a set fee to be determined onaproject-by-project basis for such design services.
On May 9, 2006, the Company entered into an agreement with American Marine Holdings, LLC (AMH). Under the terms of the agreement, AMH has agreed to assist the Company in the development of the mold for its high-speed 28' motorboat and to construct it at a fixed price to the Company.
Note 7. SUBSEQUENT EVENTS
Beginning October, 2006 the Company leased office space under a sublease expiring December 31, 2009 for $4,000 per month. The monthly rent payment includes rent, sales tax, and shared office expense with the sublessor.
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