QDM International Inc. - Annual Report: 2012 (Form 10-K)

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable

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PART II

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

    Item 5(a)

a)  Market Information.  The Company began trading publicly on the NASD Over the Counter Bulletin Board on June 22, 2000 under the symbol "DJRT".

The following table sets forth the range of high and low bid quotations for our common stock.  The quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.

b)  Holders.  At April 11, 2013, there were approximately 340 shareholders of the Company.

c)  Dividends.  Holders of our common stock are entitled to receive such dividends as may be declared by our board of directors.  No dividends on our common stock have ever been paid, and we do not anticipate that dividends will be paid on our common stock in the foreseeable future.

d)  Securities authorized for issuance under equity compensation plans.  No securities are authorized for issuance by the Company under equity compensation plans.

e)  Performance graph.  Not applicable.

f)  Sale of unregistered securities.  

Not applicable

    Item 5(b)  Use of Proceeds.  Not applicable.

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    Item 5(c)  Purchases of Equity Securities by the issuer and affiliated purchasers.  

During 2012 and 2011 we repurchased no shares of our common stock.

ITEM 6.  SELECTED FINANCIAL DATA

Not applicable to a smaller reporting company.

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

Trends and Uncertainties.  Demand for the Company's products is dependent on general economic conditions, which are cyclical in nature.  Because a major portion of our activities are the receipt of revenues from our driving school services and products, our business operations may be adversely affected by competitors and prolonged recessionary periods.  

There are no other known trends, events or uncertainties that have, or are reasonably likely to have, a material impact on our short term or long term liquidity.  Sources of liquidity will come from sales of our products and services.  There are no material commitments for capital expenditure at this time.  There are no trends, events or uncertainties that have had or are reasonably expected to have a material impact on the net sales or revenues or income from continuing operations.  There are no significant elements of income or loss that do not arise from the Company’s continuing operations.  There are no other known causes for any material changes from period to period in one or more line items of our financial statements.  

We currently have classes planned through December 2013.

Capital and Source of Liquidity.  The Company currently plans to expand the racecars we currently run on the racetracks to include exotic racecars as well.

We believe that our cash on hand and cash generated from operations will be sufficient to conduct operations through December 31, 2013.  

The board of directors has no immediate offering plans in place and shall determine the amount and type of financing as our financial situation dictates.

For the year ended December 31, 2012, we spent $19,912 on additions to racecars under construction, and we spent $42,181 on the acquisition of property and equipment.  As a result, we spent $62,093 on investing activities for the year ended December 31, 2012.

Comparatively, for the year ended December 31, 2011, we spent $31,834 on additions to racecars under construction, and spent $5,600 on acquisition of property and equipment.  As a result, we spent $37,434 on investing activities for the year ended December 31, 2011.

For the year ended December 31, 2012, we received proceeds from a shareholder advance of $100,000 and we repaid long-term debt of $30,962.  As a result, we had net cash provided by financing activities of $69,038 for the year ended December 31, 2012.

Comparatively, for the year ended December 31, 2011, we repaid long-term debt of $24,962.  As a result, our net cash used in financing activities was $24,962 in 2011.

Our long-term liquidity is dependent on the continuation of operations and receipt of revenues.

Results of Operations.

For the year ended December 31, 2012, we had sales of $3,481,607, which represents a 21.1% increase from the 2011 sales of $2,875,602.  Revenues increased primarily due to our expansion into Las Vegas in 2012.  The cost of sales increased 36.4% to $1,849,377 from the 2011 cost of sales of $1,355,924 as a result of the additional costs of the expansion.  General and administrative expenses stayed close, with $1,834,737 in 2012 compared to $1,849,847 in 2011, a decrease of 0.8%.  In 2012, we had interest income of $448, other income of $22,453, and interest expenses of $2,465.  As a result, we had a net loss of $182,071 for the year ended December 31, 2012, a 45.2% decrease from the year ended December 31, 2011.  Comparatively, for the year ended December 31, 2011, we had interest income of $942 and interest expenses of $3,006, resulting in a net loss of $332,233 for the year ended December 31, 2011.

Plan of Operation.  The Company may experience problems, delays, expenses and difficulties, many of which are beyond the Company’s control.  These include, but are not limited to, unanticipated problems relating to additional costs and expenses that may exceed current estimates and competition.

Critical Accounting Policies

The following accounting policies are considered critical by our management.  These and other accounting policies require that estimates be made based on assumptions and judgment, which affect revenues, expenses, assets, liabilities and disclosure of contingencies in our financial statements.  These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances.  However, actual results may differ from these estimates under different and/or future circumstances.

Revenue Recognition

In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the student is fixed or determinable, and collectability is reasonably assured.  The following policies reflect specific criteria for the various revenue streams of the Company:

Revenue is recognized at the time the product is delivered or the service is performed.

Deferred revenue is recorded for amounts received in advance of the time at which services are performed and included in revenue at the completion of the related services. Deferred revenue aggregated $1,036,816 and $1,172,821 at December 31, 2012 and 2011, respectively.

Property and Equipment

Property and equipment are recorded at cost and are depreciated based upon estimated useful lives using the straight-line method. Estimated useful lives range from three to ten years.  At December 31, 2012, we believe the remaining carrying values of these assets are recoverable.

Stock-Based Compensation

We record stock based compensation in accordance with FASB ASC 718, Stock Compensation.   ASC 718 requires that the cost resulting from all share-based transactions be recorded in the financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.

Recent Pronouncements

We do not believe any recently issued accounting standards will have a material impact on our financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Dale Jarrett Racing Adventure, Inc.

Index to the Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Dale Jarrett Racing Adventure, Inc.:

We have audited the accompanying balance sheets of Dale Jarrett Racing Adventure, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these 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 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of its operations, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Kingery & Crouse, P.A.

Certified Public Accountants

Tampa, Florida

April 11, 2013

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DALE JARRETT RACING ADVENTURE, INC.

BALANCE SHEETS

DECEMBER 31, 2012 and 2011

See accompanying notes to financial statements.

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Dale Jarrett Racing Adventure, Inc.

Notes to Financial Statements

December 31, 2011 and 2010

Note 1. Organization and Significant Accounting Policies

Dale Jarrett Racing Adventure, Inc. (referred to as “we”, “us”, “our” or the “Company”) was incorporated in Florida on November 24, 1998.  The Company offers the “NASCAR” racing school to the public.  The Company owns several “NASCAR” type racecars and has secured several racetrack locations at which it offers these services at various dates during the year.

Revenue Recognition

In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price to the student is fixed or determinable, and collectability of the sales price is reasonably assured.  The following policies reflect specific criteria for our various revenue streams:

·

Revenue is recognized at the time the product is delivered or the service is performed.  Provision for sales returns will be estimated based on the Company’s historical return experience; however sales returns have not been significant due to the nature of the services we provide.

·

Deferred revenue is recorded for amounts received in advance of the time at which services are performed and included in revenue at the completion of the related services. Deferred revenue aggregated $1,036,816 and $1,172,821 at December 31, 2012 and 2011, respectively.

Statements of Cash Flows

For purposes of the statements of cash flows, we consider all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from students net of estimated allowances for uncollectible accounts.  In determining collectability, historical trends are evaluated and specific student issues are reviewed to arrive at appropriate allowances.  There was no allowance at December 31, 2012 and 2011.

Spare Parts and Supplies

Spare parts and supplies are valued at the lower of cost or market on a first-in, first-out basis. At December 31, 2012 and 2011 spare parts and supplies include $139,377 and $138,245, respectively, of spare parts and tires used in the racecar operations, and finished goods (which are primarily promotional items that bear our logo), of $6,878 and $4,617, respectively.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets, ranging from 3 to 10 years.  Major additions are capitalized, while minor additions and maintenance and repairs, which do not extend the useful life of an asset, are expensed as incurred.

Long Lived Assets

We annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, review our long-lived assets for impairment.  An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.  No such impairment losses have been identified by the Company for the years ended December 31, 2012 and 2011.

Use of Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain 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.  The reported amounts of revenues and expenses may be affected by the estimates management is required to make.  Actual results could differ from those estimates.

Advertising Costs

Advertising costs are charged to operations when the advertising first takes place.  Advertising costs charged to operations were $462,325 and $489,015 for the years ended December 31, 2012 and 2011, respectively.

Fair Value of Financial Instruments

At December 31, 2012, our short-term financial instruments consist primarily of accounts receivable, accounts payable, accrued and other liabilities and the advance from shareholder. The carrying amounts of these financial instruments approximate fair value because of their short-term maturities.  Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents.  As of December 31, 2012 and 2011, and periodically throughout such years, balances in various operating accounts exceeded federally insured limits.  We monitor our positions with, and the credit quality of, the financial institutions in which we maintain cash balances and we have not experienced any losses in such accounts.  We do not hold or issue financial instruments for trading purposes nor do we hold or issue interest rate or leveraged derivative financial instruments.

The carrying value of our long-term debt approximated its fair value based on the current market conditions for similar debt instruments.

Segment Information

The Company follows Financial Accounting Standards Board (FASB) ASC 280-10, Segment Reporting.  Under ASC 280-10, certain information is disclosed based on the way management organizes financial information for making operating decisions and assessing performance.  We currently operate in a single segment and will evaluate additional segment disclosure requirements as we expand its operations.

Income Taxes

We compute income taxes in accordance with FASB ASC Topic 740, Income Taxes.  Under ASC-740, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period.  Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

We follow guidance in FASB ASC Topic 740-10, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We do not believe we have taken any uncertain tax positions on any of our open income tax returns filed through the year ended December 31, 2012.  Our methods of tax accounting are based on established income tax principles in the Internal Revenue Code and are properly calculated and reflected within our income tax returns.  Due to the carryforwards of net operating losses, all of our federal and state income tax returns remain subject to audit.

Stock-Based Compensation

We recognize stock based compensation in accordance with FASB ASC 718, Stock Compensation.   ASC 718 requires that the cost resulting from all share-based transactions be recorded in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.

Net Income (Loss) Per Common Share

We calculate net income (loss) per share in accordance with ASC Topic 260, Earnings per Share.  Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding.  

During periods in which we incur losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive.

Recent Accounting Pronouncements

We do not believe any recently issued accounting standards will have a material impact on our financial statements.

Note 2.  Property and Equipment  

Property and equipment consist of the following at December 31, 2012 and 2011:

Depreciation charged to operations was $125,099 and $125,070 for the years ended December 31, 2012 and 2011, respectively, of which $122,722 and $119,176 is included in cost of sales and services for those years.

Note 3. Long-term Debt

At December 31, 2011, long-term debt consisted of obligations under vehicle purchase contracts having outstanding principal balances of $25,235.   The loans, which were paid in full in 2012,  were payable in monthly principal and interest installments of $2,306 (with interest rates ranging from 5.0% to 7.5%) , and were collateralized by three support vehicles.  

During the year ended December 31, 2012, we entered a new debt obligation under a vehicle purchase contract having an initial outstanding principal balance of $23,935.   The vehicle purchase loan is payable in monthly installments of $543, including interest at 4.24%, through January 2016, and is collateralized by a support vehicle.

Note 4. Stockholders’ Equity (Deficit)

The following table summarizes the stock option activity during the years ended December 31, 2012 and 2011:

During April 2009, we extended the expiration date of 3,500,000 outstanding options for a period of five years.  The exercise price remained at $.15 per share and the options now expire on October 21, 2014. The incremental cost of the extension of these options was $50,000 and was charged to stock option based compensation expense during 2009.

Common stock issued upon the exercise of stock options would come from our authorized common shares.  

All options outstanding were fully vested as of 2009 and no compensation cost was recognized during 2012 or 2011.  In valuing our options at grant date we used a Black-Scholes model and the average expected life was calculated using the simplified method as we believe we do not have sufficient history to estimate the expected life of our options.

Note 5. Income Taxes

We have not provided for income taxes in 2012 or 2011 as a result of operating and tax losses.  We have net operating loss carryforwards at December 31, 2012 of approximately $4,800,000 that expire in various years through 2032.  We have fully reserved the deferred tax assets that would arise from the loss carryforwards since we believe it is likely that future income from operations will be available to utilize the deferred tax asset.  The approximate deferred tax asset and the related reserve are as follows:

The valuation reserve increased by $54,000 in 2012 and by $113,000 in 2011.

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the years ended December 31, 2012 and 2011.  The sources and tax effects of the differences are as follows:

Note 6. Commitments

Operating Leases

In 2011 and through November 2012, we were obligated under an operating lease for use of a building in Hickory, North Carolina. On November 1, 2012 we entered a new operating lease in such locale, which requires monthly payments of $1,800 and expires October 31, 2014.  Also during 2012, we entered into a lease for office and warehouse space in Las Vegas, NV.  The lease requires monthly payments of $1,510 and expired February 28, 2013.  Future minimum payments under these lease agreements are as follows:  $24,620 in 2013 and $18,000 in 2014.

Employment Agreements

During July 2011, we extended the employment agreement of our Chief Executive Officer through June 2016 at a base salary of $150,000, with cost of living adjustments to be made on the first day of each year.

Vendor Agreements

On August 19, 2010, we entered into an agreement with Talladega Superspeedway, LLC to allow us exclusivity during 2011 in providing stock car ride along programs and stock car driving experiences to paying students at Talladega Superspeedway.  Under the terms of the agreement, we agreed to rent a minimum of 60 days during 2011 for $450,000, which amount was paid in four payments of $112,500 at the end of each quarter during 2011.  

During October 2011, we entered into a new agreement with Talladega Superspeedway, LLC to allow us exclusivity during 2012 in providing stock car ride along programs and stock car driving experiences to paying students at Talladega Superspeedway.  Under the terms of the agreement, we agreed to rent a minimum of 60 days during 2012 for $438,000, which amount was paid in four payments of $109,500 at the end of each quarter during 2012.  We also were required to pay Talladega Superspeedway the greater of a set amount of each experience provided or 20% of all DJRA revenues on five designated racing days at the track.

During October 2012, we entered into a new usage agreement with Talladega Superspeedway, LLC for 2013 with no exclusivity and no minimum racing days.

On October 18, 2011, we signed an agreement with Las Vegas Motor Speedway to allow us to provide 34 event dates at the speedway during 2012.  We paid $271,000 to Las Vegas Motor Speedway over the course of 2012 for use of the speedway.  This agreement was not renewed for 2013.

Note 7.  Other Related Party Transactions

During 2012 we received an unsecured advance from a shareholder with an outstanding principal balance of $100,000, accruing interest at 5% per year with no payment terms specified.  As of December 31, 2012 the note had accrued interest of $1,123.

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

None

ITEM 9A.  CONTROLS AND PROCEDURES

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to insure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or the persons performing similar functions, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our CEO and CFO, or the persons performing similar functions, our management has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on that evaluation, our CEO and CFO, or the persons performing similar functions, concluded that our disclosure controls and procedures were effective as of December 31, 2012.

Management’s Annual Report on Internal Control over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of our CEO and CFO, or the persons performing similar functions, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America.  Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control over Financial Reporting – Guidance for Smaller Public Companies.

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Under the supervision and with the participation of our CEO and CFO, or the persons performing similar functions, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, and concluded that it is effective.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the registrant’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the registrant to provide only management’s report in this annual report.

Evaluation of Changes in Internal Control over Financial Reporting:

Under the supervision and with the participation of our CEO and CFO, or those persons performing similar functions, our management has evaluated changes in our internal controls over financial reporting that occurred during the fourth quarter of 2012.  Based on that evaluation, our CEO and CFO, or those persons performing similar functions, did not identify any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Important Considerations:

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

ITEM 9B.  OTHER INFORMATION

None

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PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Board of Directors.  The following persons listed below have been retained to provide services as director until the qualification and election of his successor.  All holders of common stock will have the right to vote for directors of the Company.  The board of directors has primary responsibility for adopting and reviewing implementation of the business plan of the registrant, supervising the development business plan, review of the officers' performance of specific business functions.  The board is responsible for monitoring management and from time to time, to revise the strategic and operational plans of the registrant.  Directors receive no cash compensation or fees for their services rendered in such capacity.

Mr. Shannon is a full time employee of the Company.

The executive officers and directors are: