UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number 000-52051 |
THE MINT LEASING, INC. (Exact Name of Registrant as Specified in Its Charter) |
Nevada (State or Other Jurisdiction of Incorporation or Organization) | 87-0579824 (IRS Employer Identification No.) |
323 N. Loop West, Houston, Texas (Address of Principal Executive Offices) | 77008 (Zip Code) |
(713) 665-2000 (Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o | Accelerated Filer o |
Non-Accelerated Filer o | Smaller reporting company þ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of November 19, 2010, there were outstanding 82,224,504 shares of the registrant’s common stock, $0.001 par value per share.
FORWARD-LOOKING STATEMENTS
Portions of this Form 10-Q, including disclosure under “Management’s Discussion and Analysis or Plan of Operation,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Forward-looking statements involve assumptions and describe our p lans, strategies, and expectations. You can generally identify a forward-looking statement by words such as may, will, should, expect, anticipate, estimate, believe, intend, contemplate or project. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include those risks set forth below under “Risk Factors,” among others, including:
· | our ability to raise capital in the form of either debt or equity, |
· | our ability to obtain and retain customers, |
· | our ability to provide our products and services at competitive rates, |
· | our ability to execute our business strategy in a very competitive environment, |
· | our degree of financial leverage, |
· | risks associated with our acquiring and integrating companies into our own, |
· | risks related to market acceptance and demand for our services, |
· | the impact of competitive services, and |
· | other risks referenced from time to time in our SEC filings. |
With respect to any forward-looking statement that includes a statement of its underlying assumptions or basis, we caution that, while we believe such assumptions or basis to be reasonable and have formed them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by applicable law, including the securities laws of the United States and/or if the existing disclosure fundamentally or materially changes, we do not undertake any obligation to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect unanticipated events that may occur.
PART I
FINANCIAL INFORMATION
Item1. Financial Statements.
THE MINT LEASING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS | September 30, 2010 | December 31, 2009 | ||||||
(unaudited) | ||||||||
Cash and cash equivalents | $ | 1,032,372 | $ | 1,231,594 | ||||
Investment in sales-type leases, net | 30,521,350 | 36,681,689 | ||||||
Vehicle inventory | 567,377 | 765,690 | ||||||
Property and equipment, net | 72,557 | 103,940 | ||||||
Other assets | - | 98,400 | ||||||
Deferred income tax receivable | 1,790,900 | 736,620 | ||||||
TOTAL ASSETS | $ | 33,984,556 | $ | 39,617,933 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued liabilities | $ | 889,876 | $ | 1,204,406 | ||||
Credit facilities | 25,800,072 | 29,464,396 | ||||||
Notes payable to shareholders | 913,800 | 630,300 | ||||||
TOTAL LIABILITIES | 27,603,748 | 31,299,102 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock; Series A, 18,000,000 shares authorized at $0.001 par value, 0 shares outstanding | - | - | ||||||
Preferred stock; Series B, 2,000,000 shares authorized at $0.001 par value, 2,000,000 shares outstanding at September 30, 2010 and December 31, 2009 | 2,000 | 2,000 | ||||||
Common stock, 480,000,000 shares authorized at $0.001 par value, 82,224,504 shares issued and outstanding at September 30, 2010 and December 31, 2009 | 82,225 | 82,225 | ||||||
Additional paid in capital | 9,347,444 | 9,319,073 | ||||||
Retained deficit | (3,050,861 | ) | (1,084,467 | ) | ||||
Total Stockholders' Equity | 6,380,808 | 8,318,831 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 33,984,556 | $ | 39,617,933 |
“See accompanying notes to the unaudited consolidated financial statements”
F-1
THE MINT LEASING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ending | Three Months Ending | Nine Months Ending | Nine Months Ending | |||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
REVENUES | ||||||||||||||||
Sales-type leases, net | $ | 2,285,653 | $ | 1,245,701 | $ | 4,201,047 | $ | 10,258,234 | ||||||||
Amortization of unearned income related to sales-type leases | 1,092,229 | 1,887,500 | 3,161,682 | 4,882,086 | ||||||||||||
TOTAL REVENUES | 3,377,882 | 3,133,201 | 7,362,729 | 15,140,320 | ||||||||||||
COST OF REVENUES | 3,098,517 | 5,091,414 | 7,492,997 | 15,300,641 | ||||||||||||
GROSS PROFIT (LOSS) | 279,365 | (1,958,213 | ) | (130,268 | ) | (160,321 | ) | |||||||||
GENERAL AND ADMINISTRATIVE EXPENSE | 420,063 | 1,740,013 | 1,500,073 | 4,128,708 | ||||||||||||
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) FROM OPERATIONS | (140,098 | ) | (3,698,226 | ) | (1,630,341 | ) | (4,289,029 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | (451,335 | ) | (492,279 | ) | (1,390,333 | ) | (1,397,546 | ) | ||||||||
LOSS BEFORE INCOME TAXES | (592,033 | ) | (4,190,505 | ) | (3,020,674 | ) | (5,686,575 | ) | ||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | (214,601 | ) | (1,576,354 | ) | (1,054,280 | ) | (2,108,564 | ) | ||||||||
NET LOSS | $ | (377,432 | ) | $ | (2,614,151 | ) | $ | (1,966,394 | ) | $ | (3,578,011 | ) | ||||
Basic average shares outstanding | 82,224,504 | 81,929,504 | 82,224,504 | 81,929,504 | ||||||||||||
Basic loss per share | $ | (0.00 | ) | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
“See accompanying notes to the unaudited consolidated financial statements”
F-2
THE MINT LEASING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Loss | $ | (1,966,394 | ) | $ | (3,578,011 | ) | ||
Adjustments to reconcile Net Loss to net cash provided by operating activities: | ||||||||
Depreciation | 31,383 | 47,076 | ||||||
Bad debt expense | 126,213 | 1,065,646 | ||||||
Imputed interest on related party notes Stock based consulting expense | 28,371 - | 28,567 12,600 | ||||||
Changes in operating assets and liabilities: | ||||||||
Net investment in sales-type leases | 6,034,125 | 7,528,711 | ||||||
Inventory | 198,313 | (70,333 | ) | |||||
Other assets | 98,400 | 14,270 | ||||||
Accounts payable and accrued expenses | (314,530 | ) | (168,204 | ) | ||||
Deferred income taxes | (1,054,279 | ) | (2,108,564 | ) | ||||
Cash Provided by Operating Activities | 3,181,602 | 2,771,758 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property, plant and equipment | - | (18,374 | ) | |||||
Net Cash (used in) investing activities | - | (18,374 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from credit facilities | 820,681 | 447,373 | ||||||
Payments on credit facilities | (4,585,005 | ) | (3,761,838 | ) | ||||
Proceeds from issuance of note payable | 100,000 | - | ||||||
Proceeds from loans from related parties | 283,500 | 195,000 | ||||||
Net Cash (used in) financing activities | (3,380,824 | ) | (3,119,465 | ) | ||||
(DECREASE) IN CASH and CASH EQUIVALENTS | (199,222 | ) | (366,081 | ) | ||||
CASH and CASH EQUIVALENTS, AT BEGINNING OF PERIOD | 1,231,594 | 880,979 | ||||||
CASH and CASH EQUIVALENTS, AT END OF PERIOD | $ | 1,032,372 | $ | 514,898 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
CASH PAID FOR: | $ | 2010 | $ | 2009 | ||||
Interest | $ | 1,390,333 | $ | 1,397,546 | ||||
Income taxes | $ | - | $ | - |
“See accompanying notes to the unaudited consolidated financial statements”
F-3
THE MINT LEASING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(UNAUDITED)
NOTE 1 – ORGANIZATION and NATURE OF BUSINESS ACTIVITY
A. Organization
The Mint Leasing, Inc. (“Mint” or the “Company") was incorporated in Nevada on September 23, 1997 as Legacy Communications Corporation.
Effective July 18, 2008, The Mint Leasing, Inc., a Texas corporation (“Mint Texas”), a privately held company, completed the Plan and Agreement of Merger between itself and the Company, and the two shareholders of Mint Texas, pursuant to which the Company acquired all of the issued and outstanding shares of capital stock of Mint Texas. In connection with the acquisition of Mint Texas described herein, the Company issued 70,650,000 shares of common stock and 2,000,000 shares of Series B Convertible Preferred Stock to the selling stockholders. Consummation of the merger did not require a vote of the Company’s shareholders. As a result of the acquisition, the shareholders of Mint Texas own a majority of the voting stock of the Company, Mint Texas became a wholly-owned subsidiary of the Company, and the Company changed its name to The Mint Leasing, Inc. No prior material relationship existed between the selling shareholders and the Company, any of its affiliates, or any of its directors or officers, or any associate of any of its officers or directors.
B. Description of Business
Mint is a company in the business of leasing automobiles, and fleet vehicles throughout the United States. Most of its customers are located in Texas, and six other states in the Southeast. Lease transactions are solicited and administered by the Company’s sales force and staff. Mint’s customers are primarily comprised of brand-name automobile dealers that seek to provide leasing options to their customers, many of whom would otherwise not have the opportunity to acquire a new or late-model-year vehicle.
C. Basis of Presentation.
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The balance sheet at December 31, 2009 ha s been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
For further information, refer to the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 26, 2010.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
The Company’s financial statements are prepared using the accrual basis of accounting. The Company has a December 31st fiscal year-end. References herein to “we” or “our” refer to The Mint Leasing, Inc., unless the context specifically states otherwise.
F-4
B. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for doubtful accounts and the estimated unguaranteed residual values on the lease receivable contracts purchased.
Although Mint attempts to mitigate credit risk through the use of a variety of commercial credit reporting agencies when processing customer applications, failure of the customers to make scheduled payments under their automobile lease contracts could have a material near-term impact on the allowance for doubtful accounts.
Realization of unguaranteed residual values depends on many factors, several of which are not within the Company's control, including general market conditions at the time of the original lease contract's expiration, whether there has been unusual wear and tear on, or use of, the vehicle, the cost of comparable new vehicles and the extent, if any, to which the vehicle has become technologically or economically obsolete during the lease contract term. These factors, among others, could have a material near-term impact on the estimated unguaranteed residual values.
C. Revenue recognition
The Company’s customers typically finance vehicles over periods ranging from three to nine years. These financing agreements are classified as either operating or sales type leases as prescribed by the Financial Accounting Standards Board (FASB). Revenues representing the capitalized costs of the vehicles are recognized as income upon inception of the leases. The portion of revenues representing the difference between the gross investment in the lease (the sum of the minimum lease payments and the guaranteed residual value) and the sum of the present value of the two components is recorded as unearned income and amortized over the lease term.
For the nine months ended September 30, 2010 and 2009, amortization of unearned income totaled $3,161,682 and $4,882,086, respectively.
Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and its customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues.
Lessees are responsible for all taxes, insurance and maintenance costs.
Cost of Revenues comprises the vehicle acquisition costs for the vehicles to be leased to the Company’s customers, the costs associated with servicing the leasing portfolio and the excess of the Company’s recorded basis in leases when the related cars are reacquired (through early termination, repossessions and trade-in’s). Cars that are reacquired are typically either re-leased or sold at auction, with the related proceeds recorded in revenue. Total cost of sales was $7,492,997 and $15,300,641 for the nine months ending September 30, 2010 and 2009, respectively.
E. Cash and Cash Equivalents
Investments in highly liquid securities with original maturities of 90 days or less are included in cash and cash equivalents.
At September 30, 2010, all of the Company’s deposits with financial institutions were within FDIC insurance coverage limits.
F-5
F. Allowance for Loan Losses
Provisions for losses on investments in sales-type leases are charged to operations in amounts sufficient to maintain the allowance for losses at a level considered adequate to cover probable credit losses inherent in our receivables related to sales-type leases. The Company establishes the allowance for losses based on the determination of the amount of probable credit losses inherent in the financed receivables as of the reporting date. The Company reviews charge-off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends, and other information in order to make the necessary judgments as to probable credit losses. Assumptions regarding probable credit losses are reviewed periodically and may be impacted by actual perfor mance of financed receivables and changes in any of the factors discussed above.
G. Charge-off Policy
The Company charges off accounts when the automobile is repossessed or voluntarily returned by the customer and legally available for disposition. The charge-off amount generally represents the difference between the net outstanding investment in the sales-type lease and the fair market value of the vehicle returned to inventory. The charge-off amount is included in cost of revenues on the accompanying statement of operations. Accounts in repossession that have been charged off have been removed from finance receivables and the related repossessed automobiles are included in Vehicle Inventory on the consolidated balance sheet pending sale.
H. Vehicle Inventory
Vehicle Inventory includes repossessed automobiles, as well as vehicles turned in at the conclusion of the lease. Inventory of vehicles is stated at the lower of cost determined using the specific identification method, and market, determined by net proceeds from sale or the NADA book value.
I. Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Depreciation and amortization on property and equipment are determined using the straight-line method over the three to seven-year estimated useful lives of the assets. Leasehold improvements are depreciated using a life that corresponds to the lower of the remaining lease term or the expected life of the improvements.
Cost and accumulated depreciation of assets as of September 30, 2010 and December 31, 2009 are as follows:
September 30, 2010 | December 31, 2009 | |||||||
Leasehold Improvements | $ | 5,980 | $ | 5,980 | ||||
Furniture and Fixtures | 97,981 | 97,981 | ||||||
Computer and Office Equipment | 179,572 | 179,572 | ||||||
283,533 | 283,533 | |||||||
Less: Accumulated Depreciation | (210,976 | ) | (179,593 | ) | ||||
Net Property and Equipment | $ | 72,557 | $ | 103,940 |
Expenditures for additions, major renewal and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income.
Depreciation expense charged to operations was $31,383 and $47,076 for the nine months ended September 30, 2010 and 2009, respectively.
J. Advertising
Advertising costs are charged to operations when incurred. Advertising costs for the nine months ended September 30, 2010 and 2009 totaled $9,914 and $31,930, respectively.
F-6
K. Income Taxes
The Company accounts for income taxes in accordance with guidance provided by the FASB, whereby, deferred tax assets and liabilities are recognized for the expected future tax consequences, utilizing currently enacted tax rates of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carry forwards.
For interim financial reporting, the Company records the tax provision (benefit) based on its estimate of the effective tax rate for the year. The Company has projected its annual estimated effective income tax rate to be 34% for 2010. Accordingly, the Company has recorded a deferred tax benefit of $214,601 and $1,054,280 for the three and nine month periods ended September 30, 2010, on losses before taxes of $592,033 and $3,020,674, respectively. At September 30, 2010, the Company had a deferred tax asset of $1,790,900 primarily related to the tax effect of net operating loss carry forwards to be used in the future.
We adopted the FASB’s provisions regarding the treatment of income taxes on January 1, 2008. As of September 30, 2010, we had no liabilities included on the consolidated balance sheets associated with uncertain tax position. Due to uncertainty regarding the timing of future cash flows associated with income tax liabilities, a reasonable estimate of the period of cash settlement is not determinable.
L. Earnings per Common and Common Equivalent Share
The computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from their exercise using the treasury stock method and the average market price per share during the year. At September 30, 2010 and 2009, there was no difference between basic and diluted loss per share as the effect of these potential common shares were anti-dilutive due to the net loss during the three and nine month periods ended September 30, 2010 and 2009.
M. Effect of New Accounting Pronouncements
In September 2008, the FASB issued provisions regarding the accounting associated with instruments which are indexed to an entity’s own stock. These provisions trigger liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the Company’s functional currency or warrants with certain reset provisions to the strike price because of a “down-round” financing. The provisions are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. We adopted these provisions on January 1, 2009 and analyzed all of the outstanding options and none contained down-round reset exercise price provisions that would have precluded equity treatment. 60; Therefore, the adoption did not have a material impact on our financial position, results of operations or cash flows. In April 2009, the FASB issued additional guidance for accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This provision amends and clarifies earlier guidance on business combinations to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This provision is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company has not made any acquisitions that would require such disclosure during the third quarter of 2010.
In April 2009, the FASB issued additional guidance for determining fair value of a financial asset. This provision clarified the application of earlier guidance related to determining fair value of financial assets by providing additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. These provisions also include guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. This guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, these provisions require comparative disclosures only for p eriods ending after initial adoption. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate in accordance with FASB provisions. In the period of adoption, a reporting entity shall disclose a change, if any, in valuation technique and related inputs resulting from the application of this provision, and quantify the total effect of the change in valuation technique and related inputs, if practicable, by major category. We do not anticipate that this pronouncement will have a material impact on our results of operations or financial position.
F-7
In April 2009, the FASB Staff issued guidance on interim disclosures about fair value of financial instruments. This provision amends earlier guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements and disclosures in summarized financial information at interim reporting periods. This provision does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this guidance requires comparative disclosures only for periods ending after initial adoption. We do not anticipate that this pronouncement will have a material impact on our results of operations or financial position.
We adopted the provisions issued by the FASB on January 1, 2008 related to fair value measurements. This provision defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurement. This guidance applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. The guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the provisions established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
· | Level 1. Observable inputs such as quoted prices in active markets; |
· | Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
· | Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
The following table presents assets that are measured and recognized at fair value on a non-recurring basis:
Total | ||||||||||||||||
Gains | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | (Losses) | ||||||||||||
Cash and cash equivalents | $ | 1,032,372 | $ | - | $ | - | $ | - | ||||||||
Investment in sales-type leases – net | - | - | 30,521,350 | - | ||||||||||||
Credit facilities | - | 25,800,072 | - | - | ||||||||||||
Notes payable to shareholders | - | 913,800 | - | - |
The FASB’s guidance became effective for us on January 1, 2008 and establishes a fair value option that permits entities to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value options have been elected in earnings at each subsequent reporting date. For the nine months ended September 30, 2010, there were no applicable items on which the fair value option was elected. This FASB provision may impact our consolidated financial statements in the future.
F-8
NOTE 3 - NET INVESTMENT IN SALES-TYPE LEASES
The Company’s leasing operations consist principally of leasing vehicles under sales-type leases expiring in various years to 2015. Following is a summary of the components of the Company’s net investment in sales-type leases at September 30, 2010 and December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Total Minimum Lease Payments to be Received | $ | 29,060,508 | $ | 37,112,817 | ||||
Residual Values | 11,451,409 | 11,843,408 | ||||||
Lease Carrying Value | 40,511,917 | 48,956,225 | ||||||
Less: Allowance for Uncollectible Amounts | (1,405,894 | ) | (1,260,484 | ) | ||||
Less: Unearned Income | (8,584,673 | ) | (11,014,052 | ) | ||||
Net Investment in Sales-Type Leases | $ | 30,521,350 | $ | 36,681,689 |
NOTE 4 –CREDIT FACILITIES
Effective August 3, 2009, the Company entered into a secured $10,000,000 revolving credit agreement (the “Revolver”) with Moody National Bank (“Moody” and “Moody Bank”) to finance the purchase of vehicles for lease. The interest rate on the Revolver is the prime rate plus 1% with a floor of 6%. The Revolver is secured by purchased vehicles, the related receivables associated with leased vehicles, and the personal guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). The credit agreement also requires the Company to meet a debt to tangible net worth ratio of 2.5 to one at December 31, 2009; which the Company did not meet. At December 31, 2009, the availability under the $10,000,000 Revolver was limited to $2,500,000. The outstanding balance at December 31 , 2009 was $1,679,319. The Revolver matured on December 31, 2009 and was renewed for an additional 60 days at which time an additional $820,681 was advanced to the Company. On February 28, 2010, the Company executed a second renewal, extension and modification of the Revolver (the “Amended Moody Revolver”). The Amended Moody Revolver extends the maturity date of the facility to March 1, 2011, reduces the amount available under the facility to $2,500,000, fixes the interest rate on the facility at 6.5%, and provides for 11 monthly payments of principal and interest of $37,817, with the remaining balance due at maturity. The outstanding balance at September 30, 2010 was $2,354,609.
Effective October 5, 2009, the Company renewed its $33,000,000 revolving credit facility that matured on October 2, 2009 into a secured note payable (the “Sterling Note”) for a twelve (12) month period. The Sterling Note bears interest at the prime rate plus 2% with a floor of 6%. The Sterling Note is secured by vehicles; accounts receivable associated with leased vehicles; assignment of life insurance policies on Jerry Parish and Victor Garcia, and the personal guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). Under the terms of the Sterling Note, the Company will make six monthly principal and interest payments of $650,000 and five monthly principal and interest payments of $700,000, with the unpaid balance due at maturity on October 5, 2010 (which has been ext ended as described below). The Sterling Note also requires the Company to meet financial covenants related to tangible net worth and leverage. The Sterling Note also requires the Company to meet negative covenants, including maximum allowable operating expenses associated with the servicing of the lease contracts securing the Sterling Note. At September 30, 2010 the Company was not in compliance with the minimum tangible net worth financial covenant and the outstanding balance under the Sterling Note exceeded the borrowing base; however, as described below, pursuant to the Amended Sterling Note, Sterling Bank agreed to forbear from taking any action against the Company in connection with such non-compliance.
Effective July 1, 2010, the bank amended and extended the Sterling Note (“Amended Sterling Note”). Under the terms of the Amended Sterling Note the maturity date of the note was extended to November 10, 2010 and the principal payments were reduced to $110,000 per month. As of the date of this filing, the Amended Sterling Note has matured. The Company and the bank have negotiated another extension for an additional six months under the same payment terms, which extension has been approved by Sterling's officer's committee and which final approval is expected early next week. In July and October of 2010, the bank also agreed to forbear from taking any action against the Company as a result of its failure to meet the tangible net worth covenant for the remaining term of the Amended Sterling Note. The bank also agreed to forbear from taking any action against the Company as it relates to its non-compliance with the borrowing base as long as the outstanding balance on the Amended Sterling Note does not exceed the borrowing base by more than $1,000,000. At September 30, 2010 and December 31, 2009, the outstanding balance on the Amended Sterling Note was $23,345,463 and $27,785,076, respectively.
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On June 5, 2010, the Company entered into an unsecured $100,000 note payable (“Note Payable”) with a third party to finance the purchase of vehicles for lease. The interest rate on the Note Payable is 15% per annum and is payable monthly. Principal is due at maturity, which is December 5, 2010. The Note Payable is secured by the personal guaranty of Jerry Parish. The outstanding balance at September 30, 2010 was $100,000.
We believe that the Company has adequate cash flow being generated from its investment in sales-type leases and inventories to meet its financial obligations to the banks and other lenders in an orderly manner, provided we are able to continue to renew the current credit facilities when they come due and the outstanding balances are amortized over a four to five year period. The Company has historically been able to negotiate such renewals with its lenders. However, there is no assurance that the Company will be able to negotiate such renewals in the future on terms that will be acceptable to the Company. In the future, if we are not able to negotiate renewals and/or expansion of our current credit facilities we may be required to seek additional capital by selling debt or equity securities. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that such financing will be available to the Company in amounts or on terms acceptable to us, or at all.
NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB guidance regarding fair value measurements requires disclosure of fair value information about financial instruments, whether recognized or not in our consolidated balance sheet. Fair values are based on estimates using present value or other valuation techniques in cases where quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments and those differences may be material. The FASB provision excludes certain financial instruments and all non-financial instruments from the Company’s disclosure requirements. Accordingly, th e aggregate fair value amounts presented do not represent the underlying value of the Company.
Estimated fair values, carrying values and various methods and assumptions used in valuing our financial instruments as of September 30, 2010 are set forth below:
Carrying Value | Estimated Fair Value | |||||||
Financial assets: | ||||||||
Cash and cash equivalents | (a) | $ | 1,032,372 | $ | 1,032,372 | |||
Investment in sales-type leases – net | (b) | 30,521,350 | 30,521,350 | |||||
Financial liabilities: | ||||||||
Credit facilities | (c) | 25,800,072 | 25,800,072 | |||||
Notes payable to shareholders | (d) | 913,800 | 913,800 | |||||
(a) | The carrying value of cash and cash equivalents is considered to be a reasonable estimate of fair value since these investments bear interest at market rates and have maturities of less than 90 days. |
(b) | The fair value of finance receivables is estimated by discounting future cash flows expected to be collected using current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. |
(c) | Credit facilities have variable rates of interest and maturities of one year or less. Therefore, carrying value is considered to be a reasonable estimate of fair value. |
(d) | The fair value of shareholder notes payable is estimated based on rates currently available for debt with similar terms and remaining maturities. |
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NOTE 6 -RELATED PARTY TRANSACTIONS
Under an informal arrangement, consulting fees totaling $52,500 and $225,500 were paid to a shareholder for services rendered during the nine months ended September 30, 2010 and 2009, respectively. The Company leased office space from its President and majority shareholder, a related party, pursuant to a lease which expires on July 31, 2011 at the rate of $20,000 per month. In September of 2010, the rental payment was reduced to $15,000 per month under an informal agreement between the Company and its President. The lease payment will remain at the reduced amount for an unspecified period of time. Rent expense under the lease amounted to $175,000 and $180,000 for the nine months ended September 30, 2010 and 2009, respectively.
The Company has notes payable to Jerry Parish, Victor Garcia, and a limited liability corporation that is owned by the Company’s two majority shareholders (Mr. Parish and Mr. Garcia) through its wholly-owned subsidiary, Mint Texas. The amounts outstanding as of September 30, 2010 and December 31, 2009 were $913,800 and $630,300, respectively. These note payables are non-interest bearing and due upon demand. The Company imputed interest on these note payables at a rate of 8.75% per year. Interest expense of $28,371 and $28,567 was recorded as contributed capital for the nine months ended September 30, 2010 and 2009.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk are primarily cash equivalents, and finance receivables. Our cash equivalents are placed through various major financial institutions. Finance receivables represent contracts with consumers residing throughout the United States, with borrowers located in Texas, Arkansas, Mississippi, Alabama, Georgia, Tennessee and Florida. No state other than Texas accounted for more than 10% of managed finance receivables.
Legal Proceedings
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants. Some litigation against us could take the form of class action complaints by consumers and/or shareholders. As the assignee of finance contracts originated by dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but can include requests for compensatory, statutory and punitive dama ges. We believe that we have taken prudent steps to address and mitigate the litigation risks associated with our business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened litigation will not be material to our consolidated financial position or our results of operations and cash flows.
NOTE 8 – SUBSEQUENT EVENTS
No subsequent event other than the execution of the Amended Sterling Note occurred after the date of these financial statements and prior to their issuance, which would require its disclosure in these financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Management’s Discussion and Analysis contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the use of forward-looking terminology such as, “may”, “believe”, “expect”, “intend”, “anticipate”, “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. & #160;Important factors with respect to any such forward-looking statements include, but are not limited to, the risk factors described in the Company’s Annual Report on Form 10-K and in this report. The following discussion of the results of operations and financial condition should be read in conjunction with the Financial Statements and related Notes thereto included herein and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009.
Corporate History:
The Mint Leasing, Inc. (the “Company,” “Mint,” “we,” and “us”) was incorporated in Nevada on September 23, 1997 as Legacy Communications Corporation.
Effective July 18, 2008, The Mint Leasing, Inc., a Texas corporation, which was incorporated on May 19, 1999, and commenced operations on that date (“Mint Texas”), a privately-held company, completed the Plan and Agreement of Merger between itself and the Company (for the purposes of this paragraph, “Mint Nevada”), and the two shareholders of Mint Texas, pursuant to which Mint Nevada acquired all of the issued and outstanding shares of capital stock of Mint Texas. In connection with the acquisition of Mint Texas, Mint Nevada issued 70,650,000 shares of common stock and 2,000,000 shares of Series B Convertible Preferred Stock to the selling stockholders and owners of Mint Texas. Additionally, the Company granted stock options to purchase 2,000,000 shares of common stock to Mr. Parish. The exercise price of the options is $3.00 per share, and the options expire in 2018. One-third of the options vest to Mr. Parish on the first, second and third anniversary of the grant date (July 28, 2008). Consummation of the merger did not require a vote of the Mint Nevada shareholders. As a result of the acquisition, the shareholders of Mint Texas own a majority of the voting stock of Mint Nevada as described below, Mint Texas is a wholly-owned subsidiary of Mint Nevada, and the Company (Mint Nevada) changed its name to The Mint Leasing, Inc. No prior material relationship existed between the selling shareholders and Mint Nevada, any of its affiliates, or any of its directors or officers, or any associate of any of its officers or directors. Effective on July 18, 2008, our former operations as a developer and purchaser of radio stations ceased and since that date our operations have solely been the operations of Mint Texas, our wholly-ow ned subsidiary.
Unless otherwise stated, or the context suggests otherwise, the description of the Company’s business operations below includes the operations of Mint Texas, the Company’s wholly-owned subsidiary.
The board of directors approved a one-for-twenty reverse stock split (the “Reverse Stock Split”) with respect to shares of common stock outstanding as of July 16, 2008. Unless otherwise stated, all share amounts listed herein retroactively reflect the Reverse Stock Split.
As set forth in the Company’s Information Statement on Schedule 14C dated June 26, 2008, the Company adopted the Second Amended and Restated Articles of Incorporation and Amended Bylaws as of July 18, 2008. The Company further amended the Second Amended and Restated Articles of Incorporation on July 18, 2008 to change the Company’s name from Legacy Communications Corporation to The Mint Leasing, Inc., effective as of July 21, 2008.
Effective in July 2008, the Company designated Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, as described in greater detail below.
On or around January 6, 2009, the Company entered into a renewal of its $33,000,000 revolving credit facility with Sterling Bank of Houston, Texas (“Sterling Bank”) that matured on October 2, 2009. The Company entered into a renewal of the revolving credit facility effective the same date in October 2009 for a twelve month period. The new Secured Note Payable (“Note Payable”) bears interest at the prime rate plus 2% with a floor of 6%. The Note Payable is secured by vehicles; related receivables associated with leased vehicles; assignment of life insurance policies on Jerry Parish and Victor Garcia, and the guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). Under the terms of the Note Payable the Company will make six monthly principal and i nterest payments of $650,000 and five monthly principal and interest payments of $700,000, with the unpaid balance due at maturity on October 5, 2010, (which has since been extended as described below). The Note Payable also requires the Company to meet financial covenants related to tangible net worth and leverage. The Note Payable also requires the Company to meet negative covenants, including maximum allowable operating expenses associated with the servicing of the lease contracts securing the Note Payable. At September 30, 2010 the Company was not in compliance with the minimum tangible net worth financial covenant and the outstanding balance under the Sterling Note exceeded the borrowing base; however, as described below, pursuant to the Amended Sterling Note, Sterling Bank agreed to forbear from taking any action against the Company in connection with such non-compliance.
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Effective July 1, 2010, the bank amended and extended the Sterling Note (“Amended Sterling Note”). Under the terms of the Amended Sterling Note the maturity date of the note was extended to November 10, 2010 and the principal payments were reduced to $110,000 per month. As of the date of this filing, the Amended Sterling Note has matured. The Company and the bank have negotiated another extension for an additional six months under the same payment terms, which extension has been approved by Sterling's officer's committee and which final approval is expected early next week. In July and October of 2010, the bank also agreed to forbear from taking any action against the Company as a result of its failure to meet the tangible net worth covenant for the remaining term of the Amended Sterling Note. The bank also agreed to forbear from taking any action against the Company as it relates to its non-compliance with the borrowing base as long as the outstanding balance on the Amended Sterling Note does not exceed the borrowing base by more than $1,000,000. At September 30, 2010 and December 31, 2009, the outstanding balance on the Amended Sterling Note was $23,345,463 and $27,785,076, respectively. The Company will be unable to borrow any new funds under the Amended Sterling Note.
The Amended Sterling Note requires us to comply with certain affirmative and negative covenants customary for restricted indebtedness, including covenants requiring that: our statements, representations and warranties made in the credit facility and related documents are correct and accurate; if Jerry Parish, our Chief Executive Officer and Chairman fails to own at least 50% of the ownership of the Company; the death of either of the guarantors of the credit facility, Jerry Parish or Victor Garcia; the termination of the employment of Mr. Parish; or the transfer of any ownership interest of Mint Texas without the approval of Sterling Bank. As stated above, at September 30, 2010, the Company was not in compliance with the tangible net worth covenant and the outstanding balance under the Amended Sterling Note exceeded the borr owing base.
Effective August 3, 2009, the Company entered into a secured $10,000,000 revolving credit agreement (the “Revolver”) with Moody National Bank (“Moody” and “Moody Bank”) to finance the purchase of vehicles for lease. The interest rate on the Revolver is the prime rate plus 1% with a floor of 6%. The Revolver is secured by purchased vehicles, the related receivables associated with leased vehicles, and the personal guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). The credit agreement also requires the Company to meet a debt to tangible net worth ratio of 2.5 to one at December 31, 2009, which the Company was not in compliance with. The outstanding balance at December 31, 2009 was $1,679,319 and subsequent to December 31, 2009, Moody advanced an additi onal $820,681; increasing the outstanding balance to $2,500,000. On February 28, 2010, the Company executed a second renewal, extension and modification of the Revolver (the “Amended Moody Revolver”). The Amended Moody Revolver extends the maturity date of the facility to March 1, 2011; reduces the amount available under the facility to $2,500,000; fixes the interest rate on the facility at 6.5%, and provides for 11 monthly payments of principal and interest of $37,817 with the remaining balance due at maturity. The outstanding balance at September 30, 2010 was $2,354,609.
On June 5, 2010, the Company entered into an unsecured $100,000 note payable (“Note Payable”) with a third party to finance the purchase of vehicles for lease. The interest rate on the Note Payable is 15% per annum and is payable monthly. Principal is due at maturity, which is December 5, 2010. The Revolver is secured by the personal guaranty of Jerry Parish. The outstanding balance at September 30, 2010 was $100,000.
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Description of Business
Mint Leasing is a company in the business of leasing automobiles and fleet vehicles throughout the United States. Mint Leasing has partnerships with more than 500 dealerships within 17 states. However, most of its customers are located in Texas and six other states in the Southeast. The credit analysts at Mint Leasing review every deal individually, refusing to depend on a target “beacon score” to determine authorization for each deal and instead relying on a common-sense approach for deal approval.
Lease transactions are solicited and administered by the Company’s sales force and staff. Mint’s customers are directed to the Company by brand-name automobile dealers that seek to provide leasing options to their customers, many of whom would otherwise not have the opportunity to acquire a new or late-model-year vehicle. The Company’s sales are principally accomplished through the Company’s sales force, which includes seven full-time employees. The Company’s primary marketing and sales strategy is to market to automobile dealers that have established a history of directing customers to the Company.
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Throughout the remainder of fiscal 2010 and into fiscal 2011, we plan to continue investigating opportunities to increase the Company’s capital base through the issuance of additional common or preferred stock and/or debt by the Company. Without access to additional capital in the form of debt or equity the Company’s ability to add new leases to its current portfolio will be limited to the excess cash generated by its current lease portfolio. While the cash flow from its current lease portfolio is sufficient to service the Company’s debts and expenses, it may not generate sufficient excess cash to allow the Company to enter into enough new leases to generate a profit.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2009
For the three months ended September 30, 2010, total revenues were $3,377,882, compared to $3,133,201 for the three months ended September 30, 2009, an increase in total revenues of $244,681 or approximately 7.8% over the prior period. Revenues from sales-type leases, net increased $1,039,952 or 83.5% to $2,285,653 for the three months ended September 30, 2010, when compared to revenues from sales-type leases, net of $1,245,701 for the three months ended September 30, 2009. Revenues from amortization of unearned income related to sales-type leases decreased $795,271 or 42.1% to $1,092,229 for the three months ended September 30, 2010, from $1,887,500 for the three months ended September 30, 2009.
The increase in revenues from sales-type leases, net was principally due to the improved cash flow available to the Company for the purchase of vehicles and issuance of new leases during the three months ended September 30, 2010 as compared to the same period in 2009. The improved cash flow available to purchase vehicles and enter into new leases is the result of the amendment to the Sterling Note entered into in July 2010 that reduced the mandatory principal payments in the quarter from $700,000 per month down to $110,000 per month. The decrease in revenues from the amortization of unearned income related to sales-type leases was principally the result of the portfolio of current active leases continuing to mature at a rate in excess of the number of new leases being added during the quarter.
Cost of revenues decreased $1,992,897 or 39.1% to $3,098,517 for the three months ended September 30, 2010, compared to $5,091,414 for the three months ended September 30, 2009. Cost of revenues decreased mainly as a result of the lower costs associated with non-performing leases for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.
Gross profit increased $2,237,578 or 114.3% to a gross profit of $279,365 for the three months ended September 30, 2010 compared to a gross loss of $1,958,213 for the three months ended September 30, 2009. Gross profit increased due to the 83.5% increase in revenues associated with sales-type leases and the lower costs associated with non-performing leases.
General and administrative expenses were $420,063 and $1,740,013, for the three months ended September 30, 2010 and September 30, 2009, respectively, constituting a decrease in general and administrative expenses of $1,319,950 or 75.9% from the prior period. The decrease in general and administrative expenses was mainly the result of the Company’s downsizing of its operations to be consistent with the reduced volume of lease transactions.
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The loss before other expenses from continuing operations was $140,698 for the three months ended September 30, 2010 compared to a loss of $3,698,226 for the three months ended September 30, 2009, resulting in an improvement of $3,557,528, or 96.2%. The improvement in the operating results before other expenses can be attributed to the Company’s improved performance at the gross profit level and the significant reduction in general and administrative expenses.
Other expense, consisting solely of interest expense, was $451,335 and $492,279 for the three months ended September 30, 2010 and September 30, 2009, respectively. The main reason for the $40,944 or 8.3% decrease in interest expense for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, was due to reduced overall balances on our credit facilities for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.
The Company recorded a benefit from income taxes of $214,601 and $1,576,354 for the three months ended September 30, 2010 and 2009, respectively. The $1,361,753 decrease in the tax benefit recorded in 2010 versus 2009 is primarily the result of the Company having a loss before income taxes of $592,033 for the three months ended September 30, 2010 as compared to a loss before income taxes of $4,190,505 for the same period in 2009. In addition, the Company is using a 34% estimated interim tax rate in 2010 versus an estimated 36% interim tax rate in 2009.
The Company had a net loss of $377,432 for the three months ended September 30, 2010, compared to a net loss of $2,614,151 for the three months ended September 30, 2009, an improvement in the net loss of $2,236,719 or 85.6% over the prior period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2009
For the nine months ended September 30, 2010, total revenues were $7,362,729, compared to $15,140,320 for the nine months ended September 30, 2009, a decrease in total revenues of $7,777,591 or approximately 51.4% from the prior period. For the nine months ended September 30, 2010, revenues from sales-type leases, net decreased $6,057,187 or 59.0% to $4,201,047 for the nine months ended September 30, 2010, from $10,258,234 for the nine months ended September 30, 2009. Revenues from amortization of unearned income related to sales-type leases decreased $1,720,404 or 35.2% to $3,161,682 for the nine months ended September 30, 2010, as compared to $4,882,086 for the same period in 2009.
The decrease in revenues from sales-type leases, net was principally due to the lack of financing available to the Company for the purchase of vehicles and issuance of new leases during the nine months ended September 30, 2010 as compared to the same period in 2009. In 2009, the Company’s cash available to fund the new lease transactions was not significantly curtailed until the third quarter. Whereas in 2010, the Company’s cash available to fund new lease transactions was extremely limited until July of 2010, when the Company was able to reach agreement with its bank to reduce the required principal payment amount of the Sterling Note by $590,000 per month. The decrease in revenues from the amortization of unearned income related to sales-type leases was principally the result of the portfolio of current active leases continuing to mature with a limited number of new leases being added.
The Company believes that its revenues were adversely affected during the nine months ended September 30, 2010, due to its lack of access to funds. During the nine months ended September 30, 2010, the Company’s access to new capital was limited to the $100,000 it borrowed from a third party in June of 2010. The Company believes that if it had access to additional capital during the nine months ended September 30, 2010, its revenues would have been similar to the Company’s revenues for the same period in 2009. Management’s opinion is supported by the Company’s improved operating results for the three months ended September 30, 2010 when its cash available to fund new lease transactions improved by $590,000 as a result of the amendment to the Sterling Note that reduced the required monthly principal payments.
Cost of revenues decreased $7,807,644 or 51.0% to $7,492,997 for the nine months ended September 30, 2010, compared to $15,300,641 for the nine months ended September 30, 2009. Cost of revenues decreased mainly as a result of the lower revenues for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.
Gross loss decreased $30,053 or 18.8% to a gross loss of $130,268 for the nine months ended September 30, 2010, as compared to a gross loss of $160,321 for the nine months ended September 30, 2009. The improvement in gross profit is attributable to a slight improvement in the costs associated with non-performing leases for the nine month period ended September 30, 2010 as compared to the same period in 2009.
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General and administrative expenses were $1,500,073 and $4,128,708, for the nine months ended September 30, 2010 and September 30, 2009, respectively. The $2,628,635 or 63.7% decrease in general and administrative expense from the prior period was mainly associated with overhead reductions made to align the Company’s operations with the reduced level of lease transactions.
The loss before other expense from continuing operations of $1,630,341 for the nine months ended September 30, 2010 compared to the loss of $4,289,029 for the nine months ended September 30, 2009, represents a decrease of $2,658,688 or 62.0% from the prior period. The decrease in the loss before other expense from continuing operations was due to the $30,053 improvement in the gross loss and the reduction in general and administrative expense for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009.
Other expense, consisting solely of interest expense, was $1,390,333 and $1,397,546 for the nine months ended September 30, 2010 and September 30, 2009, respectively. The main reason for the $7,213 or 0.5% decrease in interest expense for the nine months ended September 30, 2010, as compared to the same period in 2009, is the lower average balance outstanding on the credit facilities in 2010 as compared to 2009, being offset by higher interest rates on our credit facilities in 2010 versus 2009.
The Company had a benefit from income taxes of $1,054,280 for the nine months ended September 30, 2010, compared to a benefit from income taxes of $2,108,564 for the nine months ended September 30, 2009. The $1,054,284 or 50.0% decrease in the benefit from income taxes is primarily the result of the reduction in the loss before income taxes of $2,665,901 for the nine month period ended September 30, 2010 as compared to the same period in 2009. In addition, the Company is using a 34% estimated interim tax rate in 2010 versus an estimated 36% interim tax rate in 2009.
The Company had a net loss of $1,966,394 for the nine months ended September 30, 2010, compared to a net loss of 3,578,011 for the nine months ended September 30, 2009, an improvement of $1,611,617 or 45.0% over the prior period.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $33,984,556 as of September 30, 2010, which included cash and cash equivalents of $1,032,372, investment in sales-type leases, net of $30,521,350, vehicle inventory of $567,377, deferred income taxes receivable of $1,790,900, and property and equipment, net of $72,557.
We had total liabilities as of September 30, 2010 of $27,603,748, which included $889,876 of accounts payable and accrued liabilities, $25,800,072 of amounts due under our senior credit facilities, $100,000 due to a third party (described in greater detail below), and $913,800 of notes payable to related parties.
On or around January 6, 2009, the Company entered into a renewal of its $33,000,000 revolving credit facility with Sterling Bank of Houston, Texas (“Sterling Bank”) that matured on October 2, 2009. The Company entered into a renewal of the revolving credit facility effective the same date in October 2009 for a twelve month period. The new Secured Note Payable (“Note Payable”) bears interest at the prime rate plus 2% with a floor of 6%. The Note Payable is secured by vehicles; related receivables associated with leased vehicles; assignment of life insurance policies on Jerry Parish and Victor Garcia, and the guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). Under the terms of the Note Payable the Company will make six monthly principal and i nterest payments of $650,000 and five monthly principal and interest payments of $700,000, with the unpaid balance due at maturity on October 5, 2010 (which date has since been extended as provided below). The Note Payable also requires the Company to meet financial covenants related to tangible net worth and leverage. The Note Payable also requires the Company to meet negative covenants, including maximum allowable operating expenses associated with the servicing of the lease contracts securing the Note Payable. At September 30, 2010 the Company was not in compliance with the minimum tangible net worth financial covenant and the outstanding balance under the Sterling Note exceeded the borrowing base.
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Effective July 1, 2010, the bank amended and extended the Sterling Note (“Amended Sterling Note”). Under the terms of the Amended Sterling Note the maturity date of the note was extended to November 10, 2010 and the principal payments were reduced to $110,000 per month. As of the date of this filing, the Amended Sterling Note has matured. The Company and the bank have negotiated another extension for an additional six months under the same payment terms, which extension has been approved by Sterling's officer's committee and which final approval is expected early next week. The bank also agreed to forbear from taking any action against the Company as a result of its failure to meet the tangible net worth covenant for the remaining term of the Amended Sterling Note. In July and October of 2010 , the bank also agreed to forbear from taking any action against the Company as it relates to its non-compliance with the borrowing base as long as the outstanding balance on the Amended Sterling Note does not exceed the borrowing base by more than $1,000,000. At September 30, 2010 and December 31, 2009, the outstanding balance on the Amended Sterling Note was $23,345,463 and $27,785,076, respectively. The Company is unable to borrow any new funds under the Amended Sterling Note.
The Amended Sterling Note requires us to comply with certain affirmative and negative covenants customary for restricted indebtedness, including covenants requiring that: our statements, representations and warranties made in the credit facility and related documents are correct and accurate; if Jerry Parish, our Chief Executive Officer and Chairman fails to own at least 50% of the ownership of the Company; the death of either of the guarantors of the credit facility, Jerry Parish or Victor Garcia; the termination of the employment of Mr. Parish; or the transfer of any ownership interest of Mint Texas without the approval of Sterling Bank. As stated above, at September 30, 2010, the Company was not in compliance with the tangible net worth covenant and the outstanding balance under the Amended Sterling Note exceeded the borr owing base; however, as stated above, pursuant to the Amended Sterling Note, Sterling Bank agreed to forbear from taking any action against the Company in connection with such non-compliance.
Effective August 3, 2009, the Company entered into a secured $10,000,000 revolving credit agreement (the “Revolver”) with Moody National Bank (“Moody” and “Moody Bank”) to finance the purchase of vehicles for lease. The interest rate on the Revolver is the prime rate plus 1% with a floor of 6%. The Revolver is secured by purchased vehicles, the related receivables associated with leased vehicles, and the personal guaranties of Jerry Parish and Victor Garcia (the Company’s majority shareholders). The credit agreement also requires the Company to meet a debt to tangible net worth ratio of 2.5 to one at December 31, 2009, which the Company was not in compliance with. The outstanding balance at December 31, 2009 was $1,679,319 and subsequent to December 31, 2009, Moody advanced an additi onal $820,681; increasing the outstanding balance to $2,500,000. On February 28, 2010, the Company executed a second renewal, extension and modification of the Revolver (the “Amended Moody Revolver”). The Amended Moody Revolver extends the maturity date of the facility to March 1, 2011; reduces the amount available under the facility to $2,500,000; fixes the interest rate on the facility at 6.5%, and provides for 11 monthly payments of principal and interest of $37,817 with the remaining balance due at maturity. The outstanding balance at September 30, 2010 was $2,354,609.
On June 5, 2010, the Company entered into an unsecured $100,000 note payable (“Note Payable”) with a third party to finance the purchase of vehicles for lease. The interest rate on the Note Payable is 15% per annum and is payable monthly. Principal is due at maturity, which is December 5, 2010. The Revolver is secured by the personal guaranty of Jerry Parish. At September 30, 2010 the balance on the Note Payable was $100,000.
The Company has notes and advances payable to Jerry Parish, Victor Garcia and an affiliate of the Company of $913,800 and $630,300 as of September 30, 2010 and December 31, 2009, respectively. These notes and advances payable are non-interest bearing and subordinated to the credit facilities with the banks described above. Accordingly, they have been classified as long term. The Company imputed interest on these note payables at a rate of 8.75% per year. Interest expense of $28,371 and $28,567 was recorded as contributed capital for the nine months ended September 30, 2010 and 2009.
We generated $3,181,602 in cash from operating activities for the nine months ended September 30, 2010, which was mainly due from collections and reductions of net investment in sales-type leases of $6,034,125, a decrease in inventory of $198,313, and a decrease in other assets of $98,400. Non-cash charges for the period included the change in the allowance for doubtful accounts, depreciation, and imputed interest that were $126,213, $31,383, and $28,371, respectively, which also contributed positively to the cash provided by operating activities. Those items negatively impacting the cash provided by operations for the nine months ended September 30, 2010, were the net loss of $1,966,394, the deferred tax benefit of $1,054,279, and a decrease in accounts payable and accrued liabilities of $314,530.
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Our cash balance was not affected by investing activities for the nine months ended September 30, 2010.
We had $3,380,824 of cash used in financing activities for the nine months ended September 30, 2010, which was due to $4,585,005 of payments on credit facilities, offset by $820,681 of proceeds from borrowings on the Amended Moody Revolver, $100,000 of proceeds from borrowings on the Note Payable, and $283,500 of advances from related parties.
We believe that the Company has adequate cash flow being generated from its investment in sales-type leases and inventories to meet its financial obligations to the banks in an orderly manner, provided we are able to continue to renew the current credit facilities when they come due and the outstanding balances are amortized over a four to five year period. The Company has historically been able to negotiate such renewals with its lenders. However, there is no assurance that the Company will be able to negotiate such renewals in the future on terms that will be acceptable to the Company.
Currently we are exploring opportunities to increase the Company’s capital base through the sale of additional common or preferred stock and/or the issuance of debt. The sale in the future of additional equity or convertible debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that such financing will be available to the Company in amounts or on terms acceptable to us, or at all.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
We are evaluating the impact that recently adopted accounting pronouncements discussed in the notes to the financial statements will have on our financial statements but do not believe their adoption will have a significant impact.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our princ ipal executive officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effo rt to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Change In Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
As a consumer leasing company, we may be subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of applicants. Some litigation against us could take the form of class action complaints by consumers. Through our partnership with various automobile dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but can include requests for compensatory, statutory and punitive damages.
From time to time, we may become a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
ITEM 1A. RISK FACTORS
Our securities are highly speculative and should only be purchased by persons who can afford to lose their entire investment in our Company. If any risks actually occur, our business and financial results could be negatively affected to a significant extent. There have been no material changes from the risk factors previously disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the Commission on May 18, 2010, and investors are encouraged to review such risk factors, as well as other disclosures set forth herein and the Company’s other periodic and current report filings, before making an investment in the Company.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - (REMOVED AND RESERVED)
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ITEM 5 - OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. | Description of Exhibit |
3.1(2) | Amended and Restated Articles of Incorporation |
3.2(2) | Amended and Restated Bylaws |
3.3(3) | Amendment to the Bylaws of the Company |
4.1(1) | Incentive Stock Option for 2,000,000 shares |
4.2(1) | Consulting Agreement dated June 1, 2007 |
4.3(1) | Consulting Agreement dated June 1, 2007 |
4.4(1) | Common Stock purchase warrant for 1,050,000 shares |
4.5(1) | Common Stock purchase warrant for 1,050,000 shares |
4.6(1) | Note Conversion Agreement dated July 18, 2008 |
4.7(1) | Designation of Series B Convertible Preferred Stock |
4.8(2) | 2008 Directors, Officers, Employees and Consultants Stock Option, Stock Warrant and Stock Award Plan |
10.1(1) | Agreement and Plan of Reorganization among Legacy Communications Corporation, The Mint Leasing, Inc., a Texas corporation, and the shareholders of the Mint Leasing, Inc., dated July 18, 2008 (without Exhibits). |
10.2(1) | Stock Purchase Agreement between Legacy Communications Corporation and Three Irons, Inc. dated July 18, 2008. |
10.3(1) | Employment Agreement between The Mint Leasing, Inc. and Jerry Parish dated July 10, 2008 assumed by The Mint Leasing, Inc. (f/k/a Legacy Communications Corporation) |
10.4(1) | Form of Indemnification Agreements between The Mint Leasing, Inc. (f/k/a Legacy Communications Corporation) and each of Jerry Parish, Michael Hluchanek, and Kelley V. Kirker |
10.5(4) | Voting Trust Agreement between Jerry Parish and Victor Garcia |
10.6(5) | Modification, Renewal and Extension Agreement with Sterling Bank |
14.1(1) | Code of Ethics dated July 18, 2008 |
16.1(6) | Letter from HJ & Associates, LLC |
21.1(5) | Subsidiaries |
31* | Certificate of the Chief Executive Officer and Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 |
32* | Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed herein.
(1) Filed as exhibits to the Company’s Form 8-K/A filed with the Commission on July 28, 2008, and incorporated herein by reference.
(2) Filed as exhibits to the Company’s Definitive Schedule 14C filing, filed with the Commission on June 26, 2008, and incorporated herein by reference.
(3) Filed as an exhibit to the Company’s Form 8-K, filed with the Commission on July 9, 2008, and incorporated herein by reference.
(4) Filed as an exhibit to Mr. Parish’s Schedule 13d filing, filed with the Commission on July 24, 2008, and incorporated herein by reference.
(5) Filed as an exhibit to the Company’s Form 10-K, filed with the Commission on April 15, 2009, and incorporated herein by reference.
(6) Filed as an exhibit to the Company’s Form 8-K, filed with the Commission on May 11, 2009, and incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE MINT LEASING, INC. | |
DATED: November 19, 2010 | |
By: /s/ Jerry Parish | |
Jerry Parish | |
Chief Executive Officer, | |
Secretary and President | |
(Principal Executive Officer and Principal Accounting Officer) |
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