ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Portions of this Form 10-K, including disclosure under “Management’s Discussion and Analysis or Plan of Operation,” contain forward-looking statements. These forward-looking statements which include words such as "anticipates", "believes", "expects", "intends", "forecasts", "plans", "future", "strategy" or words of similar meaning, 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 plans, 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 among others, set forth under “Risk Factors”:
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our need to raise additional financing;
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observance of covenants as required by our credit facilities;
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the fact that our Comerica credit facility is currently in default;
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the loss of key personnel or failure to attract, integrate and retain additional personnel;
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our ability to execute on our business plan;
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rights and privileges associated with our preferred stock;
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the fact that our CEO has majority control over our voting stock;
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fluctuations in our quarterly and annual results of operations;
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economic downturns in the United States;
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the fact that a significant part of the Company’s consumer base are high risk for defaults and delinquencies;
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write-offs for losses and defaults;
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costs associated with being a public company;
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the limited market for the Company’s common stock;
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the fact that we only have one officer and director;
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the volatile market for our common stock;
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risks associated with our common stock being a “penny stock”;
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material weaknesses in our internal controls over financial reporting;
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the level of competition in our industry and our ability to compete; and
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other risk factors included under “Risk Factors” in this filing.
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.
INDUSTRY DATA
In this Form 10-K, we may rely on and refer to information regarding the automobile industry from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.
Corporate History
The Mint Leasing, Inc. (the “Company,” “Mint,” "Mint Leasing", “we,” “Mint Nevada,” 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 (Jerry Parish, our sole officer and director and Victor Garcia, our former director), 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 vested 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-owned subsidiary.
Unless otherwise stated, or the context suggests otherwise, the description of the Company’s business operations below includes the operations of Mint Texas, and the Company’s other wholly-owned subsidiaries, The Mint Leasing North, Inc., The Mint Leasing South, Inc. and South Mint Leasing, LLC.
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.
Moody Bank Credit Facility
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 required 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 extended the maturity date of the facility to March 1, 2011, reduced the amount available under the facility to $2,500,000, fixed the interest rate on the facility at 6.5%, and provided for 11 monthly payments of principal and interest of $37,817, with the remaining balance due at maturity. Effective February 28, 2011, the Company executed a Third Renewal, Extension and Modification of the Revolver (the "Third Renewal"). Under the terms of the Third Renewal, the maturity date of the Revolver was extended to March 1, 2012, the amount available remained at $2,500,000, the interest rate was increased and fixed at 6.75%, and the Third Renewal provided for 11 monthly payments of principal and interest of $45,060, with the remaining balance due at maturity on March 1, 2012. On March 29, 2012 and effective March 1, 2012, Moody Bank agreed to enter into a Fourth Renewal, Extension and Modification Agreement (the “Fourth Renewal”), pursuant to which Moody Bank agreed to extend the due date of the Revolver to March 1, 2013 and we agreed to pay monthly payments of principal and interest due under the Revolver of $57,500 per month until maturity. The amount outstanding under the Revolver at the time of the parties’ entry into the Fourth Renewal was $1,822,767.
At December 31, 2012, the outstanding balance on the Revolver was $1,385,886. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth covenant required by the Revolver (we were required to have a tangible net worth ratio of 2.5:1 or less and the Company's was 10.68:1 at December 31, 2012), which non-compliance was previously waived by Moody.
On March 26, 2013 and effective March 1, 2013, Moody Bank agreed to enter into a Fifth Renewal, Extension and Modification Agreement (the “Fifth Renewal”), pursuant to which Moody Bank agreed to extend the due date of the Revolver to March 1, 2014 and we agreed to increase the interest rate of the Revolver to 6.75% per annum and to pay monthly payments of principal and interest under the Revolver of $62,500 per month (beginning April 1, 2013) until maturity. The amount outstanding on the Revolver as of the parties’ entry into the Fifth Renewal was $1,290,463.
Comerica Bank Credit Facility
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 (now Comerica Bank “Comerica Bank” or “Comerica”) that matured on October 2, 2009. On or around October 27, 2009, the Company entered into a Modification, Renewal and Extension Agreement and an Amended and Restated Loan Agreement in connection with its $33,000,000 line of credit facility with Comerica Bank (collectively the “Renewal”). On or around July 30, 2010, we entered into a Modification Agreement with Comerica Bank to modify and amend the Renewal. On December 14, 2010, and effective November 10, 2010, we entered into an additional Modification Agreement with Comerica Bank to modify and amend the Renewal (the “Modification”). On April 13, 2011, and effective as of March 10, 2011, the Company entered into an additional Modification Agreement with Comerica Bank (the "March 2011 Modification"). The Modification and March 2011 Modification also modified and amended our required borrowing base and minimum net worth requirements under the Renewal, which factor into whether we are in compliance with the terms and conditions of and/or in default of the terms of the Renewal.
The outstanding amount of the Renewal at the time of the parties’ entry into the Modification was $23,704,253, and the Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $110,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning December 10, 2010 and continuing until February 10, 2011 (we had previously been making monthly installment payments of $110,000 beginning in July 2010), with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on March 10, 2011 (previously the full amount of the Renewal as modified by the first Modification Agreement, was due and payable on November 10, 2010).
The outstanding amount of the Renewal at the time of the parties' entry into the March 2011 Modification was $22,648,222, and the March 2011 Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $160,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning April 10, 2011 and continuing until August 10, 2011, with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on September 10, 2011.
On October 27, 2011 and effective September 10, 2011, the Company entered into an additional Modification Agreement with Comerica Bank (the “September 2011 Modification”), to modify and amend the Renewal.
The September 2011 Modification, similar to the Modification and March 2011 Modification modified and amended our required borrowing base and minimum net worth requirements under the Renewal, which factor into whether we are in compliance with the terms and conditions of and/or in default of the terms of the Renewal. Additionally, each month, we are required to pay Comerica Bank, in addition to the monthly payments, a prepayment of principal equal to the amount of all proceeds from the sale of our vehicles which have not already been paid to Comerica Bank as a result of the monthly payment. The outstanding amount of the Renewal on the effective date of the September 2011 Modification was $21,846,701, and the September 2011 Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $260,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning October 10, 2011 and continuing until March 10, 2012, with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on March 10, 2012. Additionally, each month, we are required to pay Comerica Bank, in addition to the monthly payments, a prepayment of principal equal to the amount of all proceeds from the sale of our vehicles which have not already been paid to Comerica Bank as a result of the monthly payment. The September 2011 Modification did not otherwise materially amend or modify the terms of the Renewal, which evidences a Secured Note Payable (the "Note Payable"); except that it increased the interest rate of the Note Payable to the prime rate plus 2.5%, compared to the prime rate plus 2% (as was previously provided under the terms of the Note Payable), in each case subject to a floor of 6%.
On March 30, 2012, and with an effective date of March 10, 2012, Comerica Bank agreed to extend the due date of the Renewal until June 10, 2012 and to forbear from enforcing certain covenants of the Renewal and we agreed to increase the amount of interest payable under the Renewal to the prime rate plus 3.5%, subject to a floor of 6%, which rate is currently 6.75% per annum, increase the monthly payments due under the Renewal to $275,000 per month, and pay fees associated with the extension totaling $210,000 (the “March 2012 Extension”). The outstanding balance on the Note Payable as of the effective date of the March 2012 Extension was $20,372,657.
Comerica subsequently agreed to further extend the maturity date of the Renewal, and on several dates agreed to accept a discounted payment in full satisfaction of the amounts owed in connection with the Renewal, provided that we were unable to make such discounted payments.
At December 31, 2012, the outstanding balance on the Note Payable was $19,063,447. Under the terms of the renewals of the Note Payable, the Company has been and will continue to be unable to borrow any new funds under the credit facilities during 2013 or in subsequent years, unless the credit facilities are refinanced or replaced.
Our credit facility with Comerica Bank 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 sole director 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 Comerica Bank. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth (required to be $6.75 million and was $2.1 million at December 31, 2012) and debt to tangible net worth (required to be 4:1 and was approximately 10.27:1 at December 31, 2012) covenants required by the Renewal.
On April 8, 2013, we and Comerica entered into a Settlement, Release, Indemnity and Limited Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, we agreed that the Renewal was in default and Comerica agreed to forbear from taking any action against us to enforce the default until the earlier of 4 p.m. on April 18, 2013, or the date that a default occurred under the Renewal other than in connection with our failure to repay such Renewal. We also agreed to pay $500,000 towards the balance of the Renewal on April 5, 2013, which funds have been paid to date and to pay a discounted settlement payment in full satisfaction of the Renewal in the amount of $12 million on April 18, 2013, along with legal fees of Comerica’s counsel (the “Settlement Amount”). We also agreed to release Comerica from and to indemnify Comerica against certain claims and causes of action.
Over the past approximately ninety days, we have been in discussions with various parties and have entered into various term sheets regarding potential funding transactions in order to enable us to raise funds sufficient to pay the discounted Settlement Amount that Comerica has agreed to accept in satisfaction of the Renewal. To date, we have not entered into any definitive agreements associated with such potential funding transactions and do not have sufficient funding to pay the Settlement Amount when due on April 18, 2013. In the event that we are unable to pay the Settlement Amount when due, Comerica could take further actions against us to enforce its security interest over our assets, seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek an immediate foreclosure of such assets and/or may take other actions which have a material adverse effect on our operations, assets and financial condition.
Third Party Promissory Notes
On March 1, 2011, the Company entered into a Promissory Note with Pamela Kimmel, a third party, in the amount of $100,000, which accrues interest at the rate of 12% per annum payable monthly, and was due on March 1, 2012. The Promissory Note was secured by the personal guaranty of Jerry Parish. This note was paid off on March 26, 2011, with the proceeds of a new Promissory Note as described below.
On March 26, 2011, the Company paid off the $100,000 Promissory Note and entered into a new Promissory Note with Pamela Kimmel in the amount of $142,000, with a maturity date of March 26, 2012. The Promissory Note accrues interest at the rate of 12% per annum payable monthly. On December 6, 2011, the Company renegotiated the maturity date on $100,000 of the Promissory Note, and extended the maturity of that portion of the Promissory Note to December 6, 2012. The Promissory Note is secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 and December 31, 2011 was $142,000. The note has been extended until December 6, 2013.
In August 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which the Company sold Asher a convertible note in the amount of $68,000, bearing interest at the rate of 8% per annum (the “Convertible Note”) which Convertible Note was amended in October 2011, to be effective as of August 2011. The Convertible Note provided Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to the greater of (a) 61% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to such conversion date; and (b) $0.00009 per share.
The Convertible Note, which accrued interest at the rate of 8% per annum, was payable, along with interest thereon on May 7, 2012, but was repaid in March 2012. The note’s convertible feature was valued and resulted in a debt discount of $43,475, which was fully amortized at the time of payment.
Asher converted $10,000 of the amount owed under the Convertible Note into 190,476 shares of the Company’s common stock ($0.0525 per share) in February 2012. In March 2012, the Company repaid the entire remaining balance due under the Convertible Note for an aggregate of $90,003 including penalty and interest.
On November 28, 2011, the Company entered into a Promissory Note with Pablo J. Olivarez, a third party (the husband of one of our employees) in the amount of $100,000, which accrues interest at the rate of 12% per annum payable monthly, and was due and payable on December 28, 2012. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 was $100,000. The note has been extended until December 28, 2013.
In March 2012, the Company entered into a Promissory Note with Sambrand Interests, LLC, a third party in the amount of $220,000, which accrues interest at the rate of 12% per annum payable monthly, and will be due in March 2013. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 was $220,000. The note has been extended until March 2014.
In May 2012, the Company entered into another Promissory Note with Sambrand Interests, LLC in the amount of $250,000, which accrues interest at the rate of 12% per annum payable monthly, and will be due in May 2013. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 was $250,000.
Description of Business
Mint Leasing is a company in the business of leasing automobiles and fleet vehicles throughout the United States. We have been in business since May 1999. Over 800 franchise dealers have signed dealer agreements with the Company. Additionally, Mint Leasing has partnerships with more than 500 dealerships within 17 states. However, most of its customers are located in Texas and seven other states in the Southeast, with the majority of the leases originated in 2011 and 2010 with customers in the state of Texas. We generate partnerships with dealerships through the business relationships our Chief Executive Officer and sole director, Jerry Parish, has built over the past 40 years. Lease transactions are also solicited and administered by the Company’s sales force and staff. 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.
We act as an indirect lender to customers. Generally, brand-name automobile dealers with which we have a relationship send us applications of customers for approval in order to allow such customers, which may not meet the higher leasing criteria of those dealerships, to lease new or late-model-year vehicles. We also generate business from pre-existing clients, referrals from non-dealerships and walk-ins. Once we receive an application, 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. Assuming the Company approves credit for the buyer; the Company will purchase the subject automobile directly from the dealership and then lease such automobile directly to the buyer. Once the automobile is purchased by the Company from the dealership, the dealership is no longer involved in the transaction and the buyer pays the Company directly pursuant to the lease terms. If at the end of the lease term, the leasee decides not to purchase the vehicle, the Company will either put the vehicle on its lot to be re-leased or sell it at auction. Similarly, if the leasee defaults under the terms of the lease, the Company will repossess the vehicle and either re-lease it or sell it at auction, depending on the condition of the vehicle and the Company’s independent estimation of whether it may be re-leased. The Company’s sales are principally accomplished through the Company’s sales force, which includes three full-time employees. All vehicles are stored at the Company’s principal business location.
We had a total of approximately 2,500 leases in place as of December 31, 2009; 2,000 in place as of December 31, 2010; 1,500 in place as of December 31, 2011, and 1,700 in place as of December 31, 2012. The Company has chosen to reduce its total leases over the last three years due to the downturn in the economy; provided that the Company has also been limited in the funds available to it for the purchase of vehicles under its lines of credit, as described in greater detail above. We currently have approximately 1,500 cars in our inventory (including vehicles which are being leased). The value of our inventory was $36.6 million as of December 31, 2009; $29.7 million as of December 31, 2010; $25.6 million as of December 31, 2011; and $22.7 million as of December 31, 2012. We generated approximately $935,000 per month in revenues from individually leased vehicles, and $130,000 per month in revenues from fleet leased vehicles and approximately $70,000 per month in revenues from other sources (including the sale of vehicles) during the year ended December 2010. We generated approximately $830,000 per month in revenues from individually leased vehicles, and $125,000 per month in revenues from fleet leased vehicles and approximately $150,000 per month in revenues from other sources (including the sale of vehicles) during the year ended December 2011. We generated approximately $400,000 per month in revenues from individually leased vehicles, and $420,000 per month in revenues from fleet leased vehicles and approximately $100,000 per month in revenues from other sources (including the sale of vehicles) during the year ended December 2012.
As of the filing of this report, we had approximately 1,500 outstanding leases which were in good standing, and approximately 40 leases which are over 60 days delinquent. Historically, leasees have defaulted on approximately 15% of our leases, which vehicles we have been forced to repossess. We turn over all repossessions to licensed repossession companies. We do not repossess any vehicles ourselves.
Payments are received by leasees in the form of cash, automatic bank withdrawals, debit card and credit card payments, and checks.
Industry Segment
With the average cost of new cars rising annually, it is becoming increasingly vital for consumers to understand the alternative financing options at their disposal. This is one of the core missions of Mint Leasing - to educate the average consumer about financing alternatives. It is imperative that consumers understand that by choosing to lease the vehicle, rather than purchase, they may reduce their risk and save money. Mint Leasing believes it provides consumers with the best of both worlds - the ability to drive their dream car, without having to spend more than they can afford. With car and housing prices at all-time highs over the past decade; the auto leasing industry has increased in popularity.
Mint Leasing maintains two significant, distinct client sectors - (1) The Franchise Dealer and (2) The Individual Consumer.
The Franchise Dealer
The Chief Executive Officer and sole director of Mint Leasing, Jerry Parish, has been a part of the automobile industry for most of his adult life. It is through his knowledge, reputation and expertise that Mint Leasing has forged hundreds of partnerships with dealers across the United States.
Mint Leasing maintains these relationships with dealerships based on the Company’s innovative lease structure. By partnering with Mint Leasing, dealers are provided the opportunity to attract consumers who would otherwise fail to meet their financing standards. We believe that this availability permits franchise dealers to increase their client base, move inventory, and reduce the risk of default, resulting in an increase in profit. In addition to these benefits, Mint Leasing provides a unique payment structure which we believe actually increases the dealer’s profit in the sale. Upon verification of a consumer’s credit and execution of the lease, Mint Leasing will purchase the vehicle the consumer desires to lease directly from the dealer. The newly purchased vehicle, which is owned by Mint Leasing, is leased by Mint Leasing directly to the consumer as described in greater detail below.
We believe these benefits provide Franchise Dealers with an ideal partnership with Mint Leasing.
The Individual Consumer
While the Company’s primary customer is the Franchise Dealer, Mint Leasing’s financial relationship is with the consumer/lessee of the vehicle. The benefits of offering leasing alternatives are clear for the dealer - leasing provides yet another option for consumers looking to purchase (or lease) a new vehicle. Mint Leasing believes however that the benefits to the consumer are less clear.
We believe that the choice to lease always provides one automatic benefit to the consumer - the lack of initial cash expenditure. With leasing there is normally a small amount of cash necessary to “close the deal”. At Mint Leasing, the necessity of a “down payment” is determined by the customer’s credit score. As with most terms, a Mint Leasing lease can be structured to meet the individual consumer’s needs. Also, the tax benefits of an auto lease may exceed those of a loan. With an auto loan, the buyer is typically required to pay the sales tax up front in a lump sum. However, with an auto lease the lessee is permitted to amortize the sales tax over the course of the lease, thereby reducing the upfront costs.
Additionally, the availability of financing is critical to the sales of both used and new cars. Americans overwhelmingly choose to, or need to, finance the purchase of automobiles to cover the majority, if not all, of the sales price.
Role of Traditional Lending at a Dealership
Typically, auto financing is arranged through the dealer at the time of the car purchase. Most car dealers provide financing through a wide variety of banks, manufacturer finance subsidiaries and independent finance companies who lend to prime customers. The dealer is typically compensated by the financier through a fee based on the difference between the amount provided by the institution and the loan negotiated with the customer. In the case of high-risk and sub-prime sources, the dealer may, in fact, have to pay a discount in order to place the loan.
Expansion Opportunity - The Fleet Customer
In 2010, Mint Leasing began to actively seek out a new market segment - leasing to commercial customers who maintain small fleets of vehicles, particularly rental car franchise owners and large repair shop operations that rent cars to customers having work done at their shops. We believe that there are several advantages to leasing to these customers, including that:
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They are generally better credit risks than the individual consumer because the leased vehicles will be used to generate income to service the lease payments;
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Lease payments are guaranteed by both the company and the owner individually;
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Payments are set up via automatic debits; and
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They lease several vehicles of similar make and model at one time, allowing Mint Leasing to negotiate better pricing from dealers.
While these customers may also be in a position to demand better terms, thus lowering the gross margin for Mint Leasing, we believe that the risk of default is minimal and the opportunity for cost savings significant. Over the course of 2010, 2011 and 2012, this market segment grew to represent over 50% of the total receivables for Mint Leasing. As of the date of this filing, the Company expects to continue to expand this segment over the coming year, while still maintaining its consumer business segment.
The Advantages of Mint Leasing
Mint Leasing offers a different approach to auto financing. Mint Leasing doesn’t rely on Finance Managers and salesmen to verify customers’ applications. Mint Leasing relies on its trained, experienced credit analysts to verify every transaction. Mint Leasing has entered into financial relationships with over 500 dealerships as a premier source for outside financing. Because the agreements with the dealerships have been pre-negotiated, Mint Leasing is able to quickly and efficiently respond to the dealerships and the individual customer’s immediate needs. The Company uses a standard form of Dealer Agreement (a copy of which is incorporated by reference into this filing as Exhibit 10.18). The Dealer Agreement requires the Company to pay the dealer within 30 days of the Company’s approval date, the purchase price of any vehicle; requires the dealer to collect all down payments from customers; requires the dealer, within 20 days from the date of purchase, to file all documentation necessary for the Company to have a perfected security interest in the vehicle; and requires the dealer to indemnify the Company against any breach of any provision of the dealer agreement. The Company requires the dealer to execute its form of Dealer Agreement.
As a partner with the dealership, the finance manager/sales consultant at the dealership can enter the application information into the sales office computer while sitting beside the customer. The application is then instantly transmitted to Mint Leasing for approval. Approvals are displayed instantly, allowing the franchise dealer to quickly close the transaction.
Rather than rely on a weighted average credit score of the end customer, Mint Leasing chooses to apply a common sense approach to financing. While the customer’s credit score is taken into account, there is no minimum, or “beacon score” to determine approval. However, Mint Leasing does recognize the inherent risk in lending to non-prime or sub-prime borrowers. Mint Leasing takes into account several factors when considering whether a potential customer’s application will be approved or not, including the individual’s (the percentage next to each criteria is the approximate weight given to each factor); credit score and history (10%); the stability in the customer’s residence (e.g., homeowner or not, how long lived at current address)(30%), job stability (45%), age (5%), and income (10%). Currently approximately 50% of the Company’s leases are fleet leases and 50% are sub-prime and non-prime borrowers.
Mint Leasing offers quality, affordable leasing to at-risk borrowers to provide customers with the freedom associated with a vehicle. Because of this mission, the Company employs a “reasonableness” test to determine the fitness of the transaction. Mint Leasing relies on the decades of experience within its staff to determine the character of the lease application. This standard ensures that every transaction is approved or disapproved by a person, and not a computer.
Independence
Mint Leasing maintains a relationship with every major automobile manufacturer. Because of this, Mint Leasing is able to retain an autonomous, independent relationship with its dealers and work directly with the finance department to provide fair leasing options.
Repossession Rate
The Mint Leasing repossession rate for 2012 and 2011 has been approximately 10% and 12% of total units out on lease, respectively, because of downturns in the economy in 2009 and early 2010 as the repossession rate spiked to approximately 20% during those time periods, but normally runs approximately 12-15% of total units.
Marketing and Advertising:
The Company markets its leasing products through its partnerships with dealerships and representatives in such dealerships. The Company also advertises its vehicles on Autotrader.com, ebay.com and on the radio. The Company’s advertising costs for the year ended December 31, 2012 totaled $8,749 and for the year ended December 31, 2011 totaled $2,087.
Competition:
The automobile leasing industry is highly competitive. The Company currently competes with several larger competitors such as Americredit Corp. and Americas Car Mart. Although we believe that our services compare favorably to our competitors, the Company can make no assurance that it will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, will not arise. In the event that the Company cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on the Company’s business, results of operations and financial condition.
Dependence on One or a Few Major Customers:
Mint Leasing does not depend on a few major customers for its revenues. As stated above, it has partnerships with over 500 dealerships and has over 1,200 current leasing customers.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
The Company maintains a website at www.mintleasing.com, which contains information the Company does not desire to be incorporated by reference into this report. The Company also maintains a Motor Vehicle Lessor License (LB50619) and a Motor Vehicle Dealer License (P39596) with the State of Texas.
Number of Total Employees and Number of Full-Time Employees
The Company currently employs 17 full-time employees, of which 3 employees are in the Company’s sales department.
ITEM 1A.
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 of the following risks actually occur, our business and financial results could be negatively affected to a significant extent. The Company's business is subject to many risk factors, including the following:
Our Credit Facility With Comerica Bank Is In Default.
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 (now Comerica Bank “Comerica Bank”) that matured on October 2, 2009. On or around October 27, 2009, the Company entered into a Modification, Renewal and Extension Agreement and an Amended and Restated Loan Agreement in connection with its $33,000,000 line of credit facility with Comerica Bank (collectively the “Renewal”). Subsequent thereto, the Company entered into various extensions and renewals of the Renewal, including the entry on March 30, 2012, and with an effective date of March 10, 2012, of an extension of the Renewal with Comerica Bank, which agreed to extend the due date of the Renewal until June 10, 2012 and to forbear from enforcing certain covenants of the Renewal and pursuant to which we agreed to increase the amount of interest payable under the Renewal to the prime rate plus 3.5%, subject to a floor of 6%, which rate is currently 6.75% per annum, increase the monthly payments due under the Renewal to $275,000 per month, and pay fees associated with the extension totaling $210,000 (the “March 2012 Extension”). The outstanding balance on the Note Payable as of the effective date of the March 2012 Extension was $20,372,657. Additionally, each month, we are required to pay Comerica Bank, in addition to the monthly payments, a prepayment of principal equal to the amount of all proceeds from the sale of our vehicles which have not already been paid to Comerica Bank as a result of the monthly payment.
Comerica subsequently agreed to further extend the maturity date of the Renewal, and on several dates agreed to accept a discounted payment in full satisfaction of the amounts owed in connection with the Renewal, provided that we were unable to make such discounted payments.
The Renewal, as amended, evidences a Secured Note Payable (the "Note Payable"). At December 31, 2012, the outstanding balance on the Note Payable was $19,063,447. Under the terms of the renewals of the Note Payable, the Company has been and will continue to be unable to borrow any new funds under the credit facilities during 2013 or in subsequent years, unless the credit facilities are refinanced or replaced.
Our credit facility with Comerica Bank 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 sole director 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 Comerica Bank. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth (required to be $6.75 million and was $2.1 million at December 31, 2012) and debt to tangible net worth (required to be 4:1 and was approximately 10.27:1 at December 31, 2012) covenants required by the Renewal, which non-compliance has previously been waived by Comerica.
On April 8, 2013, we and Comerica entered into a Settlement, Release, Indemnity and Limited Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, we agreed that the Renewal was in default and Comerica agreed to forbear from taking any action against us to enforce the default until the earlier of 4 p.m. on April 18, 2013, or the date that a default occurred under the Renewal other than in connection with our failure to repay such Renewal. We also agreed to pay $500,000 towards the balance of the Renewal on April 5, 2013, which funds have been paid to date and to pay a discounted settlement payment in full satisfaction of the Renewal in the amount of $12 million on April 18, 2013, along with legal fees of Comerica’s counsel (the “Settlement Amount”). We also agreed to release Comerica from and to indemnify Comerica against certain claims and causes of action.
Over the past approximately ninety days, we have been in discussions with various parties and have entered into various term sheets regarding potential funding transactions in order to enable us to raise funds sufficient to pay the discounted Settlement Amount that Comerica has agreed to accept in satisfaction of the Renewal. To date, we have not entered into any definitive agreements associated with such potential funding transactions and do not have sufficient funding to pay the Settlement Amount when due on April 18, 2013. In the event that we are unable to pay the Settlement Amount when due, Comerica could take further actions against us to enforce its security interest over our assets, seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek an immediate foreclosure of such assets and/or may take other actions which have a material adverse effect on our operations, assets and financial condition.
Our failure to extend, refinance or repay the credit facility and/or our default in the repayment of the facility could allow Comerica Bank to enforce its security interests, take over control of substantially all of our assets, or force us into Bankruptcy protection, any of which could cause the value of our securities to decline in value or become worthless and could force us to cease operations.
Our Credit Facility With Moody Bank Is Due On March 1, 2014.
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 Revolver has been extended and renewed from time to time thereafter, including on on March 26, 2013 and effective March 1, 2013, when Moody Bank agreed to enter into a Fifth Renewal, Extension and Modification Agreement (the “Fifth Renewal”), pursuant to which Moody Bank agreed to extend the due date of the Revolver to March 1, 2014 and we agreed to increase the interest rate of the Revolver to 6.75% per annum and to pay monthly payments of principal and interest under the Revolver of $62,500 per month (beginning April 1, 2013) until maturity. At December 31, 2012, the outstanding balance on the Revolver was $1,385,886. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth covenant required by the Revolver (we were required to have a tangible net worth ratio of 2.5:1 or less and the Company's was 10.68:1 at December 31, 2012), which non-compliance was previously waived by Moody. The Moody Bank facility may not be further extended and we may be unable to refinance or repay such credit facility when it comes due. Our failure to extend, refinance or repay the credit facility and/or our default in the repayment of the facility could allow Moody Bank to enforce its security interests, take over control of certain of our assets, or force us into Bankruptcy protection, any of which could cause the value of our securities to decline in value or become worthless and could force us to cease operations.
We Will Need To Obtain Additional Financing To Continue To Execute On Our Business Plan and Continue as a Going Concern.
The availability of our credit facilities (as described above) and similar financing sources depends, in part, on factors outside of our control, including the availability of bank liquidity in general. The current disruptions in the capital markets have caused banks and other credit providers to restrict availability of new credit facilities and require more collateral and higher pricing upon renewal of existing credit facilities, if such facilities are renewed at all. Accordingly, as our existing credit facility matures, we may be required to provide more collateral in the form of finance receivables or cash to support borrowing levels which will affect our financial position, liquidity, and results of operations. In addition, higher pricing would increase our cost of funds and adversely affect our profitability.
The Comerica Bank (which is currently in default) and Moody Bank credit facilities may not be further extended. Additionally, even if extended, the Company may not have sufficient funds on hand when the credit facilities mature to retire the debt. Accordingly, we will need to further extend the credit facility and/or seek alternative financing to repay such credit facilities. Additionally, we may need additional credit to support our operations, which credit may not be available from our current banking institutions. We also have approximately $1.3 million of notes payable, which accrue interest at 12% per annum, which amount is due at various times from December 2013 to May 2014, as described in greater detail above under “Business” - “Third Party Promissory Notes”, which we do not currently have funds to repay, but which we plan to repay from funds generated from our business activities.
We do not currently have any additional commitments of additional capital from third parties or from our sole officer and director or majority shareholders. We can provide no assurance that additional financing will be available on favorable terms, if at all. If we choose to raise additional capital through the sale of debt or equity securities, such sales may cause substantial dilution to our existing shareholders. If we are not able to extend the credit facilities or to raise the capital necessary to repay the credit facilities and our outstanding notes payable, we may be forced to abandon or curtail our business plan, which may cause any investment in the Company to become worthless. Our independent auditor has expressed substantial doubt regarding our ability to continue as a going concern if we are not successful in obtaining renewals of and/or renegotiating our credit facilities. If we are unable to continue as a going concern, we may be forced to file for bankruptcy protection, may be forced to cease our filings with the Securities and Exchange Commission, and the value of our securities may decline in value or become worthless.
Our Auditor Has Highlighted the significance of our Banking Relationships.
Management has had a long standing relationship with the financial institutions that are currently providing its credit facilities. The Company has a history of successfully working with its lenders in negotiating previous modifications and extensions, and believes that it will continue to be able to do so in the future. Such extensions or modifications are critical to the Company’s ability to meet its financial obligations and execute its business plan. Currently the majority of the amounts due to the Company's lenders are due within the next 12 months and this amount exceeds the current and readily available assets available to satisfy these obligations. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available, the Company may not renew or continue its operations. These factors among others indicate that we may be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty and if we cannot continue as a going concern, your investment could become devalued or even worthless.
Our Credit Facilities Require Us To Observe Certain Covenants, And Our Failure To Satisfy Such Covenants Could Render Us Insolvent.
Our credit facilities require the Company to comply with certain affirmative and negative covenants customary for restricted indebtedness, including covenants requiring that: we make timely payments of principal and interest under the credit facilities; maintain certain financial ratios; Jerry Parish, our Chief Executive Officer and sole director maintains at least 50% of the ownership of the Company, and that Jerry Parish continues to serve as the Chief Executive Officer of the Company. At December 31, 2012, the outstanding balance on the Revolver was $1,385,886. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth covenant required by the Revolver (we were required to have a tangible net worth ratio of 2.5:1 or less and the Company's was 10.68:1 at December 31, 2012), which non-compliance was previously waived by Moody. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth (required to be $6.75 million and was $2.1 million at December 31, 2012) and debt to tangible net worth (required to be 4:1 and was approximately 10.27:1 at December 31, 2012) covenants required by the Renewal (which Renewal is currently in default for non-payment).
Subject to notice and cure period requirements where they are provided for, any unwaived and uncured breach of the covenants applicable to our credit facilities could result in acceleration of the amounts owed and the cross-default and acceleration of indebtedness owing to other lenders, which default may cause the value of our securities to decline in value or become worthless.
We Rely Heavily On Jerry Parish, Our Chief Executive Officer and Sole Director, And If He Were To Leave, We Could Face Substantial Costs In Securing A Similarly Qualified Officer and Director.
Our success depends in large part upon the personal efforts and abilities of Jerry Parish, our Chief Executive Officer and sole director. Our ability to operate and implement our business plan and operations is heavily dependent on the continued service of Mr. Parish and our ability to attract and retain other qualified senior level employees.
We face continued competition for our employees, and may face competition for the services of Mr. Parish in the future. We currently have $1,000,000 of key man insurance on Mr. Parish. We also have an employment agreement in place with Mr. Parish which expires on July 10, 2017. Mr. Parish is our driving force and is responsible for maintaining our relationships and operations. We cannot be certain that we will be able to retain Mr. Parish and/or attract and retain qualified employees in the future. The loss of Mr. Parish, and/or our inability to attract and retain qualified employees on an as-needed basis could have a material adverse effect on our business and operations.
Mr. Parish, Our Sole Director, May, At His Own Discretion And Without Notice To Shareholders, Increase The Salary That He Pays Himself To The Amount Already Provided For In His Employment Agreement Or Any Other Amount He Determines In His Sole Discretion.
On July 18, 2008, the Company assumed a three year employment agreement between The Mint Leasing, Inc., a Texas corporation and Mr. Parish, originally effective as of July 10, 2008, which has since been extended through July 10, 2017. The employment agreement provides for a salary $675,000 per annum and a bonus payable quarterly equal to 2% of the Company’s “modified EBITDA” (as defined in the employment agreement), as well as a discretionary bonus payable at the option of the Company’s Board of Directors (currently consisting solely of Mr. Parish). During 2012, 2011 and 2010, Mr. Parish received cash compensation of $315,000, $315,000 and $379,995, respectively. Mr. Parish has agreed to forgo any additional cash compensation he would be entitled to under his employment agreement for 2010, 2011 and 2012. However, Mr. Parish can require the Company to pay him the full amount due under the employment agreement (i.e., $675,000 per year plus a quarterly bonus of 2% of the Company’s “modified EBITDA”) at any time, at his own discretion, and without notice to the shareholders, subject only to the requirements of the Moody credit facility which requires that his salary remain below $400,000 per year. Additionally, as Mr. Parish is the Company’s sole director, he can unilaterally and without shareholder notice or approval, increase the amount he is paid under this employment agreement at any time. In the event that Mr. Parish was to request to be paid the full amount due pursuant to the terms of his employment agreement, or he was to increase the amount he was due pursuant to the terms of the employment agreement, such increased payments would significantly increase the Company’s quarterly expenses and could materially adversely affect the Company’s results of operations, resulting in a decrease in the value of the Company’s common stock. Additionally, a significant increase in Mr. Parish’s salary could prohibit the Company from paying its liabilities as they come due, decrease the funds the Company has available for working capital, and force the Company to curtail its operations and business plan.
Our Success In Executing On Our Business Plan Is Dependent Upon The Company’s Ability To Attract And Retain Qualified Personnel.
Our success depends heavily on the continued services of our executive management (i.e., our sole officer and director) and employees. Our employees are the nexus of our operational experience and customer relationships. Our ability to manage business risk and satisfy the expectations of our customers, stockholders and other stakeholders is dependent upon the collective experience of our employees and our sole officer and director. The loss or interruption of services provided by our sole officer and director could adversely affect our results of operations. Additionally, the Company’s ability to successfully expand the business in the future will be directly impacted by its ability to hire and retain highly qualified personnel.
The Company Has Established Preferred Stock Which Can Be Designated By The Company’s Sole Director Without Shareholder Approval And Has Established Series A and Series B Preferred Stock, Which Gives The Holders Majority Voting Power Over The Company.
The Company has 20,000,000 shares of preferred stock authorized and 185,000 shares of Series A Convertible Preferred Stock and 2,000,000 shares of Series B Convertible Preferred Stock designated. As of the filing date of this report, the Company has no Series A Convertible Preferred Stock shares issued and outstanding and 2,000,000 Series B Convertible Preferred Stock shares issued and outstanding, which shares are held by the Company’s Chief Executive Officer and sole director, Jerry Parish. The Company’s Series A Convertible Preferred Stock allows the holder to vote 200 votes each on shareholder matters and Series B Convertible Preferred Stock shares allow the holder to vote a number of voting shares equal to the total number of voting shares of the Company’s issued and outstanding stock as of any record date for any shareholder vote plus one additional share. As a result, due to Mr. Parish’s ownership of the Series B Convertible Preferred Stock shares, he has majority control over the Company. Mr. Parish also beneficially owns approximately 54.2% of the Company’s outstanding common stock and 76.8% of the Company’s voting stock.
Additional shares of preferred stock of the Company may be issued from time to time in one or more series, each of which shall have distinctive designation or title as shall be determined by the Board of Directors of the Company, currently consisting solely of Mr. Parish (“Board of Directors”), prior to the issuance of any shares thereof. The preferred stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as adopted by the Board of Directors. Because the Board of Directors is able to designate the powers and preferences of the preferred stock without the vote of a majority of the Company’s shareholders, shareholders of the Company will have no control over what designations and preferences the Company’s preferred stock will have. As a result of this, the Company’s shareholders may have less control over the designations and preferences of the preferred stock and as a result the operations of the Company.
Jerry Parish, Our Chief Executive Officer and sole Director, Can Exercise Voting Control Over Corporate Decisions.
Jerry Parish beneficially holds voting control over (a) 2,000,000 Series B Convertible Preferred Stock shares, which provide him the ability to vote the total number of outstanding shares of voting stock of the Company plus one vote, and (b) approximately 54.2% of the Company’s outstanding common stock; which in aggregate provides him voting control over approximately 76.8% of our total voting securities. As a result, Mr. Parish will exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Parish may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other shareholders.
Due To The Fact That The Company Leases Its Office and Warehouse Space and Automobile Lot From An Entity Partially Owned By Mr. Parish, The Company’s Majority Shareholder, Sole Officer And Sole Director, If Mr. Parish Was To Step Down As An Officer And Director Of The Company, The Company Could Be Forced To Seek Alternative Office, Warehouse and/or Automobile Lot Space.
The Company leases an approximately 27,000 square foot facility, which includes 6,000 square feet of office space and certain other adjacent property which it uses an automobile lot from a limited liability corporation that is owned by the Company’s sole officer and director, Jerry Parish and Victor Garcia, a significant shareholder, at the rate of $15,000 per month. The lease was renewed for a term of one year on July 31, 2012. The Company also has the right to three additional one year extensions. Any extensions under the lease shall be at a monthly rental cost mutually agreeable by the parties. The payment of the rental costs due under the lease is secured by a lien on all of the Company's goods and personal property located within the leased premises. Because of the fact that the entity which leases the property to the Company is partially owned by Mr. Parish, our sole officer and director, it is possible that if Mr. Parish were to resign as an officer and/or director of the Company, he could choose not to renew the lease arrangement and we could be forced to find an alternative location for our operations and automobiles. Such alternative lease location may be a higher monthly cost than our current lease arrangement and as such, our expenses could increase, creating a materially adverse effect on our results of operations and consequently, the value of our securities.
Our Quarterly and Annual Results Could Fluctuate Significantly.
The Company’s quarterly and annual operating results could fluctuate significantly due to a number of factors. These factors include:
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access to additional capital in the form of debt or equity;
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the number and range of values of the transactions that might be completed each quarter;
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fluctuations in the values of and number of our leases;
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the timing of the recognition of gains and losses on such leases;
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the degree to which we encounter competition in our markets, and
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other general economic conditions.
As a result of these factors, quarterly and annual results are not necessarily indicative of the Company’s performance in future quarters and future years.
A Prolonged Economic Slowdown Or A Lengthy Or Severe Recession Could Harm Our Operations, Particularly If It Results In A Higher Number Of Customer Defaults.
The risks associated with our business are more acute during periods of economic slowdown or recession, such as the one we are currently in, because these periods may be accompanied by loss of jobs as well as an increased rate of delinquencies and defaults on our outstanding leases. These periods may also be accompanied by decreased consumer demand for automobiles and declining values of automobiles, which weakens our collateral coverage with our financing source. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed or resale automobiles may be sold or delay the timing of these sales. Additionally, higher gasoline prices, unstable real estate values, reset of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income, could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles. If the current economic slowdown continues to worsen, our business could experience significant losses and we could be forced to curtail or abandon our business operations.
There Are Risks That We Will Not Be Able To Implement Our Business Strategy.
Our financial position, liquidity, and results of operations depend on our sole officer and director’s ability to execute our business strategy. Key factors involved in the execution of the business strategy include achieving the desired leasing volume, the use of effective credit risk management techniques and strategies, implementation of effective lease servicing and collection practices, and access to significant funding and liquidity sources. Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity, and results of operations.
A Substantial Part of the Company’s Target Consumer Base Includes Customers Which Are Inherently at High Risk for Defaults and Delinquencies.
A substantial number of our leases involve at-risk customers, which do not meet traditional dealerships’ qualifications for leases. While we take steps to reduce the risks associated with such customers, including post-verification of the information in their lease applications and requiring down-payments ranging up to thirty percent of the manufacturer’s suggested retail price (MSRP) of the vehicles we lease, no assurance can be given that our methods for reducing risk will be effective in the future. In the event that we underestimate the default risk or under-price or under-secure leases we provide, our financial position, liquidity, and results of operations would be adversely affected, possibly to a material degree. The Company believes that the expansion into the fleet leasing segment discussed above will help to reduce this risk over time.
The Company May Experience Write-Offs for Losses and Defaults, Which Could Adversely Affect Its Financial Condition And Operating Results.
It is common for the Company to recognize losses resulting from the inability of certain customers to pay lease costs and the insufficient realizable value of the collateral securing such leases. Additional losses will occur in the future and may occur at a rate greater than the Company has experienced to date. If these losses were to occur in significant amounts, our financial position, liquidity, and results of operations would be adversely affected, possibly to a material degree.
We Incur Significant Costs As A Result Of Operating As A Fully Reporting Company And Our Management Is Required To Devote Substantial Time To Compliance Initiatives.
We incur significant legal, accounting and other expenses in connection with our status as a fully reporting public company. Specifically, we are required to prepare and file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Additionally, our sole officer and director and significant shareholders are required to file Form 3, 4 and 5’s and Schedule 13d/g’s with the SEC disclosing their ownership of the Company and changes in such ownership. Furthermore, the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and rules subsequently implemented by the SEC have imposed various new requirements on public companies, including requiring changes in corporate governance practices. As a result, our management (i.e., our sole officer and director) and other personnel are required to devote a substantial amount of time and resources to the preparation of required filings with the SEC and SEC compliance initiatives. Moreover, these filing obligations, rules and regulations increase our legal and financial compliance costs and quarterly expenses and make some activities more time-consuming and costly than they would be if we were a private company. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. Our testing has previously revealed deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. The costs and expenses of compliance with SEC rules and our filing obligations with the SEC, or our identification of deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, could materially adversely affect our results of operations or cause the market price of our stock to decline in value.
We Are Governed Solely By A Single Executive Officer And Director, And, As Such, There May Be Significant Risk To Us From A Corporate Governance Perspective.
Mr. Parish, our sole officer and director, makes decisions such as the approval of related party transactions, the compensation of executive officers, and the oversight of the accounting function. Additionally, because we only have one executive officer, there may be limited segregation of executive duties, and thus, there may not be effective disclosure and accounting controls. In addition, Mr. Parish will exercise full control over all matters that require the approval of the Board of Directors, as he currently serves as the sole Director of the Company. Accordingly, the inherent controls that arise from the segregation of executive duties and review and/or approval of those duties by the Board of Directors may not prevail. We have not adopted formal policies and procedures for the review, approval or ratification of transactions with our executive officers, directors and significant shareholders (provided that Mr. Parish currently serves as our sole officer and director). As such, the Company’s lease agreement with a partnership, which is owned by the Company’s two majority shareholders (Mr. Parish and Mr. Garcia), the Company’s notes payable to Jerry Parish, Victor Garcia, and a partnership which is owned by Mr. Parish and Mr. Garcia, the Company’s employment agreement with Mr. Parish and the amounts previously paid to Mr. Garcia in consideration for consulting services rendered, were only approved by Mr. Parish as the Company’s sole director, without Mr. Parish undertaking any formal review of those transactions.
We have not adopted corporate governance measures such as an audit or other independent committees as we presently do not have any independent directors. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions. Due to the Company’s lack of formal policies and procedures for the review and approval of transactions with our executive officer, sole director and significant shareholders, Mr. Parish will have the authority in his sole and absolute discretion to approve related party transactions. This authority could lead to perceived or actual conflicts of interest between Mr. Parish and the Company. Additionally, Mr. Parish may approve transactions or the terms of transactions which independent directors may not have approved. Investors should keep in mind that they will have no say in the related party transactions that Mr. Parish approves, that Mr. Parish has the sole authority to approve all related party transactions, and because of the above, Mr. Parish may approve transactions which are adverse to the interests of the shareholders of the Company. Actual or perceived conflicts of interest between Mr. Parish and the Company’s other shareholders could cause the value of the Company’s common stock to decline in value or trade at levels lower than similarly situated companies that have policies and procedures in place for the review and approval of related party transactions.
We Do Not Intend To Pay Cash Dividends On Our Common Stock In The Foreseeable Future, And Therefore Only Appreciation Of The Price Of Our Common Stock Will Provide A Return To Our Stockholders.
We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our sole director. As a result, only appreciation of the price of our common stock, which may not occur, will provide a return to our stockholders.
The Market Price of Our Common Stock Historically Has Been Volatile.
The market price of our common stock historically has fluctuated significantly based on, but not limited to, such factors as general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate new revenues, and conditions and trends in the market for automobile leasing services.
In recent years, the stock market in general has experienced extreme price fluctuations that have oftentimes been unrelated to the operating performance of the affected companies. Similarly, the market price of our common stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
Securities Analysts May Not Cover Our Common Stock And This May Have A Negative Impact On Our Common Stock’s Market Price.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
Our Operations Are Subject to Significant Competition.
The automobile leasing industry is highly competitive. The Company currently competes with several larger competitors such as Americredit Corp. and Americas Car Mart. Although we believe that our services compare favorably to our competitors, the Company can make no assurance that it will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, will not arise. In the event that the Company cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on the Company’s business, results of operations and financial condition.
Our Earnings May Decrease Because Of Increases Or Decreases In Interest Rates.
Changes in interest rates could have an adverse impact on our business. For example:
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rising interest rates will increase our borrowing costs;
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rising interest rates may reduce our consumer automotive financing volume by influencing customers to pay cash for, as opposed to leasing vehicles; and
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rising interest rates may negatively impact our ability to remarket off lease vehicles.
We are also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which leases are prepaid.
Our Business May Be Adversely Affected If More Burdensome Government Regulations Were Enacted.
Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. In most states in which we operate, a consumer credit regulatory agency regulates and enforces laws relating to consumer lenders and sales finance companies such as us. These rules and regulations generally provide for licensing as a sales finance company or consumer lender or lessor, limitations on the amount, duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate do not require special licensing or provide extensive regulation of our business.
We are also subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective borrowers and lessees and protect against discriminatory lending and leasing practices and unfair credit practices. The principal disclosures required under the Truth in Lending Act include the terms of repayment, the total finance charge and the annual percentage rate charged on each contract or loan and the lease terms to lessees of personal property. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, age or marital status. According to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. In addition, the credit scoring system used by us must comply with the requirements for such a system as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency and to respond to consumers who inquire regarding any adverse reporting submitted by us to the consumer reporting agencies. Additionally, we are subject to the Gramm-Leach-Bliley Act, which requires us to maintain the privacy of certain consumer data in our possession and to periodically communicate with consumers on privacy matters. We are also subject to the Servicemembers Civil Relief Act, which requires us, in most circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted or called to active military duty. The dealers who originate automobile finance contracts and leases purchased by us also must comply with both state and federal credit and trade practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on us.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable local, state and federal regulations. There can be no assurance however; that we will be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could have a material adverse effect on our operations. Further, the adoption of additional, or the revision of existing, rules and regulations could have a material adverse effect on our business.
Compliance with applicable law is costly and can affect operating results. Compliance also requires forms, processes, procedures, controls and the infrastructure to support these requirements, and may create operational constraints. Laws in the financial services industry are designed primarily for the protection of consumers. The failure to comply with these laws could result in significant statutory civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible revocation of licenses and damage to reputation, brand and valued customer relationships.
In the near future, the financial services industry is likely to see increased disclosure obligations, restrictions on pricing and fees and enforcement proceedings, which could have a material adverse effect on our revenues and results of operations.
Shareholders May Be Diluted Significantly Through Our Efforts To Obtain Financing And Satisfy Obligations Through The Issuance Of Additional Shares Of Our Common Stock.
Our sole director may attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or convertible securities, convertible into shares of our common stock. Our sole director has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock (either restricted shares in private placements or registered shares), possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s (i.e., our sole officer and director’s) ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
Investors May Face Significant Restrictions On The Resale Of Our Common Stock Due To Federal Regulations Of Penny Stocks.
Our common stock will be subject to the requirements of Rule 15g-9, promulgated under the Securities Exchange Act of 1934, as amended, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock.
Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
In addition, various state securities laws impose restrictions on transferring "penny stocks" and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.
We Have Reported Several Material Weaknesses In The Effectiveness Of Our Internal Controls Over Financial Reporting, And If We Cannot Maintain Effective Internal Controls Or Provide Reliable Financial And Other Information, Investors May Lose Confidence In Our SEC Reports.
We reported material weaknesses in the effectiveness of our internal controls over financial reporting related to the lack of segregation of duties and the need for a stronger internal control environment. In addition, we concluded that our disclosure controls and procedures were ineffective and that material weaknesses existed in connection with such internal controls. Specifically, we identified the following two material weaknesses in our internal control over financial reporting at the end of each period from December 31, 2007 through December 31, 2012:
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Inadequate and ineffective controls over the period-end financial reporting close process - The controls were not adequately designed or operating effectively to provide reasonable assurance that the financial statements could be prepared in accordance with GAAP. Specifically, we did not have sufficient personnel with an appropriate level of technical accounting knowledge, experience and training to adequately review manual journal entries recorded, ensure timely preparation and review of period-end account analyses and the timely disposition of any required adjustment, review of our customer contracts to determine revenue recognition in the proper period, and ensure effective communication between operating and financial personnel regarding the occurrence of new transactions; and
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Adequacy of accounting systems at meeting Company needs - The accounting system in place at the time of the assessment lacks the ability to provide high quality financial statements from within the system, and there were no procedures in place or built into the system to ensure that all relevant information is secure, identified, captured, processed, and reported within the accounting system. Failure to have an adequate accounting system with procedures to ensure the information is secure and accurately recorded and reported, amounts to a material weakness to the Company’s internal controls over its financial reporting processes.
Internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles, or GAAP. Disclosure controls generally include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial and other reports and effectively prevent fraud. If we cannot maintain effective internal controls or provide reliable financial or SEC reports or prevent fraud, investors may lose confidence in our SEC reports, our operating results and the trading price of our common stock could suffer and we might become subject to litigation.
We Currently Have A Sporadic, Illiquid, Volatile Market For Our Common Stock, The Market For Our Common Stock Is And May Remain Sporadic, Illiquid, And Volatile In The Future, And Our Common Stock Was Previously Delisted From the Over-The-Counter Bulletin Board.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future and will likely be subject to wide fluctuations in response to several factors, including, but not limited to:
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actual or anticipated variations in our results of operations;
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our ability or inability to generate revenues;
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the number of shares in our public float;
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increased competition; and
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conditions and trends in the market for vehicle leasing services.
On July 23, 2012, our common stock was delisted from the Over-The-Counter Bulletin Board (“OTCBB”) due to the fact that no market maker quoted our common stock on the OTCBB for a period of four or more days. Since that date our common stock has traded on the OTCQB market. We have not yet determined whether we will relist our common stock on the OTC Bulletin Board or continue to be quoted on the OTCQB market maintained by the OTC Markets Group Inc. Because our common stock is traded on the OTCQB, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to the actual value of the Company, and not reflect the actual value of our common stock. Additionally, the value of our common stock could be adversely impacted by the fact that our common stock was recently delisted from the OTCBB, differences between the OTCQB versus the OTCBB markets and/or negative perceptions relating to such delisting. Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in the Company's public reports, industry information, and those business valuation methods commonly used to value private companies.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases an approximately 27,000 square foot facility, which includes 6,000 square feet of office space and certain other adjacent property which it uses an automobile lot from a limited liability corporation that is owned by the Company’s sole officer and director, Jerry Parish and Victor Garcia, a significant shareholder. Beginning in September 2010, the Company and the lessor agreed to reduce the monthly rent from $20,000 (which was the amount originally required under the terms of the lease) to $15,000 per month for the balance of the lease term. The lease was renewed for a term of one year on July 31, 2012, at a monthly rental rate of $15,000 per month. The Company also has the right to three additional one year extensions. Any extensions under the lease shall be at a monthly rental cost mutually agreeable by the parties. The payment of the rental costs due under the lease is secured by a lien on all of the Company's goods and personal property located within the leased premises. Rent expense under the lease amounted to $180,000 and $180,000 for the years ended December 31, 2012 and 2011, respectively.
ITEM 3.
ITEM 3. 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 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 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The common stock of The Mint Leasing, Inc. commenced trading on the Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “LGCC” on August 14, 2006. Effective July 21, 2008, we changed our name and the trading symbol became “MLES”. On February 23, 2011, we were automatically delisted from the OTC Bulletin Board due to the fact that no market maker quoted our common stock on the OTC Bulletin Board for a period of four or more days; provided that our common stock was re-quoted on the OTCBB on April 27, 2011. Subsequently on July 23, 2012, our common stock was again automatically delisted from the OTCBB due to the fact that no market maker quoted our common stock on the OTC Bulletin Board for a period of four or more days. We have not yet determined whether we will relist our common stock on the OTC Bulletin Board or continue to be quoted on the OTCQB market maintained by the OTC Markets Group Inc.
The following table sets forth the high and low trading prices of one (1) share of our common stock for each fiscal quarter over the past two fiscal years. The quotations provided are for the over the counter market, which reflect interdealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions.
As of April 1, 2013, we had 80,414,980 shares of common stock issued and outstanding held by approximately 60 shareholders of record, no shares of Series A Convertible Preferred Stock issued and outstanding and 2,000,000 shares of Series B Convertible Preferred Stock issued and outstanding.
Dividends
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any dividends in the foreseeable future. We intend to devote any earnings to fund the operations and the development of our business.
Common Stock
Holders of shares of common stock are entitled to one vote per share on each matter submitted to a vote of shareholders. In the event of liquidation, holders of common stock are entitled to share pro rata in the distribution of assets remaining after payment of liabilities, if any. Holders of common stock have no cumulative voting rights, and, accordingly, the holders of a majority of the outstanding shares have the ability to elect all of the directors. Holders of common stock have no preemptive or other rights to subscribe for shares. Holders of common stock are entitled to such dividends as may be declared by the Board out of funds legally available therefore. The outstanding shares of common stock are validly issued, fully paid and non-assessable.
Series A Convertible Preferred Stock
The Company’s Series A Convertible Preferred Stock shares (the “Series A Stock”) allow the holder to vote a number of voting shares equal to two hundred shares for each share of Series A Stock held by such Series A Stock shareholder. The Series A Stock has a liquidation preference over the shares of common stock issued and outstanding equal to the stated value of such shares, $1.00 per share multiplied by 12.5%. The Series A Stock is convertible at the option of the holder into 200 shares of common stock for each share of Series A Stock issued and outstanding, provided that no conversion shall be allowed if the holder of such Series A Stock would own more than 4.99% of the Company’s common stock upon conversion.
No amendment to the Company’s Series A Stock shall be made while such Series A Stock is issued and outstanding to amend, alter or repeal the Articles of Incorporation or Bylaws of the Company to adversely affect the rights of the Series A Stock holders; authorize or issue any additional shares of preferred stock; or effect any reclassification of the Series A Stock unless a majority of the outstanding Series A Stock vote to approve such modification or amendment.
Series B Convertible Preferred Stock
The Company’s Series B Convertible Preferred Stock shares (the “Series B Stock”) allow the holder to vote a number of voting shares equal to the total number of voting shares of the Company issued and outstanding as of any record date for any shareholder vote plus one additional share. The Series B Stock has a liquidation preference over the shares of common stock issued and outstanding. The Series B Stock is convertible at the option of the holder with 61 days’ notice to the Company into 10 shares of common stock for each share of Series B Stock issued and outstanding, which conversion rate may be increased by the Company’s Board of Directors from time to time as provided in the Series B Stock designation.
No amendment to the Company’s Series B Stock shall be made while such Series B Stock is issued and outstanding to amend, alter or repeal the Articles of Incorporation or Bylaws of the Company to adversely affect the rights of the Series B Stock holders; authorize or issue any additional shares of preferred stock; or effect any reclassification of the Series B Stock unless a majority of the outstanding Series B Stock vote to approve such modification or amendment.
EQUITY COMPENSATION PLAN INFORMATION
On June 26, 2008, the Board of Directors adopted, and on July 18, 2008, the stockholders approved, the 2008 Directors, Officers, Employees and Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). Under the Plan, the Board of Directors (or a committee thereof)(currently consisting solely of Mr. Parish) may grant options, warrants or restricted or unrestricted shares of the Company’s common stock or preferred stock to its directors, officers, employees or consultants.
The following table provides information as of December 31, 2012 regarding compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance:
(1) Includes options to purchase 2,000,000 common shares of stock granted to Jerry Parish, the Company’s President and sole director in July 2008 (all of which have vested to date), in connection with his employment agreement with Mint Texas which was assumed by Mint Nevada on the closing date of the merger. The exercise price of the options is $3.00 per share and the options expire ten years after the grant date. One third of the options may be exercised respectively on the first, second and third anniversary of the grant date. The Company recorded the transaction as part of its recapitalization.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective in November 2012, a shareholder holding 2 million shares of the Company’s common stock agreed to cancel such shares , which shares were cancelled effective in March 2013.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect amounts reported in the accompanying consolidated financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information the Company believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to the Company’s estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The following policies are those the Company believes to be the most sensitive to estimates and judgments.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of The Mint Leasing, Inc., its wholly-owned Texas subsidiary, and all of its subsidiaries. Inter-company accounts and transactions are eliminated in consolidation.
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 relate to the determination of the allowance for doubtful accounts and the estimated unguaranteed residual values on the lease receivable contracts.
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 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 impact on the estimated unguaranteed residual values.
Revenue Recognition for Sales-type Leases
The Company’s customers typically finance vehicles over periods ranging from three to five years. These financing agreements are classified as operating leases or sales-type leases as prescribed by the Financial Accounting Standards Board (the “FASB”) guidance for accounting for leases. 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.
Cost of Revenues
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 direct costs of non-performing leases. Portfolio servicing costs include direct wages, bank service fees and premises costs.
Cash and Cash Equivalents
Investments in highly liquid securities with original maturities of 90 days or less are included in cash and cash equivalents.
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 other state accounted for more than 10% of managed finance receivables. No single customer accounts for more than 10% of either revenues or outstanding receivables.
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 performance of financed receivables and changes in any of the factors discussed above.
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.
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.
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 five year estimated useful lives of the assets.
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.
Stock-based Compensation
The Company accounts for stock-based compensation using the modified prospective application method in accordance with accounting guidance provided by the Financial Accounting Standards Board (the “FASB”). This method provides for the recognition of the fair value with respect to share-based compensation for shares subscribed for or granted on or after January 1, 2006, and all previously granted but unvested awards as of January 1, 2006. The cost is recognized over the period during which an employee is required to provide service in exchange for the options.
Income Taxes
Prior to July 18, 2008, the Company’s financial statements do not include a provision for Income Taxes because the taxable income of Mint is included in the Income Tax Returns of the stockholders under the Internal Revenue Service "S" Corporation elections. As an “S” Corporation the Company was eligible to and did so elect to be taxed on a cash basis under the provisions of the Internal Revenue Service.
Upon completion of the July 18, 2008 transaction with Legacy as more fully described in Note 1 to the audited consolidated financial statements, Mint ceased to be treated as an "S" Corporation for Income Tax purposes, resulting in (1) the imposition of income tax at the corporate level instead of the shareholder level and (2) the inability to continue to elect to be taxed on a cash basis.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company’s significant accounting policies are more fully described in Note 2 to our consolidated financial statements.
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Throughout the 2013 fiscal year, we plan to continue investigating opportunities to support our long-term growth initiatives. We are exploring opportunities to increase the Company’s capital base through institutional or bank funding, the issuance by the Company of additional common or preferred stock and/or the issuance of convertible debt, which may not be available on favorable terms if at all. The Company has also historically engaged various consultants from time to time in an effort to help facilitate the Company’s ability to raise funding. 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, after paying its debt servicing costs. While the cash flow from its current lease portfolio is sufficient to service the Company’s debts and expenses (assuming the continued renewal/extension of its outstanding credit facilities described above), it may not generate sufficient excess cash to allow the Company to enter into enough new leases to generate a profit.
COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2012, COMPARED TO THE YEAR ENDED DECEMBER 31, 2011
For the year ended December 31, 2012, total revenues were $9,973,759, compared to $10,765,300 for the year ended December 31, 2011, a decrease in total revenues of $791,541 or 7% from the prior period. For the year ended December 31, 2012, revenues from sales-type leases, net, decreased $504,169 or 7% to $7,112,800 for the year ended December 31, 2012, from $7,616,969 for the year ended December 31, 2011. Revenues from amortization of unearned income related to sales-type leases decreased $287,372 or 9% to $2,860,959 for the year ended December 31, 2012, from $3,148,331 for the year ended December 31, 2011.
The decrease in revenues from sales-type leases, net, was primarily due to the Company’s inability to obtain new financing during the year ended December 31, 2012. Although the Company was unable to borrow any funds under the Comerica Bank facility (which is currently in default) or the Moody Bank facility (described in greater detail above under “Business” - “Moody Bank Facility” and “Business” - “Comerica Bank Credit Facility”) during 2012, the slightly lower principal payments and lower interest payments gave the Company the ability to deploy cash to purchase additional vehicles. The Company believes that if it had access to additional capital during the year ended December 31, 2012, its revenues would have been even higher.
Cost of Sales-type leases decreased $557,508 or 12% to $3,971,058 for the year ended December 31, 2012, compared to $4,528,566 for the year ended December 31, 2011. Cost of sales-type leases decreased as a result of fewer new leases as well as lower costs incurred purchasing vehicles for the year ended December 31, 2012, compared to the year ended December 31, 2011. The costs of vehicles decreased due to the Company’s ability to negotiate better terms with the car dealers since the Company’s increased emphasis on fleet leases meant that the Company could buy several vehicles at a time rather than a single vehicle. The emphasis on fleet leasing also led to purchases of somewhat less expensive vehicles for the new leases.
Repossession and cancelled lease expense decreased by $1,980,125 or 46% to $2,308,222 for the year ended December 31, 2012, compared to $4,288,347 for the year ended December 31, 2011. This decrease in costs associated with early lease terminations and repossessions of vehicles is the result of a concentrated effort to locate and repossess vehicles in the prior year, which resulted in a decreasing number of early lease terminations in 2012.
Gross profit increased $1,746,092 or 90% to a gross profit of $3,694,479 for the year ended December 31, 2012 compared to a gross profit of $1,948,387 for the year ended December 31, 2011. Gross profit increased as a result of the decrease in cost of revenues discussed above.
Gross profit as a percentage of revenues was 37% for the year ended December 31, 2012 compared to 18% for the year ended December 31, 2011. As stated above, the increases in the gross profit in actual dollars and as a percentage of revenues are primarily attributable to lower costs of acquiring vehicles for lease and to the decrease in costs associated with repossessions and cancelled leases.
General and administrative expenses were $2,350,827 and $1,967,264 for the years ended December 31, 2012 and December 31, 2011, respectively, resulting in an increase of $383,563 or 19% from the prior period. The increase in general and administrative expense was primarily the result of legal, accounting and consulting fees associated with renewals of existing debt facilities and locating potential new funding sources in 2012.
Other expense, consisting primarily of interest expense, offset somewhat by other income, was $1,582,621 and $1,597,407 for the years ended December 31, 2012 and December 31, 2011, respectively. The main reason for the $14,786 or less than 1% decrease was due to lower outstanding debt balances on the bank borrowings in 2012 compared to 2011, offset by higher interest rates charged on the third party notes added in 2012.
There was no income tax expense for either the year ended December 31, 2012 or the year ended December 31, 2011.
The Company had a net loss of $238,969 for the year ended December 31, 2012, compared to a net loss of $1,616,284 for the year ended December 31, 2011, an improvement in net loss of $1,377,316 or 85%. The decrease in net loss during 2012 was the cumulative effect of the decrease in revenues from sales-type leases; the decrease in cost of sales-type leases; a decrease in revenues from the amortization of unearned income; the decrease in cost of revenues associated with repossessions and cancelled leases; an increase in general and administrative expenses; and a decrease in other expense.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $24,067,944 as of December 31, 2012, which included cash of $894,794, investment in sales-type leases, net, of $22,661,504, vehicle inventory of $479,834, property and equipment, net, of $27,183, and other assets of $4,629.
We had total liabilities as of December 31, 2012 of $23,319,626 which included $846,730 of accounts payable and accrued liabilities (including notes discussed above under “Business” - “Third Party Promissory Notes”), $21,161,332 of amounts under our senior credit facilities (described in greater detail above under “Business” - “Moody Bank Facility” and “Business” - “Comerica Bank Credit Facility”) and $1,311,564 of notes payable to related parties as described below.
The Company had notes and advances payable to Jerry Parish, Victor Garcia and an affiliate of $1,311,564 and $898,000 as of December 31, 2012 and December 31, 2011, respectively. These notes and advances payable are non-interest bearing and subordinated to the credit facilities with the banks. 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 $37,830, and $37,616 was recorded as contributed capital for the years ended December 31, 2012 and 2011, respectively.
We generated $2,518,844 in cash from operating activities for the year ended December 31, 2012, which was mainly from collections and reductions of net investment in sales-type leases of $2,513,000 and an increase in accounts payable and accrued expenses of $413,798. Non-cash charges for the period included the change in the bad debt expense, depreciation, and imputed interest which were $159,875, $10,461, and $37,830, respectively, which together had a net negative impact on the cash provided by operating activities. Additionally, debt discount amortization of $20,017 related to the Convertible Note described above under “Business” - “Third Party Notes”, had a positive impact on the cash provided from operating activities. Those items negatively impacting the cash provided by operations for the year ended December 31, 2012 were the net loss of $238,969, and an increase in vehicle inventory of $91,634.
We used $2,566 in investing activities to purchase additional equipment for the year ended December 31, 2012.
We had $1,773,280 of net cash used in financing activities for the year ended December 31, 2012, which was due to $2,656,844 of payments on credit facilities and notes payable and $361,436 of payments on related party notes, offset by $775,000 of shareholder and related party loans, and $470,000 of new financing.
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 or refinance the current credit facilities 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. Additionally, as described above, the Company is currently in default of its Comerica credit facility and is required to pay Comerica an aggregate of approximately $12 million on April 18, 2013, in satisfaction of the Renewal, which funds the Company does not currently have. In the event that we are unable to pay the Settlement Amount when due, Comerica could take further actions against us to enforce its security interest over our assets, seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek an immediate foreclosure of such assets and/or may take other actions which may have a material adverse effect on our operations, assets and financial condition.
We continue to explore 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 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE MINT LEASING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
The Mint Leasing, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of The Mint Leasing, Inc. (the “Company”) as of December 31, 2012 and 2011 and the related statements of operations, stockholders' equity and cash flows for the twelve month periods 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 audit.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Mint Leasing, Inc. as of December 31, 2012 and 2011 and the results of its operations and cash flows for the period described above in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has a significant amount of debt due within the next 12 months. The Company has historically been successful at renegotiating their loans and renewing such loans. If the Company is not successful in obtaining renewals or renegotiating its loans, these matters raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are discussed in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
April 15, 2013
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See accompanying notes to the consolidated financial statements
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See accompanying notes to the consolidated financial statements
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The Mint Leasing, Inc.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2012 and 2011
See accompanying notes to the consolidated financial statements
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The Mint Leasing, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
See accompanying notes to the consolidated financial statements
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NOTE 1 - ORGANIZATION and NATURE OF BUSINESS ACTIVITY
A. Organization
The Mint Leasing, Inc. (“Mint” or the “Company") was incorporated on May 19, 1999, in the State of Texas and commenced operations on that date.
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 Mint Leasing, Inc. (formerly Legacy Communications Corporation) (“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 described herein, 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. 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 and Mint Texas is a wholly-owned subsidiary of Mint Nevada. 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.
Upon completion of the July 18, 2008 transaction with Mint Nevada, Mint Texas ceased to be treated as an "S" Corporation for Income Tax purposes. In accordance with accounting guidance issued by the staff of the Securities and Exchange Commission (the “SEC”), the Company had included in its financial statements all of its undistributed earnings on that date as additional paid in capital. This is to assume constructive distribution to owners followed by a contribution to the capital of the Company.
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 seven other states in the Southeast. Lease transactions are solicited and administered by the Company’s sales force and staff. Mint’s customers are comprised of brand-name automobile dealers that seek to provide leasing options to their customers and individuals, many of whom would otherwise not have the opportunity to acquire a new or late-model-year vehicle.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements of the Company include the accounts of The Mint Leasing, Inc. and all of its subsidiaries. Inter-company accounts and transactions are eliminated in consolidation.
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.
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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 years ended December 31, 2012 and 2011, amortization of unearned income totaled $2,860,959 and $3,148,331, 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.
D. Cost of Revenues
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). Vehicles that are reacquired are typically either re-leased or sold at auction, with the related proceeds recorded in revenue. Total cost of sales was $6,279,280 and $8,816,913 for the years ending December 31, 2012 and 2011, 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 in the accompanying balance sheets. At December 31, 2012 and December 31, 2011, the Company had cash of $894,794 and $151,796, respectively. The Company had no cash equivalents at December 31, 2012 and December 31, 2011.
At December 31, 2012 and December 31, 2011, the Company had no deposits that exceeded FDIC insurance coverage limits.
F. 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, California and Florida. No other state accounted for more than 10% of managed finance receivables.
G. Allowance for Loan Losses
Provisions for losses on investments in sales-type leases are charged to cost of revenues 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 performance of financed receivables and changes in any of the factors discussed above. The Company recorded an allowance for doubtful accounts of $305,000 and $465,000 at December 31, 2012 and 2011, respectively.
H. 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.
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I. 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.
J. 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 five year estimated useful lives of the assets.
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.
K. Stock-based Compensation
The Company accounts for stock-based compensation using the modified prospective application method in accordance with accounting guidance issued by the FASB. This method provides for the recognition of the fair value with respect to share-based compensation for shares subscribed for or granted on or after January 1, 2006, and all previously granted but unvested awards as of January 1, 2006. The cost is recognized over the period during which an employee is required to provide service in exchange for the options.
L. Advertising
Advertising costs are charged to operations when incurred. Advertising costs for the years ended December 30, 2012 and 2011 totaled $8,749 and $2,087, respectively.
M. Income Taxes
Upon completion of the July 18, 2008 transaction with Mint Nevada as more fully described in Note 1, Mint Texas ceased to be treated as an "S" Corporation for Income Tax purposes, resulting in (1) the imposition of income tax at the corporate level instead of the shareholder level and (2) the inability to continue to elect to be taxed on a cash basis.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We adopted the provisions of the FASB’s guidance related to accounting for uncertainty as to income tax positions on January 1, 2008. As of December 31, 2012 and December 31, 2011, we had no liabilities included on the consolidated balance sheets associated with uncertain tax positions. 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.
N. 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 December 31, 2012 and 2011, there was no difference between basic and diluted earnings (loss) per share.
O. Preferred Stock Rights and Privileges
We have a total of 20,000,000 shares of preferred stock (the “Preferred Stock”) authorized. The rights and privileges of the Preferred Stock are detailed as follows:
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Series A Convertible Preferred Stock
As of December 31, 2012 and December 31, 2011, we had 185,000 shares of Series A Convertible Preferred Stock designated and 0 shares issued and outstanding.
The Company’s Series A Convertible Preferred Stock shares (the “Series A Stock”) allow the holder to vote a number of voting shares equal to two hundred shares for each share of Series A Stock held by such Series A Stock shareholder. The Series A Stock has a liquidation preference over the shares of common stock issued and outstanding equal to the stated value of such shares, $1.00 per share multiplied by 12.5%. The Series A Stock is convertible at the option of the holder into 200 shares of common stock for each share of Series A Stock issued and outstanding, provided that no conversion shall be allowed if the holder of such Series A Stock would own more than 4.99% of the Company’s common stock upon conversion.
No amendment to the Company’s Series A Stock shall be made while such Series A Stock is issued and outstanding to amend, alter or repeal the Articles of Incorporation or Bylaws of the Company to adversely affect the rights of the Series A Stock holders; authorize or issue any additional shares of preferred stock; or effect any reclassification of the Series A Stock unless the holders of a majority of the outstanding Series A Stock vote to approve such modification or amendment.
Series B Convertible Preferred Stock
As of December 31, 2012 and December 31, 2011, we had 2,000,000 shares of Series B Convertible Preferred Stock designated, authorized, issued and outstanding. The Series B Convertible Preferred Stock is non-redeemable and the dividend is non-cumulative.
Each share of Series B Convertible Preferred Stock shall be convertible into shares of common stock of the Company, par value $0.001 per share. Each share of Preferred Stock shall be convertible into fully paid and non-assessable shares of Common Stock at the rate of 10 shares of Common Stock for each full share of Preferred Stock.
The holder of Series B Convertible Preferred Stock has the number of votes equal to the number of votes of all outstanding shares of capital stock plus one additional vote such that the holders of a majority of the outstanding shares of Series B Preferred Stock shall always constitute a majority of the voting rights for the Company.
Upon liquidation, dissolution or winding up of the Company, holders of Series B Convertible Preferred Stock shall have liquidation preference over all of the Company’s Preferred and Common Stock as to asset distribution.
P. Fair Value of Financial Instruments
On January 1, 2008, the Company adopted a new standard related to the accounting for financial assets and financial liabilities and items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. This standard provides a single definition of fair value and a common framework for measuring fair value as well as new disclosure requirements for fair value measurements used in financial statements. Fair value measurements are based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, and are determined by either the principal market or the most advantageous market. The principal market is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure fair value, the Company would use the most advantageous market, which is the market that the Company would receive the highest selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when using the most advantageous market, transaction costs are only considered to determine which market is the most advantageous and these costs are then excluded when applying a fair value measurement. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.
On January 1, 2009, the Company adopted an accounting standard for applying fair value measurements to certain assets, liabilities and transactions that are periodically measured at fair value. The adoption did not have a material effect on the Company’s financial position, results of operations or cash flows.
In August 2009, the FASB issued an amendment to the accounting standards related to the measurement of liabilities that are routinely recognized or disclosed at fair value. This standard clarifies how a company should measure the fair value of liabilities, and that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This standard became effective for the Company on October 1, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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The fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3:
Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Q. Effect of New Accounting Pronouncements
In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income” in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company is currently evaluating the impact, if any, that the adoption of this pronouncement may have on its results of operations or financial position.
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R. Reclassification
Certain amounts reported in the prior period financial statements may have been reclassified to the current period presentation.
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 2014. Following is a summary of the components of the Company’s net investment in sales-type leases at December 31, 2012 and 2011:
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Cost and accumulated depreciation of equipment and leasehold improvements as of December 31, 2012 and December 31, 2011 are as follows:
Depreciation expense charged to operations was $10,461 and $27,019 for the years ended December 31, 2012 and 2011, respectively.
NOTE 5- 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 required 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 extended the maturity date of the facility to March 1, 2011, reduced the amount available under the facility to $2,500,000, fixed the interest rate on the facility at 6.5%, and provided for 11 monthly payments of principal and interest of $37,817, with the remaining balance due at maturity. Effective February 28, 2011, the Company executed a Third Renewal, Extension and Modification of the Revolver (the "Third Renewal"). Under the terms of the Third Renewal, the maturity date of the Revolver was extended to March 1, 2012, the amount available remains at $2,500,000, the interest rate was increased and fixed at 6.75%, and the Third Renewal provides for 11 monthly payments of principal and interest of $45,060, with the remaining balance due at maturity on March 1, 2012. On March 29, 2012 and effective March 1, 2012, Moody Bank agreed to enter into a Fourth Renewal, Extension and Modification Agreement (the “Fourth Renewal”), pursuant to which Moody Bank agreed to extend the due date of the Revolver to March 1, 2013 (which credit facility has since been further extended as discussed in Note 13) and we agreed to pay monthly payments of principal and interest due under the Revolver of $57,500 per month until maturity. The amount outstanding under the Revolver at the time of the parties’ entry into the Fourth Renewal was $1,822,767.
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At December 31, 2012, the outstanding balance on the Revolver was $1,385,885. Additionally, at December 31, 2012, we were not in compliance with certain of the covenants required by the Revolver.
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 (now Comerica Bank “Comerica Bank”) that matured on October 2, 2009. On or around October 27, 2009, the Company entered into a Modification, Renewal and Extension Agreement and an Amended and Restated Loan Agreement in connection with its $33,000,000 line of credit facility with Comerica Bank (collectively the “Renewal”). On or around July 30, 2010, we entered into a Modification Agreement with Comerica Bank to modify and amend the Renewal. On December 14, 2010, and effective November 10, 2010, we entered into an additional Modification Agreement with Comerica Bank to modify and amend the Renewal (the “Modification”). On April 13, 2011, and effective as of March 10, 2011, the Company entered into an additional Modification Agreement with Comerica Bank (the "March 2011 Modification").
The Modification and March 2011 Modification also modified and amended our required borrowing base and minimum net worth requirements under the Renewal, which factor into whether we are in compliance with the terms and conditions of and/or in default of the terms of the Renewal.
The outstanding amount of the Renewal at the time of the parties’ entry into the Modification was $23,704,253, and the Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $110,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning December 10, 2010 and continuing until February 10, 2011 (we had previously been making monthly installment payments of $110,000 beginning in July 2010), with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on March 10, 2011 (previously the full amount of the Renewal as modified by the first Modification Agreement, was due and payable on November 10, 2010).
The outstanding amount of the Renewal at the time of the parties' entry into the March 2011 Modification was $22,648,222, and the March 2011 Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $160,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning April 10, 2011 and continuing until August 10, 2011, with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on September 10, 2011. Additionally, each month, we are required to pay Comerica Bank, in addition to the monthly payments, a prepayment of principal equal to the amount of all proceeds from the sale of our vehicles which have not already been paid to Comerica Bank as a result of the monthly payment.
On October 27, 2011 and effective September 10, 2011, the Company entered into an additional Modification Agreement with Comerica Bank (the “September 2011 Modification”), to modify and amend the Renewal.
The September 2011 Modification, similar to the Modification and March 2011 Modification modified and amended our required borrowing base and minimum net worth requirements under the Renewal, which factor into whether we are in compliance with the terms and conditions of and/or in default of the terms of the Renewal.
The outstanding amount of the Renewal on the effective date of the September 2011 Modification was $21,846,701, and the September 2011 Modification amended the Renewal to reflect such current balance outstanding, and to provide that such outstanding balance would be repaid in monthly installments of $260,000 of principal, plus accrued interest, due on the tenth (10th) of each month beginning October 10, 2011 and continuing until March 10, 2012, with a balloon payment of the remaining amount of the outstanding principal and interest due on such Renewal payable on March 10, 2012, which credit facility has since been extended as described below. Additionally, each month, we are required to pay Comerica Bank, in addition to the monthly payments, a prepayment of principal equal to the amount of all proceeds from the sale of our vehicles which have not already been paid to Comerica Bank as a result of the monthly payment.
The September 2011 Modification did not otherwise materially amend or modify the terms of the Renewal, which evidences a Secured Note Payable (the "Note Payable"); except that it increased the interest rate of the Note Payable to the prime rate plus 2.5%, compared to the prime rate plus 2% (as was previously provided under the terms of the Note Payable), in each case subject to a floor of 6%.
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Comerica Bank also agreed pursuant to the terms of the September 2011 Modification that we could prepay and satisfy the entire outstanding amount of the Note Payable if we are able to pay Comerica Bank an aggregate of $17,500,000 by December 31, 2011 (the “Pre-Payment Right”), which we were unable to accomplish.
On March 30, 2012, and with an effective date of March 10, 2012, Comerica Bank agreed to extend the due date of the Renewal until June 10, 2012 and to forbear from enforcing certain covenants of the Renewal and we agreed to increase the amount of interest payable under the Renewal to the prime rate plus 3.5%, subject to a floor of 6%, which rate is currently 6.75% per annum, increase the monthly payments due under the Renewal to $275,000 per month, and pay fees associated with the extension totaling $210,000 (the “March 2012 Extension”). The outstanding balance on the Note Payable as of the effective date of the March 2012 Extension was $20,372,657.
In July 2012, Comerica agreed to further extend the maturity date of the Renewal, provided that the Company did not formally enter into any extension or renewal agreements with Comerica.
At December 31, 2012, the outstanding balance on the Note Payable was $19,063,447. Under the terms of the renewals of the Note Payable, the Company has been and will continue to be unable to borrow any new funds under the credit facilities during 2013 or subsequent years.
Our credit facility with Comerica Bank 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 sole director 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 Comerica Bank. Additionally, at December 31, 2012, we were not in compliance with the tangible net worth (required to be $6.75 million and was $2.1 million at December 31, 2012) and debt to tangible net worth (required to be 4:1 and was approximately 10.27:1 at December 31, 2012) covenants required by the Renewal. We were also not in compliance with the Comerica Bank covenants as of December 31, 2011.
On April 8, 2013, we and Comerica entered into a Settlement, Release, Indemnity and Limited Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, we agreed that the Renewal was in default and Comerica agreed to forbear from taking any action against us to enforce the default until the earlier of 4 p.m. on April 18, 2013, or the date that a default occurred under the Renewal other than in connection with our failure to repay such Renewal. We also agreed to pay $500,000 towards the balance of the Renewal on April 5, 2013, which funds have been paid to date and to pay a discounted settlement payment in full satisfaction of the Renewal in the amount of $12 million on April 18, 2013, along with legal fees of Comerica’s counsel (the “Settlement Amount”). We also agreed to release Comerica from and to indemnify Comerica against certain claims and causes of action.
Over the past approximately ninety days, we have been in discussions with various parties and have entered into various term sheets regarding potential funding transactions in order to enable us to raise funds sufficient to pay the discounted Settlement Amount that Comerica has agreed to accept in satisfaction of the Renewal. To date, we have not entered into any definitive agreements associated with such potential funding transactions and do not have sufficient funding to pay the Settlement Amount when due on April 18, 2013. In the event that we are unable to pay the Settlement Amount when due, Comerica could take further actions against us to enforce its security interest over our assets, seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek an immediate foreclosure of such assets and/or may take other actions which have a material adverse effect on our operations, assets and financial condition.
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On March 1, 2011, the Company entered into a Promissory Note with a third party in the amount of $100,000, which accrues interest at the rate of 12% per annum payable monthly, and was due on March 1, 2012. The Promissory Note was secured by the personal guaranty of Jerry Parish. This note was paid off on March 26, 2011, with the proceeds of a new Promissory Note as described below.
On March 26, 2011, the Company paid off the $100,000 Promissory Note and entered into a new Promissory Note with the same third party in the amount of $142,000, with a maturity date of March 26, 2012. The Promissory Note accrues interest at the rate of 12% per annum payable monthly. On December 6, 2011, the Company renegotiated the maturity date on $100,000 of the Promissory Note, and extended the maturity of that portion of the Promissory Note to December 6, 2012. The Promissory Note is secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 and 2011 was $142,000. The note has been extended until December 6, 2013.
In August 2011, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”), pursuant to which the Company sold Asher a convertible note in the amount of $68,000, bearing interest at the rate of 8% per annum (the “Convertible Note”) which Convertible Note was amended in October 2011, to be effective as of August 2011. The Convertible Note provided Asher the right to convert the outstanding balance (including accrued and unpaid interest) of such Convertible Note into shares of the Company’s common stock at a conversion price equal to the greater of (a) 61% of the average of the five lowest trading prices of the Company’s common stock during the ten trading days prior to such conversion date; and (b) $0.00009 per share. The Convertible Note, which accrued interest at the rate of 8% per annum, was payable, along with interest thereon on May 7, 2012, but was repaid in March 2012. The note’s convertible feature was valued and resulted in a debt discount of $43,475, which was fully amortized at the time of payment.
Asher converted $10,000 of the amount owed under the Convertible Note into 190,476 shares of the Company’s common stock ($0.0525 per share) in February 2012. In March 2012, the Company prepaid the entire remaining balance due under the Convertible Note for an aggregate of $90,003 including penalty and interest.
On November 28, 2011, the Company entered into a Promissory Note with another third party in the amount of $100,000, which accrues interest at the rate of 12% per annum payable monthly, and was due on December 28, 2012. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 and 2011 was $100,000. The note has been extended until December 28, 2013.
In March 2012, the Company entered into a Promissory Note with another third party in the amount of $220,000, which accrues interest at the rate of 12% per annum payable monthly, and was due in March, 2013. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 was $220,000. The note has been extended until March, 2014.
In May 2012, the Company entered into a Promissory Note with the same third party in the amount of $250,000, which accrues interest at the rate of 12% per annum payable monthly, and will be due in May, 2013. The Promissory Note was secured by the personal guaranty of Jerry Parish. The outstanding balance at December 31, 2012 was $250,000.
The following table summarizes the credit facilities, promissory notes, and convertible note discussed above for the period ended December 31, 2012 and December 31, 2011:
As described above, the Company is currently in default of its Comerica credit facility and is required to pay Comerica an aggregate of approximately $12 million on April 18, 2013, in satisfaction of the Renewal, which funds the Company does not currently have. In the event that we are unable to pay the Settlement Amount when due, Comerica could take further actions against us to enforce its security interest over our assets, seek repayment of the full amount due under the facility (and not just the Settlement Amount), seek an immediate foreclosure of such assets and/or may take other actions which may have a material adverse effect on our operations, assets and financial condition.
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NOTE 6- 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, the 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 December 31, 2012 and 2011 are set forth below:
(a)
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. This valuation is a type 3 indicator.
NOTE 7 -RELATED PARTY TRANSACTIONS
During 2012 and 2011 Mr. Parish received cash compensation of $315,000. Mr. Parish has agreed to forgo any additional cash compensation he would be entitled to under his employment agreement for 2012 and 2011. The Company leased office space from a partnership, which is owned by the Company’s two majority shareholders, pursuant to a lease which expired on August 31, 2008, at the rate of $10,000 per month. The lease was subsequently renewed to July 31, 2011 and again until July 31, 2012 and 2013, which included an adjacent property at the rate of $20,000 per month. In conjunction with the Company's cost reduction efforts the monthly rental payment was reduced to $15,000 per month during the latter part of 2010 and all of 2011 and 2012. We believe these rental rates are consistent with rental rates for similar properties in the Houston, Texas real estate market. Rent expense under the lease amounted to $180,000 and $180,000 for the years ended December 31, 2012 and 2011, respectively.
The Company has notes payable to Jerry Parish, Victor Garcia, and a partnership which 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 December 31, 2012 and December 31, 2011 were $1,311,564 and $898,000, respectively. These notes payable are non-interest bearing and due upon demand. The Company imputed interest on these notes payable at a rate of 8.75% per year. Interest expense of $37,830, and $37,616 was recorded as contributed capital for the years ended December 31, 2012 and 2011, respectively. Additional interest expense of $33,649 and $16,556 for the years ended December 31, 2012 and 2011, respectively, was recorded as a current payable.
F - 16
NOTE 8- 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 lessees 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 damages. 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 9 - GOING CONCERN & ONGOING RELATIONSHIPS WITH FINANCIAL INSTITUTIONS
Management has had a long standing relationship with the financial institutions that are currently providing its credit facilities. The Company has a history of successfully working with its lenders in negotiating previous modifications and extensions, and believes that it will continue to be able to do so in the future. Such extensions or modifications are critical to the Company’s ability to meet its financial obligations and execute its business plan. Currently the majority of the amounts due to the Company's lenders are due within the next 12 months and this amount exceeds the current and readily available assets available to satisfy these obligations. Accordingly, the financial statements do not include any adjustments related to the recoverability of assets and classification of liabilities should the Company not be able to continue to modify or extend its credit facilities. See Note 5 for further details. Please see Note 13 for subsequent events affecting our relationships with financial institutions.
NOTE 10 - FINANCING RECEIVABLES
The Company’s net investment in sales-type leases is subject to the disclosure requirements of ASC 310 “Receivables”. Due to similar risk characteristics of its individual sales-type leases, the Company views its net investment in leases as its one class of financing receivable.
The Company monitors the credit quality of each customer on a frequent basis through collections and aging analyses. The Company also holds meetings monthly in order to identify credit concerns and determine whether a change in credit quality classification is required for the customer. A customer may improve in their credit quality classification once a substantial payment is made on overdue balances or the customer has agreed to a payment plan with the Company and payments have commenced in accordance with the payment plan. The change in credit quality indicator is dependent upon management approval.
The Company classifies its customers into three categories to indicate their credit quality internally:
Current - Lessee continues to be in good standing with the Company as the client’s payments and reporting are up-to-date. Typically payments are outstanding between 0-30 days.
Performing - Lessee has begun to demonstrate a delay in payments with little or no communication with the Company. All future activity with this customer must be reviewed and approved by management. These leases are considered to be in better condition than those leases in the “Poor” category, but not in as good of condition as those leases in the “Current” category. Typically payments are outstanding between 31-60 days.
Poor - Lessee is delinquent, non-responsive or not negotiating in good faith with the Company. Once a Lessee is classified as “Poor”, the lease is evaluated for collectability and is potentially impaired. Typically payments are outstanding 61 days or more.
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The following table discloses the recorded investment in financing receivables by credit quality indicator as at December 31, 2012 (in thousands):
While recognition of penalties and interest income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectability issues are resolved and the customer has returned to being in current standing, the Company will resume recognition of penalty and interest income.
The Company’s net investment leases on nonaccrual status as of December 31, 2012, are as follows (in thousands):
The Company considers financing receivables with aging between 60-89 days as indications of lessees with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the lessee regarding payment status. Once a lessee’s aging exceeds 90 days, the Company’s policy is to review and assess collectability on lessee’s past due account. Over 90 days past due is used by the Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for dispute resolution or for the provision of further information or supporting documentation to the customer.
The Company’s aged financing receivables as of December 31, 2012 are as follows (in thousands):
The Company recorded investment in past due financing receivables for which the Company continues to accrue penalties and interest income is as follows as of December 31, 2012 (in thousands):
Activity in our reserves for credit losses for the year ended December 31, 2012 is as follows (in thousands):
F - 18
Our reserve for credit losses and minimum lease payments associated with our investment in sales- type lease balances disaggregated on the basis of our impairment method were as follows as of December 31, 2012 (in thousands):
The following table discloses the recorded investment in financing receivables by credit quality indicator as of December 31, 2011 (in thousands):
While recognition of penalties and interest income is suspended, payments received by a customer are applied against the outstanding balance owed. If payments are sufficient to cover any unreserved receivables, a recovery of provision taken on the billed amount, if applicable, is recorded to the extent of the residual cash received. Once the collectability issues are resolved and the customer has returned to being in current standing, the Company will resume recognition of penalty and interest income.
The Company’s net investment leases on nonaccrual status as of December 31, 2011 are as follows (in thousands):
The Company considers financing receivables with aging between 60-89 days as indications of lessees with potential collection concerns. The Company will begin to focus its review on these financing receivables and increase its discussions internally and with the lessee regarding payment status. Once a lessee’s aging exceeds 90 days, the Company’s policy is to review and assess collectability on lessee’s past due account. Over 90 days past due is used by the Company as an indicator of potential impairment as invoices up to 90 days outstanding could be considered reasonable due to the time required for dispute resolution or for the provision of further information or supporting documentation to the customer.
The Company’s aged financing receivables as of December 31, 2011 are as follows (in thousands):
F - 19
The Company recorded investment in past due financing receivables for which the Company continues to accrue penalties and interest income is as follows as of December 31, 2011 (in thousands):
Activity in our reserves for credit losses for the year ended December 31, 2011 is as follows (in thousands):
Our reserve for credit losses and minimum lease payments associated with our investment in sales- type lease balances disaggregated on the basis of our impairment method were as follows as of December 31, 2011 (in thousands):
NOTE 11 - DEFERRED INCOME TAX
The Company uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted.
On January 1, 2007, the Company adopted an accounting standard which clarifies the accounting for uncertainty in income taxes recognized in financial statements. This standard provides guidance on recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that a company has taken or expects to take on a tax return.
During both 2012 and 2011, the Company incurred a net loss and therefore had no tax liability. The Company does not have any material uncertain income tax positions. As a result, the net deferred tax asset generated by the loss carry forward has been fully reserved. The cumulative net operating loss carry forward is approximately $7,100,000 and $6,900,000 at December 31, 2012 and 2011, respectively, and will expire in the years 2021 through 2031.
F - 20
NOTE 12 -OPTIONS AND WARRANTS
In July 2008, the Company granted options to purchase 2,000,000 common shares of stock to a selling stockholder of Mint Texas, who was elected director, President and CEO of Mint Nevada. The exercise price of the options is $3.00 per share and such options expire ten years after the grant date. One third of the options may be exercised respectively on the first, second and third anniversary of the grant date. The Company recorded the transaction as part of its recapitalization.
In July 2008, the Company also granted warrants to purchase 2,100,000 common shares at prices of $0.10, $0.50, $1.00, $1.50 and $2.00 per share to two consultants in connection with consulting agreements executed with Mint Texas as of June 1, 2007 and assumed by Mint Nevada on the closing date. The Company recorded the transaction as part of its recapitalization. The warrants to purchase 2,100,000 shares were cancelled by the holders on September 30, 2009 as discussed below. In December 2008, the Company granted options to purchase 100,000 common shares of stock at an exercise price of $1.01 per share, to a consultant for services and recorded compensation cost of $57,644.
On or around July 17, 2009, we entered into a letter agreement (the “Letter Agreement”) to confirm certain terms of our Engagement Agreement with a placement agent. Pursuant to the Letter Agreement, the agent agreed to waive any rights to any consideration pursuant to the Engagement Agreement in connection with funding by certain financial institutions in consideration for the grant by us of warrants to purchase 300,000 shares of our common stock at an exercise price of $0.50 per share, which warrants have a term of 5 years, include a cashless exercise provision and piggy-back registration rights, which warrants were subsequently granted. The Company recorded $12,600 of consulting expense in the third quarter of 2009 and a similar amount of additional paid-in-capital. The $12,600 of consulting expense was calculated as the fair market value of the warrants using the Black-Scholes option-pricing model. The significant variables used in the calculation were; stock price of $0.17/share; $0.50/share exercise price of warrant; volatility of 88%; time to expiration of 1,750 days; and risk free interest rate of 2.31%.
On September 30, 2009, the Company and Mr. Parish and Victor Garcia, a then director of the Company, entered into a Mutual Release and Termination Agreement with third parties who were the holders of 8,278,872 shares of the Company’s common stock and warrants to purchase an additional 2,100,000 common shares at prices ranging from $0.10 to $2.00 per share. Messers. Parish and Garcia paid $250,000 in cash and Mr. Parish delivered 125,000 shares of Arrayit Corporation to the third parties for the 8,278,872 shares of the Company’s common stock, of which 4,239,436 shares were issued to Mr. Parish and 4,239,436 shares were issued to Mr. Garcia. The third parties also agreed to cancel the warrants to purchase the 2,100,000 shares of the Company’s common stock.
A summary of activity under the Employee Stock Plans for the years ended December 31, 2012 and 2011 is presented below:
The following table summarizes information about outstanding warrants at December 31, 2012 and 2011:
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NOTE 13 - SUBSEQUENT EVENTS
On March 26, 2013 and effective March 1, 2013, Moody Bank agreed to enter into a Fifth Renewal, Extension and Modification Agreement (the “Fifth Renewal”), pursuant to which Moody Bank agreed to extend the due date of the Revolver to March 1, 2014 and we agreed to increase the interest rate of the Revolver to 6.75% per annum and to pay monthly payments of principal and interest under the Revolver of $62,500 per month (beginning April 1, 2013) until maturity. The amount outstanding on the Revolver as of the parties’ entry into the Fifth Renewal was $1,290,463.
On April 8, 2013, we and Comerica entered into a Settlement, Release, Indemnity and Limited Forbearance Agreement (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, we agreed that the Renewal was in default and Comerica agreed to forbear from taking any action against us to enforce the default until the earlier of 4 p.m. on April 18, 2013, or the date that a default occurred under the Renewal other than in connection with our failure to repay such Renewal. We also agreed to pay $500,000 towards the balance of the Renewal on April 5, 2013, which funds have been paid to date and to pay a discounted settlement payment in full satisfaction of the Renewal in the amount of $12 million on April 18, 2013, along with legal fees of Comerica’s counsel (the “Settlement Amount”). We also agreed to release Comerica from and to indemnify Comerica against certain claims and causes of action.
Effective March 2013, 2,000,000 shares of the Company’s common stock were cancelled.
No other subsequent event 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 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that
(i)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions;
(ii)
provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements;
(iii)
provide reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and
(iv)
provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. This assessment is based on the criteria for effective internal control described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As of the date of our assessment we concluded our internal controls over financial reporting were ineffective due to discovery of material weaknesses.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of management’s evaluation of our internal control over financial reporting, management identified the following two material weaknesses in our internal control over financial reporting:
·
Inadequate and ineffective controls over the period-end financial reporting close process - The controls were not adequately designed or operating effectively to provide reasonable assurance that the financial statements could be prepared in accordance with GAAP. Specifically, we did not have sufficient personnel with an appropriate level of technical accounting knowledge, experience and training to adequately review manual journal entries recorded, ensure timely preparation and review of period-end account analyses and the timely disposition of any required adjustment, review of our customer contracts to determine revenue recognition in the proper period, and ensure effective communication between operating and financial personnel regarding the occurrence of new transactions; and
·
Adequacy of accounting systems at meeting Company needs - The accounting system in place at the time of the assessment lacks the ability to provide high quality financial statements from within the system, and there were no procedures in place or built into the system to ensure that all relevant information is secure, identified, captured, processed, and reported within the accounting system. Failure to have an adequate accounting system with procedures to ensure the information is secure and accurately recorded and reported amounts to a material weakness to the Company’s internal controls over its financial reporting processes.
In light of the foregoing, management plans to develop the following additional procedures to help address these material weaknesses:
·
We will create and refine a structure in which critical accounting policies and estimates are identified, and together with other complex areas, are subject to multiple reviews by qualified consultants. We believe these actions will remediate the material weaknesses by focusing additional attention on our internal accounting functions. However, the material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
·
We will hire a permanent Chief Financial Officer to oversee financial reporting specifically in lease accounting and financial reporting.
·
We will continue to work with the experienced third party accounting firm in the preparation and analysis of our interim and financial reporting to ensure compliance with generally accepted accounting principles and to ensure corporate compliance.
·
We will upgrade our existing accounting information system to one that is tailored for lease accounting to better meet the Company’s needs.
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 our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following sets forth information regarding our sole officer and director (as used below, references to our Board of Directors, currently refer only to our sole director, Jerry Parish) as of the date of this filing:
Name
Position
Year of Appointment
Jerry Parish
Chief Executive Officer, President,
Chief Financial Officer, Secretary and sole Director
Jerry Parish, Age 65
Jerry Parish, founder of The Mint Leasing, Inc., currently serves as the Chief Executive Officer, Chief Financial Officer, President, Secretary and sole director of the Company. Mr. Parish is an accomplished businessman, manager and salesman having spent his entire professional career in the automobile industry. Mr. Parish has served as both the Sales Manager and General Manager of several franchise dealerships in Texas, including Austin-Hemphill, Red McComb Automotive, Westway Ford and the Davis Chevrolet Organization. In recognition of Mr. Parish’s dedicated service to Red McComb Automotive, he received a number of awards including Salesman of the Year (in addition to his numerous “Salesman of the Month” awards). Mr. Parish, a native of Houston, Texas, began his career with military service in the United States Navy.
Director Qualifications:
Mr. Parish has significant knowledge of the Company’s history, strategies, technologies and culture. Having led the Company as Chief Executive Officer and a director since 1999, Mr. Parish has been the driving force behind the strategies and operational guidance that have generated more than a decade of operating history. His leadership of diverse business units and functions before becoming Chief Executive Officer gives Mr. Parish profound insight into the product development, marketing, finance, and operations aspects affecting the Company.
Our sole officer and any officers we appoint in the future will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. Our officers and directors may receive compensation as determined by us from time to time by vote of the Board of Directors. Such compensation might be in the form of stock options. Directors may be reimbursed by the Company for expenses incurred in attending meetings of the Board of Directors. Vacancies in the Board are filled by majority vote of the remaining directors.
Involvement in Certain Legal Proceedings
Our sole director has not been involved in any of the following events during the past ten years:
1.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3.
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
4.
being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Board of Directors Meetings
The Company had zero formal meetings of the Board of Directors of the Company during the last fiscal year ending December 31, 2012 and instead took all actions via written consent of the sole director.
Independence of Directors
We are not required to have independent members of our Board of Directors, and do not anticipate having independent directors until such time as we are required to do so.
Committees of the Board
Our Company currently does not have nominating, compensation or audit committees or committees performing similar functions, nor does our Company have a written nominating, compensation or audit committee charter. Our directors believe that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by our sole director.
Our Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The sole director believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The sole director will assess all candidates, whether submitted by management (i.e., our sole officer and director) or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our Board of Directors may do so by directing a written request addressed to our President and director, at the address appearing on the first page of this report.
CORPORATE GOVERNANCE
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. On July 18, 2008, the Board of Directors of the Company adopted a Code of Ethics for the Company’s senior officers (currently consisting solely of Mr. Parish). Mr. Parish, as the sole director, believes that these individuals must set an exemplary standard of conduct, particularly in the areas of accounting, internal accounting control, auditing and finance. This code sets forth ethical standards to which the designated officers must adhere and other aspects of accounting, auditing and financial compliance.
In lieu of an Audit Committee, the Company’s sole director is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The sole director reviews the Company's internal accounting controls, practices and policies.
Risk Oversight
Effective risk oversight is an important priority of the sole director. Because risks are considered in virtually every business decision, the sole director discusses risk throughout the year generally or in connection with specific proposed actions. The sole director’s approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The sole director exercises direct oversight of strategic risks to the Company.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act.
Based solely on the reports received by us and on the representations of the reporting persons, we believe that all required directors, officers and greater than ten percent shareholders complied with applicable filing requirements during the fiscal year ended December 31, 2012, except that:
(a)
Victor Garcia, a former director of the Company and a greater than ten percent shareholder of the Company inadvertently did not timely file a Form 4 filing relating to the sale by Mr. Garcia of 12,000 shares of common stock on July 13, 2011, 600 shares of common stock on July 22, 2011, 500 shares of common stock on August 17, 2011, and 2,500 shares of the Company’s common stock on February 22, 2012, which Form 4 was subsequently filed on March 26, 2012.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation information with respect to our Chief Executive Officer and our Chief Financial Officer, who was our only executive officer during the years presented below.
*
Does not include perquisites and other personal benefits in amounts less than 10% of the total annual salary and other compensation. No executive officer earned any non-equity incentive plan compensation or nonqualified deferred compensation during the periods reported above.
(1)
Mr. Parish has served as the Company’s Chief Executive Officer and President since July 18, 2008.
Our compensation and benefits programs are administered by our Board of Directors and are intended to retain and motivate individuals with the necessary experience to accomplish our overall business objectives within the limits of our available resources. Consequently, the guiding principles of our compensation programs are:
·
simplicity, clarity, and fairness to both the employee and the Company;
·
preservation of Company resources, including available cash; and
·
opportunity to receive fair compensation if the Company is successful.
Each element of our compensation program contributes to these overall goals in a different way.
·
Base Salary and Benefits are designed to provide a minimum threshold to attract and retain employees identified as necessary for our success.
·
Cash Bonuses and equity awards are designed to provide supplemental compensation when the Company achieves financial or operational goals within the limits of our available resources.
All compensation payable to the Chief Executive Officer and the other named executive officers is reviewed annually by the Board of Directors and changes or awards are approved by the Board of Directors.
Board Compensation
Mr. Parish was the sole director of the Company during the year ended December 31, 2012. Mr. Parish’s compensation is included in the table above. Mr. Parish did not receive any consideration separate from the compensation provided to him as an officer of the Company, as provided above, for serving as a director of the Company during the year ended December 31, 2012.
The following table sets forth certain information concerning unexercised stock options for each named executive officer.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
(1) In July 2008, the Company granted stock options to purchase 2,000,000 shares of common stock to Mr. Parish, in connection with the assumption of his employment agreement with Mint Texas. The exercise price of the options is $3.00 and the options expire ten years after the grant date.
Employment Agreement:
On July 18, 2008, the Company assumed a three year employment agreement between Mint Texas and Mr. Parish, originally effective as of July 10, 2008. The employment agreement provides for a salary $675,000 per annum and a bonus payable quarterly equal to 2% of the Company’s “modified EBITDA” (as defined in the employment agreement), as well as a discretionary bonus payable at the option of the Company’s Board of Directors (currently consisting solely of Mr. Parish). Upon the termination of the employment agreement for cause by the Company (as defined therein) or by Mr. Parish, without cause, Mr. Parish will receive only the benefits and compensation he has earned as of the termination date of the agreement. Upon termination of the agreement by Mr. Parish for good cause (as defined therein) disability, or death, Mr. Parish is due his compensation for the remainder of the current calendar month, and for 12 months thereafter (or such shorter period as the agreement is in effect) and his pro-rated bonus. In the event Mr. Parish’s employment is terminated and compensation is due to Mr. Parish as provided above, he will be paid compensation based on his current salary level regardless of the total provided for in the employment agreement (e.g., as described below, Mr. Parish currently accepts a lower yearly salary from the Company than provided for in his employment agreement). During 2012, 2011 and 2010, Mr. Parish received cash compensation of $315,000, $315,000 and $379,995, respectively. Mr. Parish has agreed to forgo any additional cash compensation he would be entitled to under his employment agreement for 2012, 2011 and 2010.
Mr. Parish also receives five weeks of vacation per year pursuant to the employment agreement, of which up to four weeks of vacation time shall roll over to the following year if not used. Mr. Parish may also exchange up to one week’s vacation time per year in exchange for an additional one week’s salary from the Company. The amount of salary Mr. Parish has the right to receive each year in exchange for one week’s vacation time is based on his then current salary level regardless of the total provided for in the employment agreement (e.g., as described above, Mr. Parish currently accepts a lower yearly salary from the Company than provided for in his employment agreement).
In July 2008, the Company granted stock options to purchase 2,000,000 shares of common stock to Mr. Parish, in connection with the assumption of his employment agreement with Mint Texas. The exercise price of the options is $3.00 and the options expire ten years after the grant date. One third of the options may be exercised respectively on the first, second and third anniversary of the grant date (July 18, 2008).
On August 17, 2011, the Company and Mr. Parish entered into a three-year extension of the employment agreement. None of the other terms or conditions of the employment agreement were modified by the extension.
On August 9, 2012, and effective July 10, 2012, the Company entered into a Second Amendment to employment agreement (the “Second Amendment”) with Mr. Parish, which amended Mr. Parish’s employment agreement with the Company. The Second Amendment extended the employment agreement for five (5) years from July 10, 2012, such that the employment agreement now expires on July 10, 2017; provided for Mr. Parish’s compensation to increase by not less than 10% upon completion of an acquisition by the Company with an aggregate value of not less than $1,000,000; and provided for Mr. Parish to formally waive any rights to unpaid salary which he may have for periods prior to the execution date of the Second Amendment.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of our common stock, Series B Preferred Stock and total voting stock, as of April 15, 2013, by: (i) each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; (ii) each of our officers and directors (provided that Mr. Parish currently serves as our sole officer and director); and (iii) all of our officers and directors as a group.
Based on information available to us, all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise indicated. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock subject to options or warrants currently exercisable or exercisable within 60 days after April 1, 2013 are deemed outstanding, but are not deemed outstanding for the purpose of computing the percentage of ownership of any other person. The following table is based on 80,414,980 shares of common stock outstanding as of April 1, 2013.
Unless otherwise indicated, the address of each individual named below is the address of our executive offices at 323 N. Loop West, Houston, Texas, 77008.
(1)
Includes stock options to purchase 2,000,000 shares of common stock. The exercise price of the options is $3.00 per share, and the options expire on July 10, 2018.
(2)
Takes into account the voting ability of the Company’s Series B Preferred Stock shares which allow the holder to vote a number of voting shares equal to the total number of voting shares of the Company issued and outstanding as of any record date for any shareholder vote plus one additional share. The Series B Convertible Preferred Stock shares are convertible at the option of the holder with 61 days’ notice to the Company into 10 shares of common stock for each share of preferred stock issued and outstanding, which conversion rate may be increased by the Company’s sole director from time to time as provided in the preferred stock designations. Mr. Parish holds all 2,000,000 outstanding shares of Series B Preferred Stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased office space from a partnership, which is owned by the Company’s two majority shareholders, pursuant to a lease which expired on August 31, 2008, at the rate of $10,000 per month. The lease was subsequently renewed to July 31, 2011, which included an adjacent property to be built, at the rate of $20,000 per month. In conjunction with the Company’s cost reduction efforts the monthly rental payment was reduced in September 2010 to $15,000 per month. The lease was renewed for a term of one year on July 31, 2011 and for an additional one year on July 31, 2012, each at a monthly rental rate of $15,000 per month. The Company also has the right to three additional one year extensions. Any extensions under the lease shall be at a monthly rental cost mutually agreeable by the parties. Rent expense under the lease amounted to $180,000 and $180,000 for the years ended December 31, 2012 and 2011, respectively.
The Company has notes payable to Jerry Parish, Victor Garcia, and a partnership which 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 December 31, 2012 and December 31, 2011 were $1,311,964 and $898,000, respectively. These notes payable are non-interest bearing and due upon demand. The Company imputed interest on these notes payable at a rate of 8.75% per year. Interest expense of $37,830, and $37,616 was recorded as contributed capital for the years ended December 31, 2012 and 2011, respectively. Additional interest expense of $33,649 and $16,556 for the years ended December 31, 2012 and 2011, respectively, was recorded as a current payable.
On August 17, 2011, the Company and Mr. Parish entered into a three-year extension of the employment agreement, which employment agreement now expires on July 10, 2014. None of the other terms or conditions of the July 2008 employment agreement were modified by the extension.
On August 9, 2012, and effective July 10, 2012, the Company entered into a Second Amendment to employment agreement (the “Second Amendment”) with Mr. Parish, which amended Mr. Parish’s employment agreement with the Company. The Second Amendment extended the employment agreement for five (5) years from July 10, 2012, such that the employment agreement now expires on July 10, 2017; provided for Mr. Parish’s compensation to increase by not less than 10% upon completion of an acquisition by the Company with an aggregate value of not less than $1,000,000; and provided for Mr. Parish to formally waive any rights to unpaid salary which he may have for periods prior to the execution date of the Second Amendment.
Review, Approval and Ratification of Related Party Transactions
We have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officer and sole director and significant stockholders to date. However, all of the transactions described above were approved and ratified by our sole officer and director, Jerry Parish. In connection with the approval of the transactions described above, Mr. Parish as our sole officer and director, took into account several factors, including his fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.
We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our sole director, or an appropriate committee thereof. On a moving forward basis, our sole director will continue to approve any related party transaction based on the criteria set forth above.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the fiscal years ended December 31, 2012 and 2011 for professional services rendered by the principal accountant for the audit of the Company's annual financial statements and the review of the Company's quarterly financial statements were $66,500 and $66,000, respectively.
Audit Related Fees
None.
Tax Fees
None.
All Other Fees
None.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report
(1)
All financial statements
(2)
Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
(3)
Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE MINT LEASING, INC.
DATED: April 16, 2013
By: /s/ Jerry Parish
Jerry Parish
Chief Executive Officer,
Secretary, President
(Principal Executive Officer), and
Chief Financial Officer (Principal Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME
TITLE
DATE
/s/ Jerry Parish
Chief Executive Officer
April 16, 2013
Jerry Parish
President, Secretary,
Chief Financial Officer
(Principal Accounting Officer)
and Sole Director
EXHIBIT INDEX
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)
Designation of Series B Convertible Preferred Stock
4.3(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)
Modification, Renewal and Extension Agreement with Sterling Bank
10.6(5)
Modification Agreement with Sterling Bank
10.7(5)
Third Renewal, Extension and Modification Agreement with Moody Bank
10.8(6)
Securities Purchase Agreement
10.9(6)
Convertible Promissory Note
10.10(6)
First Amendment to Employment Agreement with Jerry Parish
10.11(7)
Amendment No. 1 to Convertible Promissory Note with Asher Enterprises, Inc.
10.12(8)
Fourth Renewal, Extension and Modification Agreement with Moody Bank
10.13(8)
March 2012 Extension Agreement with Comerica Bank
10.14(9)
$100,000 Promissory Note with Pamela Kimmel (December 6, 2011)
10.15(9)
$100,000 Promissory Note with Pablo J. Olivarez (November 28, 2011)
10.16(9)
$220,000 Promissory Note with Sambrand Interests, LLC (February 2, 2012)
10.17(9)
$250,000 Promissory Note with Sambrand Interests, LLC
10.18(9)
Form of Company Dealer Agreement
10.19(9)
Second Amendment to Employment Agreement
10.20*
Fifth Renewal, Extension and Modification Agreement with Moody Bank (March 2013)
10.21* $320,000 Promissory Note with Sambrand Interests, LLC (February 2013)
14.1(1)
Code of Ethics dated July 18, 2008
21.1*
Subsidiaries
31*
Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to 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
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herein.
*** Furnished 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 the Company’s Form 10-K, filed with the Commission on April 15, 2009, and incorporated herein by reference.
(5) Filed as an exhibit to the Company’s Form 10-K, filed with the Commission on April 15, 2011, and incorporated herein by reference.
(6) Filed as an exhibit to the Company’s Form 10-Q, filed with the Commission on August 22, 2011, and incorporated herein by reference.
(7) Filed as an exhibit to the Company’s Form 10-Q, filed with the Commission on November 14, 2011, and incorporated herein by reference.
(8) Filed as an exhibit to the Company’s Form 10-K, filed with the Commission on April 13, 2012, and incorporated herein by reference.
(9) Filed as an exhibit to the Company’s Form 10-Q, filed with the Commission on August 20, 2012, and incorporated herein by reference.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.