Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For
the
quarterly period ended September 30, 2008
OR
o
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For
the
transition period from ____________ to _______________
Commission
File Number: 000-50243
GIANT
MOTORSPORTS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
|
33-1025552
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
13134 State Route 62, Salem, Ohio
|
|
44460
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(440)
332-8534
(Registrant's
Telephone Number, Including Area Code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definitions of "large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o
|
Accelerated Filer o
|
Non-Accelerated Filer o
|
Smaller Reporting Company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date. As of November 10, 2008 the registrant
had
12,948,316
shares
of common stock, $.001 par value, issued and outstanding.
GIANT
MOTORSPORTS, INC.
|
|
Page No.
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PART
I. FINANCIAL INFORMATION
|
1
|
|
|
|
Item 1.
|
Financial
Statements
|
1
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2008 (Unaudited)
and
December 31, 2007 (Audited)
|
1
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Nine and Three Months Ended
September 30, 2008 and 2007 (Unaudited)
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2008 and 2007 (Unaudited)
|
4
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
5
|
|
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|
Item 2.
|
Management's
Discussion and Analysis of Financial Conditions and Results of
Operations
|
15
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
|
|
|
Item 4T.
|
Controls
and Procedures
|
23
|
|
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|
PART
II. OTHER INFORMATION
|
24
|
|
|
|
Item 1.
|
Legal
Proceedings
|
|
|
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|
Item 1A.
|
Risk
Factors
|
|
|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
|
|
|
Item 3.
|
Defaults
upon Senior Securities
|
|
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
24
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|
|
|
Item 5.
|
Other
Information
|
|
|
|
|
Item 6.
|
Exhibits
|
|
|
|
|
SIGNATURES
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
GIANT
MOTORSPORTS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Unaudited
|
|
Audited
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
236,816
|
|
$
|
919,784
|
|
Accounts
receivable, net
|
|
|
4,380,333
|
|
|
3,421,107
|
|
Inventories
|
|
|
18,095,980
|
|
|
25,626,033
|
|
Deferred
tax assets
|
|
|
6,100
|
|
|
22,000
|
|
Loan
receivable related party
|
|
|
433,680
|
|
|
-
|
|
Prepaid
expenses
|
|
|
41,602
|
|
|
28,069
|
|
TOTAL
CURRENT ASSETS
|
|
|
23,194,511
|
|
|
30,016,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET
|
|
|
1,402,961
|
|
|
1,666,828
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
|
1,688,950
|
|
|
1,688,950
|
|
Deposits
|
|
|
45,600
|
|
|
45,600
|
|
TOTAL
OTHER ASSETS
|
|
|
1,734,550
|
|
|
1,734,550
|
|
TOTAL
ASSETS
|
|
$
|
26,332,022
|
|
$
|
33,418,371
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GIANT
MOTORSPORTS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
Unaudited
|
|
Audited
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
475,025
|
|
$
|
796,510
|
|
Notes
payable, floor plans
|
|
|
16,391,370
|
|
|
24,748,401
|
|
Note
payable, officer
|
|
|
257,994
|
|
|
119,551
|
|
Accounts
payable, trade
|
|
|
1,832,647
|
|
|
1,055,932
|
|
Accrued
expenses
|
|
|
627,879
|
|
|
583,102
|
|
Accrued
tax provision
|
|
|
567,200
|
|
|
436,200
|
|
Customer
deposits
|
|
|
1,181,910
|
|
|
834,594
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
21,334,025
|
|
|
28,574,290
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITIES
|
|
|
13,500
|
|
|
13,500
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, NET
|
|
|
260,132
|
|
|
428,488
|
|
TOTAL
LIABILITIES
|
|
|
21,607,657
|
|
|
29,016,278
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, authorized 5,000,000 shares 5,000 shares
designated Series A Convertible, $1,000 stated value 2,450 shares
issued
and outstanding at September 30, 2008 and December 31,
2007.
|
|
|
2,450,000
|
|
|
2,450,000
|
|
Common
stock, $.001 par value, authorized 75,000,000 shares 12,948,316 and
12,452,651 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
|
|
|
12,949
|
|
|
12,453
|
|
Additional
paid-in capital
|
|
|
2,141,942
|
|
|
2,053,218
|
|
Additional
paid-in capital - Options
|
|
|
93,426
|
|
|
93,426
|
|
Additional
paid-in capital - Warrants
|
|
|
1,724,800
|
|
|
1,724,800
|
|
Additional
paid-in capital - Beneficial conversions
|
|
|
1,303,400
|
|
|
1,303,400
|
|
Issuance
cost on preferred series A shares convertible
|
|
|
(786,762
|
)
|
|
(786,762
|
)
|
Accumulated
deficit
|
|
|
(2,215,390
|
)
|
|
(2,448,442
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
4,724,365
|
|
|
4,402,093
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
26,332,022
|
|
$
|
33,418,371
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GIANT
MOTORSPORTS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE
NINE AND THREE MONTHS ENDED SEPTEMBER 30,
|
|
Nine months ended
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
76,375,145
|
|
$
|
76,501,606
|
|
$
|
23,581,522
|
|
$
|
22,348,068
|
|
Finance,
insurance and extended service revenues
|
|
|
2,157,250
|
|
|
2,810,347
|
|
|
504,095
|
|
|
750,838
|
|
TOTAL
REVENUES
|
|
|
78,532,395
|
|
|
79,311,953
|
|
|
24,085,617
|
|
|
23,098,906
|
|
COST
OF SALES
|
|
|
67,268,668
|
|
|
66,772,340
|
|
|
20,679,595
|
|
|
19,243,945
|
|
GROSS
PROFIT
|
|
|
11,263,727
|
|
|
12,539,613
|
|
|
3,406,022
|
|
|
3,854,961
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
6,286,961
|
|
|
6,396,637
|
|
|
1,834,964
|
|
|
2,041,189
|
|
General
and administrative expenses
|
|
|
3,692,395
|
|
|
3,337,222
|
|
|
1,133,893
|
|
|
1,119,452
|
|
|
|
|
9,979,356
|
|
|
9,733,859
|
|
|
2,968,857
|
|
|
3,160,641
|
|
INCOME
FROM OPERATIONS
|
|
|
1,284,371
|
|
|
2,805,754
|
|
|
437,165
|
|
|
694,320
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
74,543
|
|
|
77,194
|
|
|
4,591
|
|
|
47,555
|
|
Gain
on sale of asset
|
|
|
-
|
|
|
184
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(763,992
|
)
|
|
(1,004,254
|
)
|
|
(216,086
|
)
|
|
(260,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(689,449
|
)
|
|
(926,876
|
)
|
|
(211,495
|
)
|
|
(213,143
|
)
|
INCOME
BEFORE PROVISION (BENEFIT) FOR TAXES
|
|
|
594,922
|
|
|
1,878,878
|
|
|
225,670
|
|
|
481,177
|
|
PROVISION
(BENEFIT) FOR INCOME TAXES
|
|
|
186,900
|
|
|
414,000
|
|
|
34,300
|
|
|
(69,500
|
)
|
INCOME
BEFORE PREFERRED DIVIDENDS
|
|
|
408,022
|
|
|
1,464,878
|
|
|
191,370
|
|
|
550,677
|
|
PREFERRED
DIVIDENDS
|
|
|
174,970
|
|
|
185,287
|
|
|
85,750
|
|
|
92,584
|
|
NET
INCOME ATTRIBUTABLE TO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHAREHOLDERS
|
|
$
|
233,052
|
|
$
|
1,279,591
|
|
$
|
105,620
|
|
$
|
458,093
|
|
BASIC
INCOME PER SHARE
|
|
$
|
0.02
|
|
$
|
0.11
|
|
$
|
0.01
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
INCOME PER SHARE
|
|
$
|
0.01
|
|
$
|
0.04
|
|
$
|
0.00
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
12,839,776
|
|
|
12,148,380
|
|
|
12,948,316
|
|
|
12,291,232
|
|
DILUTED
|
|
|
29,519,350
|
|
|
28,827,954
|
|
|
29,627,890
|
|
|
28,549,427
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GIANT
MOTORSPORTS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE
NINE MONTHS ENDED SEPTEMBER 30, 2008 and 2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
408,022
|
|
$
|
1,464,878
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
322,469
|
|
|
331,081
|
|
Deferred
federal income tax credit (net)
|
|
|
15,900
|
|
|
(16,200
|
)
|
Bad
debt expense
|
|
|
79,460
|
|
|
35,261
|
|
(Gain)
on sale of asset
|
|
|
-
|
|
|
(184
|
)
|
(Increase)
decrease in accounts receivable, net
|
|
|
(1,038,686
|
)
|
|
659,777
|
|
(Increase)
in accounts receivable, employees
|
|
|
-
|
|
|
(15,436
|
)
|
Decrease
in inventories
|
|
|
7,530,053
|
|
|
3,373,795
|
|
(Increase)
in prepaid expenses
|
|
|
(13,533
|
)
|
|
(18,817
|
)
|
Increase
in customer deposits
|
|
|
347,316
|
|
|
428,151
|
|
Increase
(decrease) in accounts payable trade
|
|
|
776,715
|
|
|
(736,439
|
)
|
(Decrease)
in floor plan liability
|
|
|
(8,357,031
|
)
|
|
(5,344,565
|
)
|
Increase
in accrued income taxes
|
|
|
131,000
|
|
|
430,200
|
|
Increase
in accrued expenses
|
|
|
44,777
|
|
|
119,968
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
246,462
|
|
|
711,470
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(58,602
|
)
|
|
(45,863
|
)
|
Proceeds
from sale of property and equipment
|
|
|
-
|
|
|
7,000
|
|
(Increase)
in deposits
|
|
|
-
|
|
|
(4,600
|
)
|
(Increase)
in accounts receivable, affiliates
|
|
|
(433,680
|
)
|
|
-
|
|
NET
CASH (USED IN) INVESTING ACTIVITIES
|
|
|
(492,282
|
)
|
|
(43,463
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(489,841
|
)
|
|
(286,424
|
)
|
Proceeds
from note payable - officer
|
|
|
298,443
|
|
|
(182,547
|
)
|
Payments
on note payable - officer
|
|
|
(160,000
|
)
|
|
-
|
|
Preferred
stock dividends to shareholders
|
|
|
(85,750
|
)
|
|
-
|
|
NET
CASH (USED IN) FINANCING ACTIVITIES
|
|
|
(437,148
|
)
|
|
(468,971
|
)
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(682,968
|
)
|
|
199,036
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of Period
|
|
|
919,784
|
|
|
156,530
|
|
CASH
AND CASH EQUIVALENTS, end of Period
|
|
$
|
236,816
|
|
$
|
355,566
|
|
|
|
|
|
|
|
|
|
OTHER
SUPPLEMENTARY CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Debt
incurred for acquisition of vehicles and equipment
|
|
|
-
|
|
$
|
56,827
|
|
Income
taxes paid
|
|
$
|
40,000
|
|
|
-
|
|
Interest
paid
|
|
$
|
758,506
|
|
$
|
1,004,254
|
|
Preferred
stock dividends paid in common stock
|
|
$
|
89,220
|
|
$
|
185,287
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation:
The
condensed consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The condensed consolidated financial statements and notes are presented as
permitted on Form 10-Q and do not contain information included in the Company’s
annual consolidated statements and notes. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed consolidated
financial statements be read in conjunction with the December 31, 2007 audited
financial statements and accompanying notes thereto. While management believes
the procedures followed in preparing these condensed consolidated financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist, and procedures that will be
accomplished by the Company later in the year.
These
condensed consolidated financial statements reflect all adjustments, including
normal recurring adjustments which, in the opinion of management, are necessary
to present fairly the consolidated operations and cash flows for the periods
presented.
Organization:
Giant
Motorsports, Inc., (the Company) through its wholly-owned subsidiaries, W.W.
Cycles, Inc. doing business as Andrews Cycles and Chicago Cycles, Inc. doing
business as Chicago Cycle Center, operates two retail dealerships of
motorcycles, all terrain vehicles, scooters and personal watercraft in
northeastern Ohio and northern Illinois. On December 30, 2003, the stockholders
of W.W. Cycles, Inc. entered into a Stock Purchase and Reorganization Agreement
in which effective January 16, 2004 W.W. Cycles, Inc. was issued an aggregate
of
7,850,000 restricted shares of common stock, $.001 par value, of American Busing
Corporation in exchange for all of the outstanding shares of the common stock
of
the Company, resulting in W.W. Cycles, Inc. becoming a wholly-owned subsidiary
of American Busing Corporation, an inactive public company. The acquisition
was
accounted for as a reverse merger whereby, for accounting purposes, W.W. Cycles,
Inc. is considered the accounting acquirer and the historical financial
statements of W.W. Cycles, Inc. became the historical financial statements
of
American Busing Corporation. Effective April 5, 2004 American Busing Corporation
changed its name to Giant Motorsports, Inc. On April 30, 2004, Giant
Motorsports, Inc. acquired substantially all of the assets and certain
liabilities of Chicago Cycle Center pursuant to an Asset Purchase Agreement
and
entered into a Noncompetition Agreement with one of the former owners and
entered into an Employment Agreement with the other former owner.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTMEBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles
of Consolidation:
The
condensed consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Cash
and Cash Equivalents:
Cash
and
cash equivalents include amounts held in demand deposit accounts and overnight
investment accounts. The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
Contracts
in Transit:
Contracts
in transit represent customer finance contracts evidencing loan agreements
or
lease agreements between the Company, as creditor, and the customer, as
borrower, to acquire or lease a vehicle whereby a third-party finance source
has
given the Company initial, non-binding approval to assume the Company’s position
as creditor. Funding and approval from the finance source is provided upon
the
finance source’s review of the loan or lease agreement and related documentation
executed by the customer at the dealership. These finance contracts are
typically funded within ten days of the initial approval of the finance
transaction by the third-party finance source. The finance source is not
contractually obligated to make the loan or lease to the customer until it
gives
its final approval and funds the transaction. Until such final approval is
given, contracts in transit represent amounts due from the customer to the
Company. See Note B for additional information.
Allowance
for Doubtful Accounts:
Accounts
are written off when management determines that an account is uncollectible.
Recoveries of accounts previously written off are recorded when received. An
estimated allowance for doubtful accounts is determined to reduce the Company’s
receivables to their carrying value, which approximates fair value. The
allowance is estimated based on historical collection experience, specific
review of individual customer accounts, and current economic and business
conditions. Historically, the Company has not incurred any significant credit
related losses. Management has determined that an allowance of $25,000 is
sufficient at September 30, 2008 and December 31, 2007.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition:
Vehicle
Sales -
The
Company records revenue when vehicles are delivered and title has passed to
the
customer, when vehicle service or repair work is performed and when parts are
delivered. Sales promotions that are offered to customers are accounted for
as a
reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized at
the
time of sale if they are vehicle specific, or as earned in accordance with
the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
Finance,
Insurance and Extended Service Revenues-
The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters into
the contract. The Company is not the obligor under any of these contracts.
In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion
of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of chargebacks the Company will
be
required to pay. Such estimates of chargeback experience are based on our
historical chargeback expense arising from similar contracts. The Company also
acts as the warrantor on certain extended service contracts and defers the
revenue and recognizes it over the life of the contract on a straight-line
basis.
Fair
Value of Financial Instruments:
Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and debt, including floor plan notes payable. The carrying amount of
all
significant financial instruments approximates fair value due either to length
or maturity or variable interest rates that approximate prevailing market
rates.
Inventories:
Parts
and
accessories inventories are stated at the lower of cost or market using the
first-in, first-out method. Vehicle inventories are stated at the lower of
cost
or market using the specific identification method.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration
of Credit Risk:
Financial
instruments that potentially subject the Company to credit risk consist of
cash
equivalents and accounts receivable.
The
Company’s policy is to review the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as
being
creditworthy. In the ordinary course of business, the Company has bank deposits
and overnight repurchase agreements that may exceed federally insured limits.
The Company had $143,903 and $821,722 in excess of the federally insured limit
at September 30, 2008 and December 31, 2007, respectively.
Concentration
of credit risk, with respect to accounts receivable-customers, is limited
through the Company’s credit evaluation process. The Company reviews the credit
history before extending credit. Generally, the Company does not require
collateral from its customers
Property
and Equipment:
Property,
equipment, and leasehold improvements are stated at cost. Maintenance and
repairs that do not add materially to the value of the asset nor appreciably
prolong its useful life are charged to expense as incurred. Gains or losses
on
the disposal of property and equipment are included in the determination of
income.
Depreciation
of property and equipment and amortization of leasehold improvements are
provided using the straight-line method over the following estimated useful
lives:
Fixtures
and equipment
|
3-7
|
years
|
Vehicles
|
5
|
years
|
Leasehold
Improvements
|
39
|
years
|
Goodwill
and Other Intangible Assets:
In
June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and
supersedes APB opinion No. 17, “Intangible Assets”. It addresses how intangible
assets that are acquired individually or with a group of other assets (but
not
those acquired in a business combination) should be accounted for in the
financial statements upon their acquisition. This statement also addresses
how
goodwill and other
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
and Other Intangible Assets (Continued):
intangible
assets should be accounted for after they have been initially recognized in
the
financial statements. The Company, in its acquisitions, recognized $1,588,950
of
goodwill and $100,000 of other intangible assets associated with a licensing
sales agreement. The Company performs its annual impairment test for goodwill
at
year-end.
|
|
Gross Carrying
|
|
|
|
Amount
|
|
|
|
|
|
Goodwill
|
|
$
|
1,588,950
|
|
Licensing
Agreement
|
|
|
100,000
|
|
TOTAL
|
|
$
|
1,688,950
|
|
Income
Taxes:
Income
taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes.”
At
September 30, 2008, income taxes are provided for amounts currently due and
deferred amounts arising from temporary differences between income for financial
reporting and income tax purposes.
Advertising
Costs:
Advertising
costs are expensed when incurred. Charges to operations amounted to $1,103,451
and $1,057,580 for the nine months ended September 30, 2008 and 2007,
respectively.
Earnings
Per Share of Common Stock:
Historical
net income per share is computed using the weighted average number of shares
of
common shares outstanding. Diluted earnings per share (EPS) include additional
dilution from common stock equivalents, such as stock issuable pursuant to
the
exercise of stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the Company
reports a loss because to do so would be anti-dilutive for the periods
presented.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
A -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings
Per Share of Common Stock (Continued):
The
following is a reconciliation of the computation for basic and diluted
EPS:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
income attributed to common shares
|
|
$
|
233,052
|
|
$
|
1.279,591
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Basic)
|
|
|
12,839,776
|
|
|
12,148,380
|
|
|
|
|
|
|
|
|
|
Weighted-average
common stock equivalents:
|
|
|
|
|
|
|
|
Warrants
|
|
|
16,679,574
|
|
|
16,679,574
|
|
Options
|
|
|
-
|
|
|
-
|
|
Weighted-average
common shares outstanding
|
|
|
29,519,350
|
|
|
28,827,954
|
|
The
Company uses the intrinsic value method to account for warrants granted to
executive officers, directors, key employees and advisors for the purchase
of
common stock. No compensation expense is recognized on the grant date, since
at
that date, the warrant price equals or is higher than the market price of the
underlying common stock. The Company discloses the pro forma effect of
accounting for stock warrants under the fair value method. The Company uses
the
fair value method to account for warrants granted to advisors for the purchase
of common stock. There were 16,679,574 common stock equivalents available at
September 30, 2008 and 2007.
Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect certain 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 period.
Actual results could differ from those estimates.
NOTE
B -
ACCOUNTS RECEIVABLE, NET
Accounts
receivable consisted of receivables due from customers and dealers,
manufacturers, employees, and finance companies for contracts in transit and
is
net of an allowance for doubtful accounts of $25,000 at September 30, 2008
and
December 31, 2007.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
C –
LOAN RECEIVABLE – RELATED PARTY
The
Company had extended funds to an entity, whose owner is an officer of the
Company. These funds are non-interest bearing and have no specific repayment
terms. As such, they have been classified as current assets. The balance as
of
September 30, 2008 and December 31, 2007 was $443,680 and $-0-,
respectively.
NOTE
D -
INVENTORIES
Inventories
consisted of vehicles and parts and accessories.
NOTE
E -
FIXED ASSETS
Fixed
assets consisted of the following:
|
|
September 30,
|
|
|
|
2008
|
|
|
|
|
|
Fixtures
and equipment
|
|
$
|
2,165,584
|
|
Vehicles
|
|
|
448,439
|
|
Leasehold
improvements
|
|
|
617,065
|
|
|
|
|
3,231,088
|
|
Less
accumulated depreciation
|
|
|
1,828,127
|
|
NET
FIXED ASSETS
|
|
$
|
1,402,961
|
|
Depreciation
expense charged to operations amounted to $322,469 and $331,081 for the nine
months ended September 30, 2008 and 2007, respectively.
NOTE
F -
NOTES PAYABLE - FLOOR PLANS
The
Company has various floor plan financing agreements aggregating $16,391,370
at
September 30, 2008. Interest is payable monthly and fluctuates with prime and
varies based on the type of unit financed and the length of time the unit
remains on the floor plan (ranging from 5.0% to 18.0% at September 30, 2008).
Principle payments are due upon the sale of the specific unit financed. The
floor plans are collateralized by substantially all corporate assets.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
G -
LONG-TERM DEBT
Long-term
debt consisted of various notes aggregating $485,294 at September 30, 2008.
This
amount matures at various times ranging from 2009 to 2011, bearing interest
at
various rates ranging from 5% to 10% per year. The notes are collateralized
by
substantially all of the Company’s assets.
The
Company has a $250,000 revolving line of credit with a bank with an outstanding
balance of $249,863 at September 30, 2008. The revolving line of credit has
no
stipulated repayment terms. This loan bears interest at prime plus one percent
(6.00% at September 30, 2008) and is collateralized by substantially all of
the
Company’s assets.
NOTE
H -
NOTES PAYABLE- OFFICERS
Notes
payable to officers consisted of two promissory notes bearing interest at 6%
per
year. The loans are payable on demand anytime after October 26, 2007 and as
such, have been classified as current liabilities. Interest charged to
operations amounted to $9,719 and $12,567 for the nine months ended September
30, 2008 and 2007, respectively. The aggregate balance at September 30, 2008
was
$257,994.
NOTE
I -
LEASES
The
Company leases its Illinois subsidiary retail facility under a ten-year
agreement with a ten-year renewal option. The agreement was signed and executed
in April, 2005, and payments on the lease commenced in August 2005 at a monthly
rent of $33,333 through May 2006 then increased to $40,000 per month from June
2006 through May 2007, $45,000 per month from June 2007 through May 2008,
$46,667 from June 2008 through May 2009 and then increasing 3% annually for
the
remaining term of the lease. The Company is also liable for a proportionate
share of expenses and taxes over a specified amount. The Company was granted
a
four (4) month rent holiday. Rent expense has been calculated using the
straight-line basis over the lease term of ten (10) years to reflect the
inclusion of the rent-free period.
The
Company also leases office space at the Chicago location under a ten-year
agreement with a ten-year renewal option. The payments on the lease commenced
in
August 2005 at a monthly amount of $15,295 through May 2007, then increasing
to
$15,754 per month from June 2007 through May 2008, $16,226 per month from June
2008 through May 2009 and then increasing 3% annually for the remaining term
of
the lease.
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
I -
LEASES (CONTINUED)
The
following is a five-year summary of future minimum lease payments under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of September 30, 2008:
Year Ending
|
|
Amount
|
|
|
|
|
|
2009
|
|
$
|
1,049,780
|
|
2010
|
|
|
1,072,633
|
|
2011
|
|
|
1,096,171
|
|
2012
|
|
|
1,120,415
|
|
2013
|
|
|
1,145,392
|
|
|
|
$
|
5,484,391
|
|
The
Company also leased two (2) residential locations in Chicago under a
month-to-month agreement. The amount charged to rent amounted to $35,449 and
$30,600 for the nine months ended September 30, 2008 and 2007, respectively.
NOTE
J -
INCOME TAXES
Income
taxes (credit) consisted of the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
171,000
|
|
$
|
492,750
|
|
Deferred
|
|
|
15,900
|
|
|
38,250
|
|
|
|
$
|
186,900
|
|
$
|
531,000
|
|
Income
taxes paid amounted to $40,000 and $-0- for the nine months ended September
30,
2008 and 2007, respectively.
Deferred
tax assets (liabilities) consisted of the following:
|
|
September
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
Deferred
tax assets - current and long term:
|
|
|
|
|
|
|
|
Allowance
for doubtful account and net operating loss carryforward
|
|
$
|
6,100
|
|
$
|
22,000
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - long term
|
|
|
(13,500
|
)
|
|
(38,250
|
)
|
TOTALS
|
|
$
|
(7,400
|
)
|
$
|
(16,250
|
)
|
GIANT
MOTORSPORTS, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER
30, 2008 and 2007
(UNAUDITED)
NOTE
K -
RELATED PARTY TRANSACTIONS
The
Company leases its Ohio subsidiary retail facility from a shareholder, who
has
personally guaranteed the debt on the building, under a five-year agreement
with
two five-year renewal terms. Charges to operations amounted to $216,000 for
the
nine months ended September 30, 2008 and 2007.
NOTE
L -
PREFERRED STOCK
The
Company has 5,000,000 shares of preferred stock authorized, with a par value
of
$.001 per share. Included in these 5,000,000 shares are 5,000 authorized shares
of Series A Convertible Preferred stock. On September 16, 2005, the Company
issued 2,870 shares of Series A Convertible Preferred stock with a stated value
of $1,000 per share to accredited investors in a private placement offering.
Each share of Series A Convertible Preferred Stock is convertible into 2,000
shares of the Company’s common stock. However, the Company did not to have its
Registration Statement declared effective by the original due date and
subsequently, each holder of the preferred shares were able to convert their
shares at less than the agreed upon factor. This “triggering event” provided a
discount on the conversion, and additional shares were provided to those
shareholders who did not consent, and subsequently, converted their preferred
Series A shares.
The
Company also issued in the private placement (i) warrants allowing the investors
to purchase up to 5,740,000 shares of the Company’s common stock, and (ii) an
option allowing the placement agent to purchase 287 shares of Series A
Convertible Preferred Stock, and warrants to purchase up to 574,000 shares
of
common stock.
The
Company issued 495,665 and 660,904 shares of its common stock as a dividend
to
all Series A Preferred shareholders for the nine-month period ending September
30, 2008 and 2007, respectively, in accordance with the placement offering
provisions. The Company issued a cash dividend in the amount of $85,750 on
September 1, 2008 to all Series A Preferred shareholders.
NOTE
M -
COMMON STOCK
The
Company has 75,000,000 shares of $.001 par common stock authorized, with
12,948,316 and 12,452,651 issued and outstanding at September 30, 2008 and
December 31, 2007, respectively.
The
Company issued 495,665 and 660,904 shares of common stock for the nine-month
period ending September 30, 2008 and 2007, respectively, to holders of our
Preferred Series A, in accordance with the placement offering provisions, as
described above on NOTE L.
Item
2. Management's Discussion and Analysis of Financial Conditions and Results
of
Operations
The
following discussion of our results of operations and financial condition should
be read together with the consolidated financial statements and the notes to
those statements included elsewhere in this quarterly report. This discussion
may contain forward-looking statements that involve risks and uncertainties.
Our
actual results could differ materially from the results anticipated in any
forward-looking statements as a result of a variety of factors.
General.
Our
goal
is to become one of the largest dealers of power sports vehicles in the United
States through acquisitions and internal growth.
The
motorsports industry is highly fragmented with an estimated 4,000 retail stores
throughout the United States. We are attempting to capitalize upon the
consolidation opportunities available and increase our revenues and income
by
acquiring additional dealers and improving our performance and
profitability.
We
plan
to maximize the operating and financial performance of our dealerships by
achieving certain efficiencies that will enhance internal growth and
profitability. By consolidating our corporate and administrative functions,
we
believe we can reduce overall expenses, simplify dealership management and
create economies of scale.
We
will
specifically target dealers in markets with strong buyer demographics that,
due
to under-management or under-capitalization, are unable to realize their market
share potential and can benefit substantially from our systems and operating
strategy.
Together
with our two wholly-owned subsidiaries, we own and operate two retail power
sports superstores. Our core brands include Suzuki, Yamaha, Honda, Ducati,
Kawasaki, and Polaris. Our superstores operate under the names “Andrews Cycles”
and “Chicago Cycles.” Andrews Cycles is located in Salem, Ohio, has
approximately 50 employees and operates from an approximately 75,000 square
foot
facility. Chicago Cycles is located in the Chicago metropolitan area, has
approximately 95 employees and operates from an approximately 95,000 square
foot
facility in Skokie, Illinois, pursuant to a ten-year lease we entered into
in
October 2004.
Overview
of Economic Trends.
Effects
of U.S. Credit Markets on Vehicle Financing
During
2007, the U.S. credit markets had dealt with the effects of numerous defaults
by
homeowners on “sub-prime” mortgage loans. By December 2007 these defaults had
also begun to increase with respect to mortgages considered to be of less credit
risk than “sub-prime” mortgages. Mortgage default rates have continued to
increase through the first nine months of 2008 and are expected to increase
throughout the remainder of the year. Additionally, in 2008, as a result of
these defaults and other global credit problems, several banking institutions
that have, in the past, provided vehicle financing for motorcycles and other
powersports equipment have either ceased doing business or have significantly
limited the availability of financing for motorcycles and other powersports
equipment. Furthermore, to the extent that financing continues to be available,
it is generally only available to consumers with the highest credit ratings,
but
at interest rates between 14.9% to 19.9% per year, notwithstanding the Federal
Reserve’s reduction of the federal discount rate to 1.25% on October 29, 2008, a
situation which can be directly attributed to significant tightening of the
global credit markets. During the year ended December 31, 2007 approximately
31.4% of our motorcycle sales were financed. We believe that a significant
portion of those sales were to customers who do not qualify as having the
highest credit ratings and would therefore find it difficult to finance
purchases of our products in the current economic environment. Additionally,
since the reduction in the value of the securities markets has reduced the
disposable income of many consumers, including those with the highest credit
ratings, our sales have also been negatively impacted by the high interest
rates
being charged to those who can obtain financing. We believe that our sales
will
continue to be affected in a negative manner until the credit markets ease
and
financing becomes more readily available to potential customers for our
products.
Effects
of Changes in Fuel Costs
Fuel
prices rose significantly during the first half of 2008, reaching an all-time
high in July 2008, and then fell significantly during the third quarter as
a
result of a significant reduction in demand caused by a severe weakening of
the
global economy. Increases in the price of gasoline to over $4.00 per gallon,
during the first half of 2008, resulted in a reduction in demand for oil in
the
second quarter of 2008. As previously stated, this reduction in demand has
continued during the third quarter of 2008 due to the overall weak global
economy. Based on current economic forecasts for an extended global recession,
we believe that it is reasonable to assume that there will continue to be a
lessening of demand for oil throughout the remainder of 2008 and into 2009,
notwithstanding the lower price of oil. To the extent that gas prices remain
at
their current level of approximately $2.35 per gallon for an extended period
of
time or fall even further, it is possible that consumers will feel that they
have more discretionary income to spend on motorcycles and other powersports
equipment, which may be considered more for entertainment and not essential.
Notwithstanding these lower prices, there is no assurance that such lower gas
prices will provide potential customers with more disposable income as a result
of the overall weakness of the economy. If, on the other hand, gas prices
increase again to the higher levels experienced earlier this year, we that
this
could result in many consumers considering the use of motorcycles and scooters
as alternative forms of transportation to automobiles, since motorcycles and
scooters provide significantly better gas mileage than automobiles resulting
in
substantially lower fuel costs. While this could have a positive effect on
our
sales, again the effect of fuel prices may not be enough to counter the overall
economic factors that have resulted in a reduction in motorcycle sales
throughout the industry.
Effects
of Increase in Unemployment
Recently,
the rate of unemployment in the United States has reached a historically high
level. In addition to all of the other current economic factors contributing
to
a reduction in sales, it seems very likely that a continued increase in the
unemployment rate will have a negative impact on sales.
Overall
impact on our Future Earnings
Notwithstanding
our downturn in sales during the first nine months of 2008 as compared to the
first nine months of 2007, we intend to continue to evaluate and analyze our
business decisions through effective inventory engagement, as described in
greater detail under the heading Inventory Management, included elsewhere in
this MD&A.
As
described in the preceding paragraphs, the health of the U.S. economy,
particularly the availability of credit and the discretionary spending power
of
potential customers, all will have an impact on our future earnings. We believe
that we may be able to counter a portion of the reduction in sales by focusing
more on sales of used motorcycles which have smaller ticket prices than new
motorcycles and provide us with profit margins that can be between 30% and
40%
greater than sales of new motorcycles. Additionally, although our revenue per
unit may be less, it appears that we have been able to maintain greater sales
levels of smaller motorcycles which even when sold new sell at prices
significantly less than the larger models. While we are hoping that this
strategy will help to increase our sales through the first quarter of 2009,
until the credit markets are hopefully revived, there is no assurance that
we
will be successful. Furthermore, in the event that we are able to successfully
integrate additional dealerships and/or new brands into our existing business,
we believe that this could result in greater sales margins and an even greater
increase in earnings. These greater sales margins would be created by the
consolidation of expenses through the implementation of our superstore business
plan, resulting in greater earnings per unit sold. While it is management's
intent to pursue the goals described herein, we cannot assure you that these
goals will be achieved at any level.
Loan
Transactions.
On
April
30, 2004, we paid $1,675,000 of the purchase price for Chicago Cycles by issuing
to Kings Motorsports a 6% $1,675,000 aggregate principal amount note (the
"Note"). We repaid all outstanding principal and interest on the Note remaining
due and payable, on October 13, 2005.
To
fund
the amount payable at closing for Chicago Cycles, we borrowed $1,250,000 from
The Fifth Third Bancorp Bank (the “Bank”), pursuant to a term loan. This loan,
which initially matured on May 31, 2004, was refinanced with the Bank through
a
term loan amortized over a 72 month period, and was payable in full on May
31,
2007, bearing interest at prime plus one percent (6.0% as of September 30,
2008). This loan was renewed on October 25, 2007 under the same terms and
conditions with a maturity date of August 31, 2010. Our payment obligations
under this term loan also are personally guaranteed by Russell Haehn and Gregory
Haehn. This loan is also secured by a first priority lien on all of our assets
(including, without limitation, the Chicago Cycles assets). As of September
30,
2008, the outstanding amount of this term loan, including accrued interest
thereon, was $451,440.
On
April
20, 2004, pursuant to a $500,000 aggregate principal amount promissory note
bearing interest at the rate of fourteen (14%) percent per annum (the “Bridge
Note”), we received, from a third party (the “Bridge Lender”), an aggregate
principal amount bridge loan (the “Bridge Loan”). All outstanding principal on
the Bridge Note was due on October 15, 2004. To secure the repayment of
principal and interest on the Bridge Note, each of Russell Haehn and Gregory
Haehn (i) pledged to the Bridge Lender 150,000 shares (300,000 shares in the
aggregate) of common stock owned by each of them, and (ii) guaranteed all of
our
payment obligations to the Bridge Lender. As partial consideration for the
Bridge Loan, we issued to the Bridge Lender a five-year warrant to purchase
100,000 shares of common stock, at an exercise price of $2.25 per share. We
also
granted the Bridge Lender certain piggyback registration rights with respect
to
the shares of common stock underlying the warrant. We used the $500,000 Bridge
Loan proceeds for working and operating capital. On October 15, 2004, we repaid
$250,000 of the principal amount outstanding under the Bridge Loan. Pursuant
to
a letter agreement entered into with the Bridge Lender on October 6, 2004,
payment of the remaining $250,000 of principal and all accrued interest thereon
was extended until January 15, 2005. We paid the Bridge Lender $2,500 in
consideration for the extension. In September 2005, the Bridge Lender assigned
its rights to $50,000 of the $250,000 principal amount then outstanding to
an
affiliate of the Bridge Lender, who in turn converted it into Series A Shares
and Series A Warrants in our September 2005 Private Placement. On September
20,
2005, we used net proceeds from our September 2005 Private Placement, in the
amount of $203,383 to repay the remaining outstanding principal amount of the
Bridge Loan and all accrued and unpaid interest thereon.
On
December 20, 2005, the Bridge Lender provided us with a new bridge loan in
the
principal amount of $250,000 (the "2005 Bridge Loan"). In connection with
the 2005 Bridge Loan we issued to the Bridge Lender a $250,000 principal amount
promissory note providing for interest at the rate of fifteen percent (15%)
per
annum (the "2005 Bridge Note"). Interest on the 2005 Bridge Note is payable
monthly, and all outstanding principal and accrued but unpaid interest was
due
and payable on March 20, 2006. In March 2006 we repaid $25,000 of the
outstanding principal amount and at March 31, 2006, the outstanding principal
amount was $225,000. We obtained a ninety (90) day extension for the payment
of
the remaining $225,000. In consideration for this extension we paid the Bridge
Lender $2,500. On June 29, 2006 we repaid an additional $25,000 of the
outstanding principal amount and at September 20, 2006, the outstanding
principal amount was $200,000. On September 20, 2006, we obtained another sixty
(60) day extension for the payment of the remaining $200,000 due on November
20,
2006. We did not pay any additional consideration to the third party for such
extension. Payment of the 2005 Bridge Note was further extended to June 15,
2007
in consideration for our payment of $2,250 to the Bridge Lender for both this
extension and the extension for repayment of the 2006 Bridge Note discussed
below. The outstanding indebtedness under the 2005 Bridge Note was restructured
on December 1, 2007 as provided below.
On
October 27, 2006, Russell Haehn, the Company's Chairman and Chief Executive
Officer, provided a working capital loan to the Company in the amount of
$350,000. This loan is evidenced by a promissory note (the “2006 Note”) in the
principal amount of $350,000 payable on demand any time after October 26, 2007.
The 2006 Note bears interest at a rate of 6% per annum and the outstanding
principal amount and all accrued interest are payable upon demand or sooner
if
prepaid by the Company. The balance as of September 30, 2008 was
$166,407.
On
December 4, 2006, the Bridge Lender provided us with an additional bridge loan
in the principal amount of $250,000 (the “2006 Bridge Loan”). In connection with
the 2006 Bridge Loan we issued to the Bridge Lender a $250,000 principal amount
promissory note providing for interest at the rate of fifteen and one-half
percent (15.5%) per annum (the "2006 Bridge Note"). Interest on the 2006 Bridge
Note is payable monthly, and all outstanding principal and accrued but unpaid
interest was due and payable on March 4, 2007. Payment of the 2006 Bridge Note
was extended to June 15, 2007 in consideration for our payment of $2,250 to
the
Bridge Lender for both this extension and the extension for repayment of the
2005 Bridge Note discussed above. The outstanding indebtedness under the 2006
Bridge Note was restructured on December 1, 2007 as provided below.
In
consideration of a 1% fee on the principal sum due under the 2005 Bridge Note
and the 2006 Bridge Note, on December 1, 2007, we executed a new promissory
note
in the principal amount of $320,000 (the “2007 Bridge Note”), which reflected
the aggregate outstanding principal balance of $70,000 under the 2005 Bridge
Note and $250,000 under the 2006 Bridge Note and cancelled the 2005 Bridge
Note
and the 2006 Bridge Note. The 2007 Bridge Note had an interest rate of 15.5%
per
annum with a maturity date of August 31, 2008. In August 2008, we repaid all
outstanding principal and interest on the 2007 Bridge Note.
On
February 26, 2008, Gregory Haehn, the Company’s President and Chief Operating
Officer, provided a working capital loan to the Company in the amount of
$100,000. This loan is evidenced by a promissory note (the “2008 Note”) in the
principal amount of $100,000 payable on demand. The 2008 Note bears interest
at
a rate of 6% per annum and the outstanding principal amount and all accrued
interest are payable upon demand or sooner if prepaid by the Company. The
balance as of September 30, 2008 was $91,587.
We
also
have obtained a revolving line of credit with the Bank, in the maximum amount
of
$250,000. This line of credit bears interest at the rate of prime plus one
percent (6.0% as of September 30, 2008), and has no stipulated repayment terms.
As of September 30, 2008, the amount of principal and interest outstanding
on
this credit line was $249,863. This line of credit is secured by a lien on
substantially all of our assets.
Financing
Activities.
In
September 2005, the Company sold to accredited investors, in a private placement
offering (the “September 2005 Private Placement”), 2,870 Series A Shares and
warrants to purchase up to of 5,740,000 shares of common stock (the “Series A
Warrants”), resulting in the receipt by the Company of $2,870,000 of gross
proceeds including the repayment of $50,000 of indebtedness outstanding under
the Bridge Loan from HSK Funding, Inc., by the conversion of that amount into
Series A Shares and Series A Warrants. These securities are convertible into
shares of common stock. After deduction of all offering expenses for the
September 2005 Private Placement, including the placement agent's commissions
and nonaccountable expense allowance, the Company received net proceeds of
$2,485,163. The Company used these net proceeds for debt repayment, legal fees,
and general working capital purposes. As of September 30, 2008, 420 Series
A
Shares were converted into 938,500 shares of our common stock. Additionally,
during 2007 and through September 30, 2008, we issued an aggregate of 1,564,816
shares of common stock to the holders of our Series A Shares, in lieu of cash
dividends. Our dividend payment to the holders of Series A Shares as of
September 1, 2008, was paid in cash and not by issuing additional shares of
our
common stock. We paid these stockholders an aggregate of $85,750 in respect
of
this dividend. We currently intend to pay future dividend payments to the
holders of our Series A Shares in cash and not by issuing additional shares
of
our common stock.
Anticipated
Funding of Operations.
The
amount required to fund the growth of our ongoing operations, as well as the
means by which we obtain this funding, will be wholly dependent on the magnitude
and timeframes we set for any growth in our business. Based on our current
expected growth in the next 12 to 24 months, we expect to fund our ongoing
operations as follows:
Cash
Flow from Operations
Although
we experienced a slight decrease in sales during the first nine months of 2008
as compared to the same period in 2007, and a reduction in cash flow from
operations, our business remained profitable during the first nine months of
2008. In an attempt to increase our cash flow from operations during the
remainder of 2008, we intend to significantly reduce our inventory and our
operating expenses, which we had already begun to do during the third quarter.
Prior to this year, we increased our cash flow from operations for an 18 month
period through a consistent plan of reducing operating costs and increasing
profit margins on our sales. We intend to continue this policy throughout the
remainder of 2008 and we remain optimistic that we can reach profitability
levels similar to 2007, although no assurances can be made that we will attain
such profitability levels or be profitable at all. We believe that by keeping
our operating costs at the reduced levels we achieved in 2007, and continuing
to
increase our profit margins, we will continue to generate sufficient cash flow
from operations to fund our business for at least the next twelve months. To
the
extent that we experience a significantly weaker sales climate during the
remainder of 2008, our ability to continue to generate such cash flow could
be
impaired, notwithstanding our reduced operating costs and increased profit
margins.
Bank
Financing
We
currently have a revolving credit line with Fifth Third Bancorp in a total
available amount of $250,000 of which $249,863 was funded at September 30,
2008.
Equity
Financing
Although
it is not our intention to raise additional funds through the sale of our equity
securities to directly fund our working capital needs, to the extent that sales
of our power sports products continue at the levels experienced in 2007 and
through the first nine months of 2008 and/or the growth of our business involves
either the acquisition of other power sports dealers or the acquisition of
significant assets out of the ordinary course of our business, such as acquiring
inventory of a new brand of motorcycles, we will most likely be required to
raise additional funds through the sale of common stock or preferred stock
to
consummate any of these acquisitions. It could be difficult for us to raise
funds in amounts and on terms sufficient to fund any of these proposed
acquisitions.
Funding
of Future Acquisitions
Given
our
experience in financing the purchase of the Chicago Cycles assets, we believe
that the terms of future acquisitions, to the extent that they involve
significant amounts of debt financing, will require substantially longer periods
of time for repayment, which we anticipate to be at least 48 months, in order
for these acquisitions to be financially viable for us. We intend to give
careful consideration to these terms when deciding whether to acquire debt
financing in connection with future acquisitions.
Results
of Operations
Three
Months Ended September 30, 2008 Compared with Three Months Ended September
30,
2007.
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Increase
(Decrease)
|
|
% Change
|
|
Total
Revenues
|
|
$
|
24,085,617
|
|
$
|
23,098,906
|
|
$
|
986,711
|
|
|
4.2
|
%
|
Cost
of Sales
|
|
$
|
20,679,595
|
|
$
|
19,243,945
|
|
$
|
1,435,650
|
|
|
7.5
|
%
|
Operating
Expenses
|
|
$
|
2,968,857
|
|
$
|
3,160,641
|
|
$
|
(191,784
|
)
|
|
(6.1
|
)%
|
Income
from Operations
|
|
$
|
437,165
|
|
$
|
694,320
|
|
$
|
(257,155
|
)
|
|
(37
|
)%
|
Other
Income and (Expense)
|
|
$
|
(211,495
|
)
|
$
|
(213,143
|
)
|
$
|
(1,648
|
)
|
|
(0.8
|
)%
|
Income
before Provision for Income Taxes
|
|
$
|
225,670
|
|
$
|
481,177
|
|
$
|
(255,507
|
)
|
|
(53.1
|
)%
|
Net
Income before Preferred Dividends
|
|
$
|
191,370
|
|
$
|
550,677
|
|
$
|
(359,307
|
)
|
|
(65.3
|
)%
|
Total
Revenues:
Total
revenues for the three months ended September 30, 2008 were $24,085,617,
representing an increase of $986,711 (4.2%) from the $23,098,906 reported for
the three months ended September 30, 2007. This increase in revenues between
these two comparable periods was primarily attributable to our decision to
substantially liquidate existing product inventory during the three month period
ended September 30, 2008 at substantially lower prices per unit, many times
at
prices that were less than our cost. This decision was made in order to sell
slow-moving 2008 models to free up space for new 2009 models, particularly
at
our Salem, Ohio location.
Cost
of
Sales:
Cost
of
sales for the three months ended September 30, 2008 was $20,679,595, which
was
$1,435,650 (7.5%) more than cost of sales of $19,243,945 for the same period
in
2007. The increase on the cost of sales between these two comparable periods
reflects the increase in the number of products sold due to our inventory
liquidation during the three months ended September 30, 2008.
Operating
Expenses:
Operating
expenses for the three months ended September 30, 2008 were $2,968,857, a
decrease of $191,784 (6.1%) from $3,160, 641 for the same period in 2007.
This
decrease in operating expenses was primarily attributable to a reduction in
advertising costs of approximately $219,000 between the comparable
periods.
Income
from Operations:
We
had
income from operations before other income (expense) for the three months ended
September 30, 2008 of $437,165, as compared to income from operations of
$694,320 for the same period in 2007, which reflects a decrease of $257,155
(37%). Notwithstanding an increase in revenues between the two comparable
periods and a corresponding reduction in cost of sales and operating expenses,
income from operations decreased during the comparable period as a result of
the
significantly lower profit margins we experienced in connection with sales
of
our motorcycles during the three months ended September 30, 2008. Again, this
occurred as a result of our decision to liquidate existing inventory many times
at prices less than our cost of such products. As a result of the foregoing,
the
reduction in total cost of sales and operating expenses was not enough to make
up for significant reduction in our profit margins per unit.
Other
Income and (Expense):
Other
expenses for the three months ended September 30, 2008 decreased $1,648 (0.8%)
to $211,495 from $213,143 for the same period in 2007. This reduction in other
expense would have been greater, as a result of the reduction of interest
expense from $260,698 during the third quarter of 2007 to $216,086 during the
same period in 2008, except for the fact that this was almost entirely offset
by
other income reported by us for the third quarter of 2007 in the amount of
$47,555, consisting primarily of a non-recurring prior period adjustment of
approximately $39,000 The
reduction in interest expense between the comparable periods was primarily
attributable to the reduction in interest rates applicable to our outstanding
indebtedness and our floor plan financing, as well as the reduction in the
amount of inventory at our locations.
Income
before Provision for Income Taxes
We
had
income before provision for taxes for the three months ended September 30,
2008
of $225,670 as compared with income before provision for taxes of $481,177
for
the same period in 2007, which represents a decrease of $255,507 (53.1%). The
decrease in income before provision for income taxes can be attributed to the
same reasons for the decrease in income from operations discussed above. Income
before provision from income taxes during the third quarter of 2008 was somewhat
better when compared with the same period in 2007, as a result of the reduction
in interest expense, between the two periods, as described in Other Income
and
(Expense) above.
Net
Income before Preferred Dividends:
We
had
income before preferred dividends of $191,370 for the three months ended
September 30, 2008, as compared to net income before preferred dividends of
$550,677 for the same period in 2007. This reflects a decrease in income before
preferred dividends of $359,307 (65.3%) between these comparable periods. The
decrease in net income before preferred dividends can be attributed to the
same
reasons for the decrease in income before provision for income taxes discussed
above. The reduction between the comparable periods would have been less except
for the fact that we recognized a benefit for income taxes of $69,500 on
$481,177 of income before provision (benefit) for income taxes for the three
months ended September 30, 2007 compared to a provision for income taxes of
$34,300 on $225,670 of income before provision (benefit) for income taxes for
the same period in 2008. This benefit for income taxes for the three months
ended September 30, 2007 resulted from the application of the net operating
loss
for the fiscal year ended December 31, 2006 in calculating the taxes payable
for
the three months ended September 30, 2007.
Nine
Months Ended September 30, 2008 Compared with Nine Months Ended September 30,
2007.
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Increase
(Decrease)
|
|
% Change
|
|
Total
Revenues
|
|
$
|
78,532,395
|
|
|
79,311,953
|
|
|
(779,558
|
)
|
|
(0.9
|
)%
|
Cost
of Sales
|
|
$
|
67,268,668
|
|
|
66,772,340
|
|
|
496,328
|
|
|
0.7
|
%
|
Operating
Expenses
|
|
$
|
9,979,356
|
|
|
9,733,859
|
|
|
245,497
|
|
|
2.5
|
%
|
Income
from Operations
|
|
$
|
1,284,371
|
|
|
2,805,754
|
|
|
(1,521,383
|
)
|
|
(54.2
|
)%
|
Other
Income and (Expense)
|
|
$
|
(689,449
|
)
|
|
(926,876
|
)
|
|
237,427
|
|
|
(25.6
|
)%
|
Income
before Provision for Income Taxes
|
|
$
|
594,922
|
|
|
1,878,878
|
|
|
(1,283,956
|
)
|
|
(68.3
|
)%
|
Net
Income before Preferred Dividends
|
|
$
|
408,022
|
|
|
1,464,878
|
|
|
(1,056,856
|
)
|
|
(72.2
|
)%
|
Total
Revenues:
Total
revenues for the nine months ended September 30, 2008 were $78,532,395
representing a decrease of $779,558 (0.9%) from the $79,311,953 reported for
the
nine months ended September 30, 2008. This reduction in revenues between the
two
periods is primarily attributable to the weak overall economic environment
and
the increased difficulty for consumers to obtain loans to finance the purchase
of our products, all of which caused a reduction in our motorcycle sales, as
well as sales throughout the industry. Revenues for the nine months ended
September 30, 2008 would have been significantly less had we not liquidated
our
inventory position during the three months ended September 30, 2008, as
described in the discussion of total revenues for the three month comparable
periods above.
Cost
of
Sales:
Cost
of
sales for the nine months ended September 30, 2008 was $67,268,668, which was
$469,328 (0.7%) more than cost of sales of $66,772,340 for the same period
in
2008. This increase in cost of sales for the comparable periods reflects the
decrease in cost of sales for the comparable six month periods ended June 30,
2008 and 2007, primarily attributable to a corresponding decrease in sales
between those periods, which was more than offset by an increase in costs and
sales during the three months ended September 30, 2008, as a result of our
liquidation of existing inventory.
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2008 were $9,979,356, an
increase of $245,506 (2.5%) from $9,733,859 for the same period in 2007.
This increase was attributable to a significant increase in cancellation fees
charged by manufacturers relating to canceled motorcycle and ATV orders made
by
our dealerships, which increased from approximately $10,000 for the nine month
period ended September 30, 2007 to approximately $85,000 for the same
period in 2008. This increase for the comparable periods also was attributable
to (i) an increase in utility costs from approximately $176,000 during the
first
nine months of 2007 to approximately $215,000 for the same period in 2008;
(ii)
an increase in fuel costs related to fueling of motorcycles while maintained
in
our showrooms from approximately $91,400 during the nine months ended 2007
to
approximately $131,000 for the same period in 2008; and (iii) an increase
in advertising costs from approximately $1,057,600 during the first nine months
of 2007 to approximately $1,103,500 for the same period in 2008.
Income
from Operations:
We
had
income from operations before other income (expense) for the nine months ended
September 30, 2008 of $1,284,371, as compared to income from operations before
other income (expense) of $2,805,754 for the same period in 2007, which reflects
a decrease in income of $1,521,383 (54.2%). This decrease in income from
operations was primarily the result of a decline in profit margins on the sale
of our products to approximately 14.4% during the first half of this year from
15.4% for the half of 2007. This reduction in profit margins was primarily
attributable to our inability to sell motorcycles at a higher price per unit
in
the first half of 2008 compared to the first half of 2007, and the
increased difficulty consumers faced in obtaining financing in the first half
of
2008 to pay such higher prices. Additionally, this reduction also reflects
the
lower profit margins which resulted from our liquidation of inventory during
the
third quarter of 2008. Furthermore this reduction in income was also
attributable to the $245,506 increase in operating expenses discussed
above.
Other
Income and (Expense):
Other
expenses for the nine months ended September 30, 2008 decreased $237,427 (25.6%)
to $689,449 from $926,876 for the same period in 2007. This reduction in other
expense was primarily attributable to the reduction of interest expense from
$1,004,254 during the first nine months of 2007 to $763,992 during the same
period in 2008. The reduction in interest expense between the comparable periods
was primarily attributable to the reduction in interest rates applicable to
our
outstanding indebtedness and our floor plan financing, as well as the reduction
in the amount of inventory at our locations.
Income
before Provision for Income Taxes
We
had
income before provision for taxes for the nine months ended September 30, 2008
of $594,922 as compared with income before provision for taxes of $1,878,878
for
the same period in 2007, which represents a decrease of $1,283,956 (68.3%).
The
decrease in income before provision for income taxes can be attributed to the
same reasons for the decrease in income from operations discussed above. Income
before provision from income taxes during the first nine months of 2008 was
somewhat better when compared with the same period in 2007, as a result of
the
reduction in interest expense, between the two periods, as described in Other
Income and (Expense) above.
Net
Income before Preferred Dividends:
We
had
income before preferred dividends of $408,022 for the nine months ended
September 30, 2008, as compared to net income before preferred dividends of
$1,464,878 for the same period in 2007. This reflects a decrease in income
before preferred dividends of $1,056,856 (72.1%) between these comparable
periods. The decrease in income before preferred dividends can be attributed
to
the same reasons for the decrease in income before provision for income taxes
discussed above.
Liquidity
and Capital Resources.
Our
primary source of liquidity has been cash generated by operations and borrowings
under various credit facilities. As of September 30, 2008, we had $236,816
in
cash and cash equivalents, compared to $919,784 as of December 31,
2007. Until required for operations, our policy is to invest excess cash in
bank
deposits and money market funds. Net working capital as of September 30, 2008
was $1,860,486, compared to $1,442,703 as of December 31,
2007.
The
Company receives floor plan financing from six different motorcycle
manufacturers for whom the Company sells the manufacturers' products. The
Company uses such floor plan financing to assist it in financing and carrying
the Company's inventory necessary to achieve the Company's sales goals. Such
manufacturers' collateral includes all unit inventory, plus a general lien
on
all assets of Andrews Cycles and Chicago Cycles.
The
Company has acquired the loans described under the heading Loan Transactions
above. As a result of the September 2005 Private Placement, the Company also
raised additional cash from financing activities of approximately $2,485,000
for
use in connection with its operations. Additionally, in the future the Company
may attempt to raise additional financing through the sale of its debt and/or
equity securities for expansion of its business, including acquisitions of
other
dealers and distribution rights for brands.
As of September
30, 2008, we had outstanding indebtedness payable within 12 months in an
aggregate amount of approximately $19,584,915. Of this amount, approximately
$16,866,395 is payable to financial institutions in repayment of loans and other
credit facilities provided to us and approximately $2,718,520 relates to
outstanding trade payables. In the event that we are unable to repay all or
any
portion of these outstanding amounts from cash from operations, we would be
required to (i) seek one or more extensions for the payment of such amounts,
(ii) refinance such debt to the extent available, (iii) raise additional equity
capital or (iv) consummate any combination of the foregoing
transactions.
Inventory
Management.
We
believe that successful inventory management is the most important factor in
determining our profitability. In the power sports business, and particularly
as
it relates to the sale of motorcycles, there is normally a limited timeframe
for
the sale of current year models. For example, if we are unable to sell a
significant portion of our 2008 models before the 2009 models are released,
it
could be very difficult for us to sell our remaining inventory of 2008 models.
Therefore, our goal is to limit sales of carryover products (i.e. products
that
remain in inventory after the release of new models) to no more than 10% of
our
total sales each year. This is accomplished by making all of our purchasing
decisions based on sales information for the prior year and then utilizing
aggressive sales and marketing techniques during the early part of a model
year
in order to assure the timely sale of our products.
Management
believes from information obtained within the industry that several motorcycle
manufacturers have reduced the number of motorcycles they export to U.S.
dealers for the model year 2008. This has resulted in fewer units
allocated to most dealerships. However, we believe that because of the number
of
units sold from our dealerships in 2007 and because allocation of units by
dealerships is based upon the number of units a dealership sold during the
prior
year, we will not be adversely affected by the reduced production in
2008.
With
respect to carryover models, while we attempt to limit carryover to 10% of
total
sales, we are able to benefit from cash incentives provided by manufacturers
for
most carryover products. These cash incentives minimize our need to reduce
prices for carryover models, as our customers are provided with cash
reimbursement directly from the manufacturers. Similarly, we are able to use
the
cash incentives provided on our carryover products to promote new models, as
publicized offers of large cash rebates generate consumer interest resulting
in
greater showroom traffic.
Seasonality.
Our
two
main products - motorcycles and all terrain vehicles (“ATVs”) are subject to
seasonality. Traditionally, the motorcycle season begins in late February or
early March and runs until September. In September/October, the sale of ATVs
increases while motorcycle sales decrease.
Impact
of Inflation.
General
inflation in the economy has driven the operating expenses of many businesses
higher, and, accordingly we have experienced increased salaries and higher
prices for supplies, goods and services. We continuously seek methods of
reducing costs and streamlining operations while maximizing efficiency through
improved internal operating procedures and controls. While we are subject to
inflation as described above, our management believes that inflation currently
does not have a material effect on our operating results, but there can be
no
assurance that this will continue to be so in the future.
Critical
Accounting Policy and Estimates.
Our
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the
United States of America, as promulgated by the PCAOB. The preparation of these
condensed consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, fixed assets, inventory, accounts
receivable, accrued expenses, financing operations, and contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed reasonable under
the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Set forth below are the policies that we have
identified as critical to our business operations and the understanding of
our
results of operations or that involve significant estimates. For detailed
discussion of other significant accounting policies see Note A, Summary of
Significant Accounting Policies, of the Notes to the Consolidated Financial
Statements, contained elsewhere in this report.
Intangibles
and Long-lived Assets
-
Goodwill is tested for impairment on an annual basis, or more frequently if
events or circumstances indicate that impairment may have occurred. The Company
is subject to financial statement risk to the extent that intangible assets
become impaired due to decreases in the fair market value of the related
underlying business.
We
estimate the depreciable lives of our property and equipment, including any
leasehold improvements, and review them on an on-going basis. The Company
believes that the long-lived assets are appropriately valued. However, the
assumptions and estimates used may change, and the Company may be required
to
record impairment to reduce the carrying value of these assets.
Revenue
Recognition: Vehicle Sales
- The
Company records revenue when vehicles are delivered and title has passed to
the
customer, when vehicle service or repair work is performed and/or when parts
are
delivered. Sales promotions that are offered to customers are accounted for
as a
reduction to the sales price at the time of sale. Incentives, rebates and
holdbacks offered by manufacturers directly to the Company are recognized at
the
time of sale if they are vehicle specific, or as earned in accordance with
the
manufacturer program rules and are recorded as a reduction of cost of
merchandise sold.
Revenue
Recognition: Finance, Insurance and Extended Service Revenues
- The
Company arranges financing for customers through various financial institutions
and receives a commission from the lender equal to the difference between the
interest rates charged to customers and the interest rates set by the financing
institution. The Company also receives commissions from the sale of various
third party insurance products to customers and extended service contracts.
These commissions are recorded as revenue at the time the customer enters into
the contract. The Company is not the obligor under any of these contracts.
In
the case of finance contracts, a customer may prepay or fail to pay their
contract, thereby terminating the contract. Customers may also terminate
extended service contracts, which are fully paid at purchase, and become
eligible for refunds of unused premiums. In these circumstances, a portion
of
the commissions the Company receives may be charged back based on the relevant
terms of the contracts. The revenue the Company records relating to commissions
is net of an estimate of the ultimate amount of charge backs the Company will
be
required to pay. Such estimates of chargeback experience are based on our
historical chargeback expense arising from similar contracts. The Company also
acts as the warrantor on certain extended service contracts and defers the
revenue and recognizes it over the life of the contract on a straight-line
basis.
Off-Balance
Sheet Arrangements.
We
have
no off-balance sheet arrangements.
Not
applicable.
Item
4T. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
In
accordance with the rules required by the SEC for information required to be
disclosed, in this quarterly report, the Company’s management evaluated, with
the participation of the Company’s President and Chief Executive Officer, the
effectiveness and the operation of the Company’s disclosure controls and
procedures. Based upon their evaluation of these disclosure controls and
procedures, the President and Chief Executive Officer have concluded that the
Company’s disclosure controls and procedures were effective for accumulating
recording, processing, summarizing and communicating, to the Company’s
management, to ensure timely decisions regarding disclosure information needed
within the time periods specified in the SEC rules and forms.
Controls
and Procedures over Financial Reporting
The
Company’s management is responsible for establishing adequate internal control
over financial reporting. Internal control over financial reporting is a process
to provide reasonable assurances regarding the reliability of our financial
reporting for external purposes. Internal control over financial reporting
includes maintaining records that in reasonable detail accurately and fairly
reflect our transactions; providing reasonable assurance that transactions
are
recorded as necessary for the preparation of our financial statements; providing
reasonable assurances that receipts and expenditures of Company assets are
made
with management authorization; and providing reasonable assurances 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.
Under
the
supervision of management, including the two executive officers, an evaluation
was conducted to measure the effectiveness of the Company’s internal control
over financial reporting. This evaluation was based on the criteria established
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The evaluation was conducted to assess the effectiveness of the Company’s
internal control as it related to the financial reporting as of September 30,
2008. Management believes that the Company’s internal control over financial
reporting was effective as of September 30, 2008.
PART
II
Item
1. Legal
Proceedings
Item
1A. Risk
Factors
Not
Applicable.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Item
3. Defaults
upon Senior Securities
Item
4. Submission
of Matters to a Vote of Security Holders
Item
5. Other
Information
Item
6. Exhibits
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule
13a-14(b)).
|
|
|
32.2
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Rule
13a-14(b)).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
GIANT
MOTORSPORTS, INC.
|
|
|
|
Date:
November 14, 2008
|
By:
|
/s/
Russell A. Haehn
|
|
|
Name:
Russell A. Haehn
|
|
|
Title:
Chairman of the Board of Directors,
|
|
|
Chief
Executive Officer and Secretary
|
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
November 14, 2008
|
By:
|
/s/
Gregory A. Haehn
|
|
|
Name:
Gregory A. Haehn
|
|
|
Title:
President, Chief Operating Officer,
|
|
|
Treasurer
and a Director
|
|
|
(Principal
Financial and Accounting
Officer)
|