NOTES
TO CONDENSED FINANCIAL STATEMENTS
March
31, 2014
NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of Business
Avangard Capital Group, Inc., a Nevada corporation is referred to in this report as “we”,
“us”, “our”, “ACG”, the “Company” or “Avangard Capital Group.”
We
were incorporated June 13, 2012 under the laws of the State of Nevada. Our executive offices are located at 2708 Commerce Way,
Suite 300, Philadelphia, PA 19154.
We
are an independent auto sales finance company that provides floor plan financing for independent used car dealers based on the
value of collateral (the car) as determined by us using the automobile industry’s nationally-recognized valuation sources.
We operate in the states of New Jersey, Pennsylvania and Florida. We commenced business June 22, 2012 with the purchase of all
floor plan receivables from Avangard Auto Finance, Inc. (“AAF”), an affiliate. Pursuant to an Assignment Agreement
with AAF dated June 13, 2012, we acquired AAF’s floor plan financing portfolio for $151,979, the face value of the contracts
plus accrued interest and fees at that time.
In
January 2013 we received approval and were licensed by the States of Florida and New Jersey as a Sales Finance Company. In February
2013, we were licensed in the Commonwealth of Pennsylvania as a Sales Finance Company. These licenses permit us to expand our
operations to providing financing for auto sales by dealers.
On
March 26, 2013 we acquired certain retail installment contract receivables from AAF and Avangard Financial Group, Inc., a related
party (“AFG”) for $102,250. The receivables consisted of an aggregate principal balance of approximately $141,868
for current loans receivables and approximately $323,449 for non-current loans receivables.
Interim
Financial Statements
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03 of Regulation
S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain
information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed
or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these financial statements
are adequate to make the information presented not misleading. The unaudited condensed financial statements included in this document
have been prepared on the same basis as the annual financial statements, and in our opinion reflect all adjustments, which include
normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial
statements. The results for the nine months ended March 31, 2014 are not necessarily indicative of the results expected for the
full year or for any subsequent interim periods. These unaudited condensed financial statements should be read in conjunction
with the audited financial statements and the notes to those statements included in our Annual Report on Form 10-K for the period
ended June 30, 2013 filed on September 30, 2013.
Use
of Estimates
We
use estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results
could differ from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents include highly liquid investments with an original maturity of three month or less when purchased.
Fair
Value of Financial Instruments
The
fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than a forced sale or liquidation. Significant differences can arise between the fair value and
carrying amount of financial instruments that are recognized at historical cost amounts. The carrying value of cash, floor plan
financing receivable, and accounts payable approximate the fair value because of the short maturity of those instruments.
The
accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish
a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value
measures.
AVANGARD
CAPITAL GROUP, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
March
31, 2014
The
three levels are defined as follows:
Level
1:
|
inputs
to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
Level
2:
|
inputs
to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
Level
3:
|
inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
|
Marketable
securities were measured at fair value using Level 1 inputs derived from quoted prices in active markets. In December 2013 the
company converted 100% of their Marketable Securities to cash and cash equivalents.
Marketable
Securities
Our
marketable equity securities are classified and accounted for as available-for-sale and reported at fair value. Unrealized gains
and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive income, net of
tax in our balance sheets. Changes in the fair value of available-for sale securities impact our net income only when such securities
are sold or other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined
by specific identification of each security’s cost basis. Management determines the appropriate classification of its investments
at the time of purchase and re-evaluates the available-for-sale designations as of each balance sheet date.
Revenue
Recognition
Interest
income from floor plan financing receivable is recognized using the interest method. Accrual of income on finance receivables
is suspended when a contract is contractually delinquent for ninety (90) days or more. The accrual is resumed when the contract
becomes contractually current and past due interest is recognized at that time.
Origination
Fees are recognized for services provided during the loan origination process at the point in time the loan is funded.
The
Company accounts for its investment in floor plan financing receivables using the interest method, under ASC 310 pools of accounts
are established based on certain common risk criteria. Each pool is recorded at cost and is accounted for as a single unit for
the recognition of income, principal payments and loss provision.
The
Company accounts for its investment in retail installment contract receivables it acquired on March 26, 2013 using the cost recovery
method as the Company’s collections on this particular pool of accounts cannot be reasonably predicted. Under the cost recovery
method, no income is recognized until the cost of the retail installment contract receivables portfolio has been fully recovered.
This pool of accounts can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections.
In this case, all cash collections are recognized as revenue when received.
Floor
Plan Financing Receivable
Floor
plan financing receivable consists of purchased automobiles, which were assigned to us upon acquisition. The titles to the automobiles,
which serve as security for the payment of the purchased contracts, are held by us.
Floor
plan financing receivable that we intend and have the ability to hold for the foreseeable future, or until maturities of payoff
are reported at their outstanding gross contractual balances, net of allowance for losses and unearned finance revenue. Unearned
finance revenue consists of unearned interest and discounts realized on contract purchases.
We
perform periodic evaluations of the adequacy of the allowance for losses taking into consideration the past loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value
of any underlying collateral, as well as recovery potential of any underlying collateral, personal guarantees and current economic
conditions. Any increases in the allowance for losses subsequent to the acquisition of the contract are charged to earnings.
Our
primary floor plan customer defaulted on their agreement in February 2014. The floor plan agreement carried personal guarantees
and confessions of judgment, in addition to first lien on all vehicles subject to the floor plan agreement. In March 2014, the
customer filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. We repossessed 9 of the 21 vehicles
subject to the floor plan agreement from the debtor prior to its Chapter 11 filing. Additionally, there is a question of the legality
of the debtor’s sale of four (4) vehicles which were subject to financing. Since we are unable to determine the exact amount
of ultimate losses, on March 31, 2014 we provided a reserve for uncollectible receivables of $115,000. As of June 30, 2013 no
provision for losses had been made.
AVANGARD
CAPITAL GROUP, INC.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
March 31, 2014
Used
Car Auto Financing
On
March 26, 2013, we acquired a portfolio of consumer automobile loans from Avangard Auto Finance, Inc., (“AAF”), a
related party.
The
Company is an indirect lender from a legal perspective, meaning the loan is originated by the dealer and immediately assigned
to the Company. Typically, the loan is purchased from the dealer. The disbursement to the dealer is calculated using our guidelines
as to the value of the automobile. The amount advanced against the collateral is 85% of the “Black Book” liquidation
value of the car. From time to time we will have automobiles in inventory as a result of repossessions due to non-payment. Our
policy is to issue a repossession order after 15 days delinquency of the loan.
As
of the date of acquisition, the entire Used Car Auto Financing Portfolio’s collection could not be reasonably predicted
by the Company; therefore the modified cost recovery method has been utilized to account for the pool of loans. As of March 31,
2014 the Company recovered its entire investment in the loan portfolio. As of March 31, 2014, we collected 100% of the aggregate
amount of the Company paid to acquire this loan portfolio. On February 19, 2014 we transferred all remaining loans receivable
to AAF as we determined that the outstanding balances were either uncollectible or difficult to collect and the Company did not
believe that pursuing further collection efforts was a good use of the Company’s resources.
Stock-based
Compensation
We
account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions
with employees and directors. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares
of our common stock instead of settling such obligations with cash payments.
Comprehensive
Income
Comprehensive
income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses,
gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other
comprehensive income consists of unrealized gains on marketable securities categorized as available-for-sale.
Concentrations
of Credit Risk
The
Company’s assets exposed to credit risk are cash and finance and interest receivables.
For
the nine months ended March 31, 2014, one significant customer accounted for 94% for both revenue and accounts receivable of total
revenue and floor plan financing receivable.
The
Company maintains its cash balances in Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions.
At times, cash balances may exceed the maximum insurance offered by FDIC.
Property
and Equipment
Fixed
assets are recorded at their historical cost upon acquisition or cost of construction. The assets are depreciated using the straight
line method over their statutory lives. The fixed asset categories and their estimated lives are as follows:
Office
Equipment 5 years
Income
Taxes
We
account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net
operating loss for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the
benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax
asset for the nine months ended March 31, 2014.
AVANGARD
CAPITAL GROUP, INC.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
March 31, 2014
NOTE
2 - MARKETABLE SECURITIES AND CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME
Marketable
Securities
Marketable
equity securities purchased during the current fiscal year were classified and accounted for as available-for-sale. As of March
31, 2014 all marketable equity securities were converted to cash and cash equivalents.
We
recognized $0 of net realized gains during the quarter ended March 31, 2014 and $58,091 for the nine months ended March 31, 2014.
Realized gains on the sale of the securities are determined by specific identification of each security’s cost basis.
Changes
in Accumulated Other Comprehensive Income:
The
following table shows the accumulated other comprehensive income balance as of March 31, 2014:
|
|
Unrealized
Gain on Marketable Securities
|
|
Balance at June 30, 2013
|
|
$
|
24,225
|
|
Other comprehensive income before reclassifications
|
|
|
(12,146
|
)
|
Net current-period other comprehensive income
|
|
|
12,079
|
|
Amounts reclassified from accumulated other comprehensive
income
|
|
|
(12,079
|
)
|
Balance at March 31, 2014
|
|
$
|
-
|
|
NOTE
3 - INCOME TAXES
The
provision for income taxes consists of the following:
|
|
March 31, 2014
|
|
|
September 30,
2013
|
|
Deferred Tax Asset
|
|
$
|
203,000
|
|
|
$
|
52,695
|
|
Less: Valuation Allowance
|
|
|
(203,000
|
)
|
|
|
(52,695
|
)
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of March 31, 2014, the Company has net operating loss carry forwards of $541,797 that can be utilized to offset future taxable
income for Federal and State income tax purposes through 2024, generating a maximum deferred tax benefit of $203,000 by applying
Federal and State statutory tax rates. The Company applied a 100% valuation reserve against the deferred tax benefit, as the realization
of the benefit is not certain.
The
following tax years remain subject to examination by the respective tax jurisdictions.
|
|
|
Fiscal
Years ending
June 30,
|
|
Internal Revenue Service
|
|
|
2012
- 2013
|
|
Commonwealth of Pennsylvania
|
|
|
2012
- 2013
|
|
NOTE
4 - COMMON AND PREFERRED STOCK
We
are authorized to issue 1,000,000,000 shares of $0.0001 par value common stock of which 10,134,664 shares have been issued and
are outstanding, designated Class A at March 31, 2014 and June 30, 2013. A total of 114,664 shares of the Company’s common
stock were issued during the year ended June 30, 2013 in connection with the sale of 28,666 Units in the Offering discussed below.
The Company received proceeds of $171,985 in connection with the sale of the Units of which, $135,996 was a subscription receivable
at June 30, 2013 and was subsequently collected on July 5, 2013.
We
are authorized to issue 300,000,000 shares of $0.0001 par value Convertible Preferred Stock Series A of which 905,000 shares have
been issued and outstanding at March 31, 2014 and June 30, 2013, respectively.
Offering
of Securities
On
February 13, 2013, our Registration Statement on Form S-1 was declared effective by the SEC whereby we offered 5,000,000 units
(the “Offering”), each unit consisting of four shares of our common stock and one redeemable common stock warrant
(a “Warrant”) at a public offering price of $6.00 per unit (a “Unit”). The Warrants became exercisable
and separately transferable from the shares 30 calendar days after February 13, 2013. At any time thereafter until three years
following February 13, 2013, subject to earlier redemption, each Warrant entitles the holder to purchase one share of our common
stock at an exercise price of $2.00 (133% of the per share price of the common stock included in the Units), subject to adjustment.
The Warrants are subject to redemption for $0.0001 per Warrant upon 30 days prior written notice, provided that the last sale
price of our common stock equals or exceeds $3.00 (150% of the Warrant exercise price), subject to adjustment, for 10 consecutive
trading days. As of March 31, 2014, 28,666 units have been sold and no warrants have been exercised. The Offering expired on August
14, 2013.
AVANGARD
CAPITAL GROUP, INC.
NOTES TO CONDENSED
FINANCIAL STATEMENTS
March 31, 2014
Common
Stock Purchase Warrants
A
summary of the status of our outstanding common stock purchase warrants granted as of March 31, 2014 and changes during the period
is as follows:
|
|
Shares
|
|
|
Weighted
|
|
|
|
Underlying
|
|
|
Average
|
|
|
|
Warrants
|
|
|
exercise price
|
|
Outstanding and exercisable at June 30, 2013
|
|
|
28,666
|
|
|
$
|
2.00
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at March 31, 2014
|
|
|
28,666
|
|
|
$
|
2.00
|
|
The
following information applies to all warrants outstanding and exercisable at March 31, 2014
Number of Warrants
|
|
|
|
|
|
|
outstanding and
|
|
|
|
|
|
Remaining contractual
|
exercisable
|
|
|
Exercise Price
|
|
|
life (Years)
|
28,666
|
|
|
$
|
2.00
|
|
|
1.83
|
NOTE
5 - LOSS PER SHARE
Basic
net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period.
The Company’s potential dilutive shares, which include convertible preferred shares and shares issuable upon exercise of
the Warrants, have not been included in the computation of diluted net loss per share as the result would be antidilutive. Such
potentially dilutive shares are excluded when the effect would be to reduce net loss per share. All potential common shares have
been excluded from the computation of the dilutive net loss per share for the period presented because the effect would have been
antidilutive. Such potential common shares consist of the following:
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
Convertible preferred stock
|
|
|
2,715,000
|
|
|
|
2,715,000
|
|
Warrants attached to units sold
|
|
|
28,666
|
|
|
|
-
|
|
NOTE
6 - RELATED PARTY TRANSACTIONS
We
entered into a lease agreement for office space with Commerce Way, LLC (“CWL”). CWL is owned by DJS Investments, LLC
and SELF, LP. SELF, LP is a shareholder of Friedman Financial Group, who is a principal shareholder of our company. The lease
requires monthly payments, commencing August 1, 2012, of $2,500 on a month to month basis. No security deposit was required. Rent
expense for the three months ended March 31, 2014 and 2013 was $7,500 and $7,500 respectively. Rent expense for the nine months
ended March 31, 2014 and 2013 was $22,500 and $22,500 respectively.
On
March 26, 2013 we entered into an Retail Installment Contract Receivable Purchase Agreement (the “Purchase Agreement”)
with Avangard Auto Finance, Inc. and Avangard Financial Group, Inc. (the “Sellers”), both of whom are our affiliates.
Under the terms of the Purchase Agreement, we agreed to pay the Sellers $102,250 (the “Purchase Price”) to purchase
certain of their retail installment contract receivables as of the date of the agreement. These amounts included an aggregate
principal balance of approximately $141,868 for current loans receivables (the “Current Loans”) and an aggregate principal
balance of approximately $323,449 for non-current loans receivables (the “Non-Current Loans”). The Sellers guaranteed
to us that we will recover no less than 70% of the aggregate amount of the Current Loans. If we recover less than 70% of the aggregate
amount of the Current Loans, the Sellers shall pay the difference to us upon demand. On February 19, 2014 we transferred all remaining
loans receivable to AAF as we determined that the outstanding balances were either uncollectible or difficult to collect and the
Company did not believe that pursuing further collection efforts was a good use of the Company’s resources.
Robert
Cornaglia, a member of the Board of Directors, provided certain consulting services to the Company during the quarter ended March
31, 2014 for which the Company incurred expenses of $9,800
Officers
and related parties of our company provide certain administrative expenses at no charge.
Related
party receivable of $2,375 reflects amounts due from the Company’s Chief Executive Officer for unreimbursable expenses.