SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|ý||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarter ended December 31, 2011
|¨||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: 000-53911
MK AUTOMOTIVE, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
5833 West Tropicana Avenue
Las Vegas, Nevada
(Address of principal executive offices)
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former
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. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
|Large accelerated filer ¨||Accelerated filer ¨|
|Non-accelerated filer ¨||Smaller reporting company ý|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes ý No
There were 38,014,672 shares of issuer’s Common Stock outstanding as of December 31, 2011.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements are speculative and uncertain and not based on historical facts. Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These uncertainties and other factors are more fully described under Part I, Item 1A of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 6, 2010 and include:
|·||the continued availability of key personnel|
|·||consumer acceptance of franchised operations in the automotive repair business|
|·||location and appearance of owned and franchised outlets|
|·||availability and cost of qualified automotive technicians|
|·||ability to attract and retain qualified technicians, managers and franchisees|
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements, and you are advised to consult any further disclosures made on related subjects in our future filings.
TABLE OF CONTENTS
|Item 1.||Financial Statements||1|
|Item 2.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||5|
|Item 3.||Quantitative and Qualitative Disclosures about Market Risk||7|
|Item 4.||Controls and Procedures||7|
|Item 5.||Other Information||7|
Item 1. Financial Statements.
MK AUTOMOTIVE, INC.
|ASSETS||December 31, 2011||March 31, 2011|
|Prepaid expenses and other current assets||4,543||1,833|
|Total current assets||225,275||139,006|
|Property and Equipment:|
|Furniture, fixtures, and equipment||158,079||158,079|
|Less - accumulated depreciation||(235,347||)||(223,629||)|
|Total property and equipment||1,322,732||1,334,450|
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)|
|Accounts payable - trade||$||227,136||$||198,233|
|Accrued expenses and other current liabilities||120,553||60,241|
|Accrued interest - related party||-||223,766|
|Line of credit||87,287||96,601|
|Payable to Related Party||446,561||220,857|
|Current portion of long-term debt - third party||138,184||612,145|
|Total current liabilities||1,019,721||1,411,843|
|Long-term debt - third party, net of current portion||1,185,011||1,227,863|
|Total Long-Term Liabilities||1,185,011||1,227,863|
|Common stock, $0.001 par value, 50,000,000 shares authorized;|
|38,014,672 and 30,414,145 shares issued and outstanding||38,015||30,415|
|Additional paid in capital||2,397,075||2,119,654|
|Total stockholders' equity||637,835||89,951|
|Total Liabilities and Stockholders' Equity||$||2,842,567||$||2,729,657|
The accompanying notes are an integral part of the unaudited financial statements
|MK AUTOMOTIVE, INC.|
|Unaudited Interim Statements of Operations|
|For the Three and Nine Months ended December 31, 2011 and 2010|
|Three Months Ended December 31,||Nine Months Ended December 31,|
|Cost of Goods Sold||807,654||980,808||2,468,101||2,934,088|
|Selling, general and administrative expenses|
|Salaries, wages, and employee benefits||32,021||29,831||94,104||88,808|
|Advertising and marketing||400||13,203||13,301||34,162|
|Income from Operations||139,558||(29,281||)||166,313||125,390|
|Other income (expense)|
|Gain on extinguishment of debt||239,382||-||239,382||-|
|Total other expense||202,505||(49,114||)||96,550||(131,036||)|
|Net (loss) Income||342,063||(78,395||)||262,863||(5,646||)|
|Basic and diluted earning per share||0.01||(0.00||)||0.01||(0.00||)|
|Weighted average shares outstanding||31,306,548||29,847,100||31,051,149||29,847,100|
The accompanying notes are an integral part of the unaudited financial statements
MK AUTOMOTIVE, INC.
Unaudited Interim Statements of Cash Flows
For the Nine Months ended December 31, 2011 and 2010
|Cash Flows from Operating Activities|
|Net (loss) Income||$||262,863||$||(5,646||)|
|Adjustments to reconcile net loss to net cash from operating activities|
|Gain on extinguishment of Debt||(239,382||)||-|
|Notes Receivable (see Note 7)||(40,000||)||-|
|Changes in operating assets and liabilities:|
|Prepaid expenses and other current assets||(2,711||)||(12,846||)|
|Accounts payable - trade||28,903||66,754|
|Accrued expenses and other current liabilities||81,567||(46,627||)|
|Net cash provided by operating activities||3,204||64,348|
|Cash Flows from Investing Activities|
|Collection of note receivable||1,641||-|
|Net cash used in investing activities||1,641||-|
|Cash Flows from Financing Activities|
|Payment of advances from shareholders/related parties||-||(19,800||)|
|Proceeds of shareholder loans||225,704||30,000|
|Payments on line of credit, net||(16,353||)||(5,566||)|
|Short-term or long-term borrowings||86,839||-|
|Repayments of debt||(357,230||)||(127,141||)|
|Net cash used in financing activities||(61,040||)||(122,507||)|
|Net Increase (decrease) in cash||(56,195||)||(58,159||)|
|Cash at Beginning of Period||80,260||111,658|
|Cash at End of Period||$||24,065||$||53,499|
|Supplemental Disclosure of Cash Flow Information|
|Cash paid during the period for interest||$||115,114||$||124,880|
|Income taxes paid||-||-|
|Common stock issued for accrued interest||245,021||-|
The accompanying notes are an integral part of the unaudited financial statements
MK Automotive, Inc.
Notes to the Unaudited Interim Condensed Financial Statements
For the Quarter ended December 31, 2011
Note 1. Basis of Presentation and Use of Estimates
The accompanying unaudited interim financial statements of MK Automotive, Inc. (“we”, “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the SEC and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended March 31, 2011 filed on June 27, 2011. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the year ended March 31, 2011, as reported in the Form 10-K have been omitted.
Note 2. Accounting Policies: We have evaluated recent accounting pronouncements and believe none will have a material effect on our financial statements upon implementation.
Note 3. Stockholders’ Equity:
During the three months ended June 30, 2011, we issued 725,000 shares to consultants, whose services were valued at $25,000. Due to the light trading and high price volatility of our stock, management determined that the fair value of the consulting services was more reliably measurable than the fair value of the stock issued. $20,000 of these services were classified as deferred offering costs at June 30, 2011.
During the three months ended September 30, 2011, there were no new shares issued. We expensed the $20,000 deferred offering costs as our intended private placement was not completed. We continue to pursue additional capitalization of the company.
Three employees had been granted 400,000 shares on November 16, 2010, which were held in escrow during a vesting period and not considered outstanding at March 31, 2011. The compensatory value of this employee stock compensation was to have been recognized over 36 months starting June 1, 2011, based on a vesting schedule. During May 2011, these three stock grants were cancelled prior to any vesting.
On July 9, 2010, the Company hired a consulting firm to perform franchise sales and/or brokerage services over a one-year term. As part of the compensation, the company granted warrants which vested based on the consultant’s performance. The contract expired July 9, 2011 without any of these warrants being vested. No stock compensation expense was ever recorded by the Company related to this agreement.
During the three months ended December 31, 2011, we issued 350,000 shares for services valued at $7,000. The Company also issued 6,125,527 shares to related parties for the conversion of accrued interest valued at $245,021. A further 400,000 shares were issued to employees for services performed valued at $8,000. All shares issued during the current quarter were valued at the market value of our common shares on the date of issuance because our trading volume has increased to the point that the market can be considered a level 1 measure of fair value, and is now a more reliable measure of fair value than all measures of the consideration we received in exchange for our shares.
At December 31, 2011, we had 38,014,672 shares outstanding.
Note 4. Extinguishment of Debt
On December 23, 2011, the company entered into a settlement agreement with one of its lenders to extinguish a loan outstanding. The principal balance of the loan at the time of the extinguishment was $460,410 with related accrued interest of $4,676. Two related parties (see note 5) loaned $225,704 to the company to settle the debt. The difference of $239,382 was recorded as a gain on extinguishment of debt.
Note 5. Related Party Transactions
On December 23, 2011, the Company borrowed $225,704 from two shareholders to settle debt with a lender (see note 4). The terms of the agreement are noninterest bearing and due on demand.
On December 30, 2011, the Company entered into agreements with three related parties to convert accrued interest to common stock. The Company issued 6,125,527 shares to convert accrued interest valued at $245,021. The terms with each related party were modified to noninterest bearing and due on demand for their principal balances due which amount to $446,561 at December 31, 2011. The company therefore will no longer record interest expense or accruals on the remaining outstanding principle.
Note 6. Franchise Sales
On December 31, 2011, the Company sold the business of our Auto Tech Sahara location to an existing Las Vegas area franchisee. Our franchisee agreed to pay us $170,000 related to the acquisition and $30,000 for the franchise license. In addition, the Company was issued a subordinated note in the amount of $40,000 (see note 7) as partial payment towards the $170,000 acquisition price.
Note 7. Note Receivable
On December 31, 2011, the Company entered into a subordinated note issued in partial consideration related to the sale of the Company’s Auto Tech Sahara location to a franchisee. The note receivable is in the amount of $40,000 with an adjustable interest rate equal to 2.75% over the current prime rate. No payments will be made on the note receivable for five years of which accrued interest will be added to the principal balance. At the beginning of the sixth year, principal and interest shall be amortized in 20 equal quarterly installments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 27, 2011. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K.
We operate full service automotive maintenance and repair service shops in five company-owned and two franchise locations in the greater Las Vegas, Nevada, metropolitan area and have two franchise locations in St. Louis, Missouri. Expansion is planned through both the establishment of additional locations that we will operate and by granting franchises to independent businesses. The term “fiscal 2011” refers to the twelve months ended March 31, 2011, and the term “fiscal 2012” refers to the twelve months ending March 31, 2012.
Results of Operations
Three Months Ended December 31, 2011 compared to the Three Months Ended December 31, 2010
Net sales during the three months ended December 31, 2011 were $1,046,326 an increase of $4,338 or 0.4%, over net sales of $1,041,988 for the three months ended December 31, 2010. Our results for 2011 do not include gross sales and cost of goods sold of our Decatur location in Nevada, which was sold to a franchisee in March of 2011. Sales for the quarter include the sale of the Sahara location and franchise fees related to the Sahara location. In addition, our primary market, Nevada, has been slower to recover from the national recession than other areas of the country. The population in our service area is no longer growing, and our customers continue to defer maintenance and repair on personal automobiles.
Cost of goods sold during the three months ended December 31, 2011 was $807,654, a decrease of $173,154, or 17.7%, compared to cost of goods sold of $980,808 for the three months ended December 31, 2010, due mostly to last year’s inclusion of the Decatur store’s costs prior to its sale to a franchisee. Cost of goods sold as a percentage of sales was 77.2% for the three months ended December 31, 2011 compared to 94.1% for the three months ended December 31, 2010. We classify some fixed administrative and selling costs as cost of goods sold, so our margin percentage is not as responsive to changes in our sales. In addition, the recessionary pressure that continues in our primary market, Nevada, increases discounting in our sales process.
Gross profit for the three months ended December 31, 2011 was $238,672, an increase of $177,492, or 290.1%, compared to gross profit of $61,180 for the three months ended December 31, 2010, reflecting the comparisons discussed in the previous two paragraphs.
Selling, general and administrative expenses during three months ended December 31, 2011 were $99,114, an increase of $8,653, or 9.6%, compared to selling, general and administrative expenses during three months ended December 31, 2010 of $90,461. Professional fees increased by $14,339 (63.1%) primarily due to increased consulting costs. Bank charges decreased by $2,840 (15%) as a result of decreased direct sales. In addition, salaries at the corporate executive and administrative level increased $2,190 (7.3%), advertising and marketing expenses decreased by $12,803 (97%), reflecting a shift from more expensive printed media to internet-based marketing conducted by existing staff. Bad debt increased by $7,767 (134.2%).
Income from operations was a profit of $139,558 for the three months ended December 31, 2011 compared to a loss of $29,281 for the three months ended December 31, 2010 due to the sale of the Sahara location. Interest expense for the three months ended December 31, 2011 was $36,877, a decrease of $12,814 or 25.8% compared to interest expense of $49,691 for the three months ended December 31, 2010. Net income for the three months ended December 31, 2011 was $342,063 ($0.01 per share) compared to a net loss of $78,395 ($0.00 per share) for the three months ended December 31, 2010.
Nine Months Ended December 31, 2011 compared to the Nine Months Ended December 31, 2010
Net sales for the nine months ended December 31, 2011 were $2,926,032, a decrease of $506,380, or 14.8%, over net sales of $3,432,412 for the nine months ended December 31, 2010. The Decatur store was franchised on March 1, so its gross sales were included in company results last year, but only franchise royalty revenue was included in company results this year. As well, the primary market in which we operate has been the slowest region in the country to achieve economic recovery. Consumers continue to defer maintenance and repair on personal automobiles as a result.
Cost of goods sold during the nine months ended December 31, 2011 was $2,468,101, a decrease of $465,987, or 15.9%, compared to cost of goods sold of $2,934,088 for the nine months ended December 31, 2010. Cost of goods sold as a percentage of sales decreased to 84.4% for the nine months ended December 31, 2011 compared to 85.5% for the nine months ended December 31, 2010. We classify some fixed administrative and selling costs as cost of goods sold, so our margin percentage is not as responsive to changes in our sales. In addition, the recessionary pressure that continues in our primary market, Nevada, increases discounting in our sales process.
The changes in net sales and cost of goods sold as a percentage of sales resulted in gross profit for the nine months ended December 31, 2011 of $457,931, a decrease of $40,393, or 8.1%, compared to gross profit of $498,324 for the nine months ended December 31, 2010.
Selling, general and administrative expenses during the nine months ended December 31, 2011 were $291,618, a decrease of $81,316, or 21.8%, compared to selling, general and administrative expenses during the nine months ended December 31, 2010 of $372,934. Total professional fees decreased by $61,900 (33.9%) from $182,695 in the nine months ended December 31, 2010 to $120,795 in the nine months ended December 31, 2011. Last year, we included stock compensation at the market value of the stock we issued, as required under GAAP, rather than the more realistic and smaller fair value of the services we contracted for. Of these amounts, $55,556 (2010) and $40,000 (2011) were stock-based (non-cash) and $127,139 (2010) and $80,795 (2011) was cash-based. The franchise development consulting we incurred last year was cash-based. Reductions in Advertising and Marketing of $34,162 (61.1%), Bank Charges of $9,915 (16.6%) were offset by an increase in bad debt of $6,064 (78.6%) and salaries, wages and employee benefit costs of $5,296 (6%).
We posted income from operations of $166,313 for the nine months ended December 31, 2011 compared to $125,390 for the nine months ended December 31, 2010. The increase in profitability was primarily the result the sale of the Sahara property. Interest expense for the nine months ended December 31, 2011 was $142,832, an increase of $10,036 or 7.6% compared to interest expense of $132,796 for the nine months ended December 31, 2010. The increase in interest expense is a result of costs associated with the sale of future credit card receivables, an agreement that we entered into just before the start of fiscal 2012 and repeated in the previous quarter, and are treating as a current note payable. Net income for the nine months ended December 31, 2011 was $262,863 ($0.01 per share) compared to a loss of $5,646 ($0.00 per share) for the nine months ended December 31, 2010.
Liquidity and Capital Resources
We had cash on hand as of December 31, 2011 of $24,065, a decrease of $56,195 compared to cash on hand as of March 31, 2011 of $80,260. Our operating activities during the nine months ended December 31, 2011 provided $3,204. In addition to the cash we used in operating activities, we reduced our debt by $373,583.
As of December 31, 2011, we had outstanding obligations to banks and other unrelated persons in the amount of $1,758,171 and obligations payable to stockholders and related parties in the amount of $446,561. Substantially all of our assets are subject to a security interest and mortgage to secure the repayment of the obligations to banks and other unrelated persons.
We lease property in six locations under non-cancelable operating leases, subletting to franchisees at three locations. All lease agreements provide for minimum lease payments and some lease agreements provide for additional rents contingent upon prescribed sales volumes or constitute net leases, which require us to pay additional rent relating to real estate taxes, insurance, rental taxes, and common area maintenance. During fiscal 2010, we renegotiated the leases relating to our “Durango” and “Henderson” locations to reduce the minimum annual rents.
Since April 1, 2011, we have required cash of approximately $319,000 per month and we generated cash from operating activities of approximately $313,000 per month. The difference was funded primarily through short-term factoring of our future credit card receipts. We will incur additional expenses in the future relating to the reporting and corporate governance requirements as a public company, including the cost of establishing and documenting the effectiveness of internal control over financial reporting as required by the Securities Exchange Act of 1934 and preparing and filing periodic reports with the Securities and Exchange Commission. We expect to pay additional professional fees of between $25,000 and $50,000 over the next 12 months relating to the expenses of being publically traded.
We will incur additional costs relating to franchise operations during fiscal 2011 to the extent a franchise broker arranges a new franchisee. We plan to expand our franchise operations if they are successful. We plan to use fees paid by existing franchisees and franchise fees from new franchisees to fund any expansion of our franchise operations. If fees generated by franchise operations are not sufficient to fund expansion of franchise operations, we may borrow additional funds to support expansion of franchise operations or delay, reduce or terminate franchise operations.
We do not expect per-store revenue to increase during the next 12 months in our primary market, Nevada, and plan to focus on opening stores in other markets to the extent we can attract debt or equity capitalization. In addition, we believe our gross profit will increase during the next 12 months as a result of our continued focus in reduced expenses as a percentage of sales. We do not expect to incur any material capital expenditures during the next 12 months unless we attract new debt or equity capitalization.
We believe that cash available at December 31, 2011, together with cash generated from operating activities will be sufficient to fund our cash requirements for the next 12 months, including all debt service, lease payments and additional expenses relating to being a public company. If funds from operations and available cash are not sufficient, we may borrow additional funds from related parties, defer salaries payable to executives, refinance or renegotiate our existing indebtedness, incur additional indebtedness to banks or unrelated parties, delay payments to our vendors, delay advertising and other expenses, or sell or close some of our operations.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2011.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 6. Exhibits.
The following documents are filed as exhibits to this report.
|31.1*||Certification of our Principal Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.|
|31.2*||Certification of our Principal Financial Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.|
|32.1*||Certification under Section 906 of the Sarbanes-Oxley Act of 2002.|
* Filed with this Report
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.
|Date: February 16, 2012||MK AUTOMOTIVE, INC.|
|By:||/s/ Michael R. Murphy|
|Michael R. Murphy|
|President and Chief Executive Officer|
|31.1||Certification of our President and Chief Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.|
|31.2||Certification of our Principal Financial Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.|
|32.1||Certification of our President and Principal Executive Officer and Principal Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.|