CLIKIA CORP.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended March 31, 2010
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: 000-53911
MK
AUTOMOTIVE, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Nevada
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43-1965656
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(State
or Other Jurisdiction of
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(IRS
Employer
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Incorporation
or Organization)
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Identification
No.)
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5833
West Tropicana Avenue
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Las
Vegas, Nevada
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89103
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code:
(702) 227-8324
Securities
registered under Section 12(b) of the Securities Exchange
Act: NONE
Securities Registered under Section
12(g) of the Exchange Act
:
Common
Stock, $.001 par value per share
(Title of
Class)
Indicate by check mark if the
registrant is a well-know seasoned issuer, as defined in Rule 405 of the
Securities Act.
o
Yes
x
No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Securities Exchange Act.
o
Yes
x
No
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.
o
Yes
x
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).
o
Yes
o
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
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.
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Large
accelerated filer
o
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Accelerated
filer
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o
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Non-accelerated
filer
o
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Smaller
reporting company
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x
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)
o
Yes
x
No
The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the issuer was
$3,847,100 based on the price at which common equity was sold in a
state-registered offering during the year ended March 31, 2010.
There
were 29,847,100 shares of issuer’s Common Stock outstanding as of June 30,
2010.
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, including those
discussed under “Business,” “Risk Factors” and “Financial
Information”. These uncertainties and other factors are more fully
described under Item 1A of this report beginning on page 5 and
include:
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·
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the
continued availability of key
personnel
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·
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consumer
acceptance of franchised operations in the automotive repair
business
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·
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location
and appearance of owned and franchised
outlets
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·
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availability
and cost of qualified automotive
technicians
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·
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ability
to attract and retain qualified technicians, managers and
franchisees
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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
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Page
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PART
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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5
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Item
1B.
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Unresolved
Staff Comments
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7
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Item
2.
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Properties
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7
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Item
3.
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Legal
Proceedings
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8
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Item
4.
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[Removed
and Reserved]
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity; Related Stockholder Matters and Issuer
Purchases of Equity Securities
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8
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Item
6.
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Selected
Financial Data
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8
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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8
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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11
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Item
8.
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Financial
Statements and Supplementary Data
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11
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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11
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Item 9A(T).
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Controls
and Procedures
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11
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Item
9B.
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Other
Information
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12
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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12
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Item
11.
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Executive
Compensation
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13
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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13
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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14
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Item
14.
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Principal
Accountant Fees and Services
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14
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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15
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We were
incorporated on June 20, 2002, and operated as a Subchapter S corporation from
January 1, 2004, until March 31, 2008. On April 1, 2008, we amended
and restated our Articles of Incorporation to increase our authorized shares to
50,000,000 shares of common stock, to increase the par value of our common stock
to $0.001 per share, and to reflect a 10,400:1 forward stock split of the shares
of our common stock outstanding on that date. We terminated our
Subchapter S election at the same time.
We
presently have six company-operated locations and one franchise location in the
greater Las Vegas, Nevada, metropolitan area, and one franchise location in St.
Louis, Missouri. We began operations in 2002 with the acquisition of
our “Tropicana” location in Las Vegas, Nevada. We acquired our
“Durango” and “Henderson” locations in 2003, opened our “Sahara” location in
2005, acquired our “Green Valley” and “Decatur” locations in 2007 and acquired
our “Buffalo” location in 2008. During 2009, we expanded our
“Buffalo” location into adjacent vacant space. We commenced franchise
operations in 2010. Our first franchise location was previously
operated by us as our “Henderson” location and was transferred to one of our
employees. It is operated by him under a franchise
agreement. We also have signed an Area Development Agreement
authorizing a franchisee to develop and open up to 40 locations in Missouri,
Kansas, Oklahoma and Arkansas. The first location under this Area
Development Agreement was opened on June 1, 2010, in St. Louis,
Missouri.
We
provide, either directly or through our franchisees, retail and commercial
automotive diagnostic, maintenance and repair services. Our locations
and franchises are identified by a common appearance and trade name, use our
proprietary location management software, and follow our proprietary operating
procedures to control costs and maintain the quality of our
services. We intend to continue to expand the number of locations we
operate and the number of locations operated by independent businesses under
franchise agreements and may transfer some of our existing operations to
franchisees.
Summary
financial information for the last three fiscal years is set forth
below:
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Year Ended March 31,
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2010
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2009
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2008
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Assets:
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Company
Operated Facilities
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$ | 2,743,909 | $ | 2,702,170 | $ | 2,441,105 | ||||||
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Franchise
Operations
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- | - | - | |||||||||
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Total
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$ | 2,743,909 | $ | 2,702,170 | $ | 2,441,105 | ||||||
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Net
Revenues:
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Company
Operated Facilities
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$ | 4,633,994 | $ | 4,978,456 | $ | 4,348,759 | ||||||
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Franchise
Operations
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$ | 175,000 | - | - | ||||||||
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Total
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$ | 4,808,994 | $ | 4,978,456 | $ | 4,348,759 | ||||||
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Gross
Profits:
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Company
Operated Facilities
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$ | 353,165 | $ | 252,192 | $ | 542,969 | ||||||
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Franchise
Operations
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$ | 172,250 | - | - | ||||||||
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Total
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$ | 525,415 | $ | 252,192 | $ | 542,969 | ||||||
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Net
Income (Loss)
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$ | (282,141 | ) | $ | (1,442,963 | ) | $ | 9,797 | ||||
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Pro
Forma Income Tax Expenses
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- | - | $ | 1,470 | ||||||||
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Pro
Forma Net Income (Loss)
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$ | (282,141 | ) | $ | (1,442,963 | ) | $ | 9,327 | ||||
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Weighted
Average Shares Outstanding
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29,726,353 | 29,202,110 | 26,000,000 | |||||||||
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Earnings
(Loss) Per Share
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$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.00 | ) | |||
Company
Operations
Our
current operations consist of the full service retail sale of automotive
diagnostic, maintenance and repair services, including oil changes, brake
overhauls, engine diagnosis and repair, transmission service and repair, and
wheel alignment and chassis repairs. We also offer the retail sale
and installation of automotive accessories, including tires, wheels and
batteries. No class of similar products or services accounted for
more than 15% of our revenues in any fiscal year. We employ 28
automobile technicians, most of whom are certified by the National Institute of
Automotive Service Excellence (“ASE”). We also employ nine on-site
store managers and assistant managers and three executive and administrative
persons.
We have
developed a proprietary management software application and have compiled
proprietary operating manuals and procedures to manage our
business. Our proprietary management software application maintains
and stores all sales, financial, marketing, customer and location information in
a format that is readily accessible. Our proprietary operating manual
contains policies and procedures for controlling costs of inventory and of work
performed and ensuring that all work is completed to the satisfaction of the
customer, our facilities have an attractive appearance and are operated safely,
and our technicians are trained to use current diagnostic procedures and
equipment. Each of our locations is required to operate using our
proprietary management software application and to follow our proprietary
operating manual.
2
Our
technicians are full time employees with benefits, vacation and overtime
pay. Advancement and bonuses are based on customer satisfaction with
their work, not on how much they sell. No employee works on the basis
of a commission or a percentage of what they sell so there is no incentive to
perform unnecessary work or sell parts that are not required. We
frequently review published compensation information and strive to pay our
employees in the top quartile of all similar positions.
Aftermarket
repair parts are available from various sources, including original equipment
manufacturers, suppliers of parts to the original equipment manufacturers, and
independent aftermarket or “will fit” parts manufacturers. We do not
use salvage parts in our operations. We are not dependent upon any
single supplier or group of suppliers for aftermarket parts or
materials.
Franchise
Operations
We
commenced franchise operations during 2010. Our first franchise
location was originally acquired by us in 2003 and operated by us as our
“Henderson” location. It was transferred to a former employee and is
now operated under a franchise agreement. Other than the franchise
agreement for the “Henderson” location, we have no continuing relationship with
the former employee. In addition, we have signed an Area Development
Agreement covering Missouri, Kansas, Oklahoma and Arkansas with Henry Antolak, a
non-affiliated stockholder. Under this agreement, Mr. Antolak has the
right to develop up to 40 franchise locations within the assigned
area. The first franchise location under this Area Development
Agreement was opened on June 1, 2010, in St. Louis, Missouri. We have
no business relationship with Mr. Antolak other than the Area Development
Agreement and the franchise agreements for locations he develops.
Our
franchise operations provide franchisees with access to our proprietary
management software application, confidential procedures manual, and trademarks;
and to benefit from the increased purchasing power of multiple locations and our
regional advertising campaigns. In addition, we make the following
services available to our franchisees:
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·
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site
selection assistance and planning
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·
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operation
training
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·
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recruiting
and hiring assistance
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·
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grand
opening and continued advertising
assistance
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·
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updates
to the management software application and operating manual and other
bulletins and materials
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·
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assistance
in developing and operating a full service aftermarket service and repair
facility
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Franchisees
are required to pay an initial franchise fee of $30,000 for each
location. In addition, franchisees are required to pay a royalty of
6% of weekly gross sales, a national advertising contribution of 1% of gross
weekly sales, and software licensing fees of $300 per month (which is waived for
franchisees with accounts in good standing). Franchisees are also
expected to use 3% of weekly gross sales for local advertising.
We intend
to expand our franchise operations and enter additional Development Agreements
for other states and additional franchise agreements for individual locations if
our initial franchise operations are successful. Our Area Development
Agreements and franchise agreements are presently offered primarily through our
internet website,
www.mikesmastermechanics.com
,
and we expect to expand our franchise operations only when we identify suitable
franchisees and funds generated from franchise operations will support
expansion. There is no assurance that we will execute additional
franchise agreements under our existing Area Development Agreement or that we
will enter additional Area Development Agreements or franchise
agreements.
As of May
31, 2010, we have incurred costs of $53,737 in preparation of franchise
registration and offering materials and development of the policies and
procedures relating to our franchise operations. We expect to incur
approximately $75,000 in additional costs relating to franchise operations
during 2010.
Competition
The
automotive aftermarket diagnostic, maintenance and repair market is estimated to
be more than $150 billion and is highly fragmented with no one competitor having
more than 1% of the total market. Participants in the market
include:
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·
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Service
operations of new car dealerships. These outlets provide
aftermarket services under factory warranty and extended service policies
and to purchasers that are not sensitive to the higher cost of factory
parts and dealership labor rates.
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·
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National
and local automobile aftermarket parts and accessory retailers like
WalMart, NTB, AutoZone, and Pep Boys. These outlets focus
primarily on the retail sale of parts and accessories but also provide
general aftermarket maintenance and repair services to
customers.
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·
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National
and local specialty shops and franchises like Lube Stop, Brake Check,
Aamco and Meineke. These outlets primarily serve customers with
specific automotive problems. They may also provide general
aftermarket maintenance and repair services but do not always have the
capability to diagnose and repair problems outside of their particular
expertise.
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·
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Locally
owned and operated service centers. These outlets provide the
bulk of aftermarket maintenance and repair services for owners but usually
have only one location and draw the majority of their customers from
within a few miles of their
facility.
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3
Many
parts suppliers offer discounts or rebates based on the volume of parts
purchased. In addition, some parts suppliers consign a parts
inventory to those customers that have sufficient sales
volume. Consigned inventory is paid for only when it is installed on
a customer’s car and paid for by the customer. As a result, the
installer is not required to purchase or finance inventory for
sale. Smaller volume outlets are usually required to purchase parts
for inventory before they are sold and incur the cost of such inventory until it
is required by operations. These concessions are informal and can be
changed by suppliers at any time. By aggregating our multiple
locations and franchises, we are able to obtain volume discounts, rebates and
consignment inventory when such concessions are available from
suppliers.
We
compete against the other constituents in the industry on the basis of price,
quality of service and customer satisfaction. We believe that our
proprietary software and management systems and the qualifications and training
of our technicians enable us to effectively compete with new car dealers and
national retail operations on the basis of quality of services. We
also believe that our innovative compensation structure and increased purchasing
power from multiple locations and franchises enable us to effectively compete
with locally owned service centers on the basis of price and customer
satisfaction. Repeat customers make up more than 81% of our total
revenue.
Our
franchise operations compete with other businesses, both within and outside of
the automotive maintenance and repair industry for
franchisees. Competition is based on the costs associated with the
franchise agreement, services provided by the franchisor, and potential for
profit from operating a franchise. We believe that our initial
franchise fee and maintenance costs compare favorably with other franchise
opportunities and represent and appropriate value for the services we provide
franchisees.
Government
Regulation
Environmental
Regulation.
Our operations are subject to numerous federal,
state and local laws and regulations controlling the discharge of materials into
the environment or otherwise relating to the protection of the environment and
human health and safety, including the Comprehensive Environmental Response,
Compensation and Liability Act (commonly referred to as “CERCLA” or the
“Superfund Act”), the Clean Air Act, the Resource Conservation and Recovery Act,
and similar state laws. These laws and the regulations adopted by the
Environmental Protection Agency (“EPA”) and similar state agencies govern the
generation, transportation, treatment, storage, labeling and disposal of
hazardous and non-hazardous wastes, the discharge of substances into the air and
water, and the responsibility for remediation of contaminated
areas. Failure to comply with the various environmental regulations
can be the basis for fines, penalties and enforcement proceedings by the EPA and
state regulatory enforcement agencies.
We
generate used automotive fluids such as motor oils, greases, hydraulic fluids
and coolants, all of which are subject to environmental regulation and could
enter the environment if not properly contained and disposed of in accordance
with applicable regulations. We estimate the costs of complying with
applicable environmental regulations is between $4,000 and $6,000 per location
per year, including installation and maintenance of grease traps and other
systems to prevent spills from being carried into the environment by storm water
runoff, the storage, transportation and disposal or recycling of waste oils, oil
filters, brake fluids, coolant and other fluids, and the recovery systems for
R-14 and other chlorinated fluorocarbons used as refrigerants in automotive air
conditioners. Our proprietary operating manual contains procedures to
comply with applicable environmental laws and regulations.
Franchising
Regulation.
Federal and state laws and regulations govern the
offering, sale and termination of franchises and regulate the
franchisor/franchisee relationship. The Federal Trade Commission
(“FTC”) Franchise Rule requires the presale disclosure to prospective
franchisees of all information necessary to make an informed decision about the
franchise opportunity, including costs, services provided, required sources of
supply, location and other important rights and obligations. In
addition, 15 states (not including Nevada or Missouri) require registration of
franchise offerings and require compliance with the Uniform Franchise Offering
Circular Guidelines before franchises may be sold to residents in those
states. The FTC is considering replacing its Franchise Rule with a
presale disclosure requirement based on the Uniform Franchise Offering Circular
Guidelines. Failure to comply with the various franchise regulations
can result in fines, penalties and enforcement proceedings by the FTC and the
state regulatory agencies as well as claims by franchisees. We
believe that our franchise agreements and offering materials comply with the
requirements of the Franchise Rule, the Uniform Franchise Offering Circular
Guidelines, and the other regulations relating to the offering of franchises in
all states.
Trademarks
and Service Marks
Both our
direct operations and our franchise operations will be conducted under the
service mark “Mike’s Master Mechanics”, an unregistered service
mark. Our direct operations in Nevada also use the trade name
“AutoTech”, an unregistered service mark.
Relationship
with Robert Handal
We have a
material continuing relationship with Mr. Robert Handal. In 2005, we
leased a vacant facility from Mr. Handal to open our “Sahara”
location. In 2007, we acquired our “Green Valley” and “Decatur”
locations from Mr. Handal for an aggregate purchase of $500,000 and, in 2008, we
acquired our “Buffalo” location from Mr. Handal for an aggregate purchase price
of $300,000. The purchase price for the “Buffalo” location was
financed by Mr. Handal in the form of a $300,000 promissory note payable in
December 2017. We lease the property on which the “Green Valley”,
Decatur” and “Buffalo” locations are located from Mr. Handal under leases that
continue through 2012. Mr. Handal is an experienced automotive master
mechanic and became an employee and stockholder following the acquisition of the
“Buffalo” location.
4
Additional
Information
We are
subject to the informational requirements of the Securities Exchange Act of 1934
and are required to file annual and quarterly reports, proxy statements and
other information with the Securities and Exchange Commission (the
“Commission”). You may read and copy any materials we file with the
Commission, including exhibits, at the Commission’s Public Reference Room,
100 F Street, NW, Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at (800) 732-0330. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with it. The address
of the Commission’s Website is
http://www.sec.gov
. You
may obtain a copy of any of our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to any of those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 within a reasonable period of time after we file them with
the Commission at our Website:
www.mikesmastermechanics.com
.
We
have recent operating losses, significant accumulated deficits and a working
capital deficit.
We
incurred net losses of $ $282,141 for fiscal 2010 and net losses of $1,442,963
for fiscal 2009. As of March 31, 2010, we had accumulated deficits of
$2,176,076 and a working capital deficit of $1,303,618. Our operating
activities used $10,518 in cash during fiscal 2010, and $190,474 in cash during
fiscal 2009. If we continue to operate at a loss and use cash in
operating activities, it may be difficult or more expensive to obtain funding
from lenders or other external sources, if such funding is available at
all. There is no assurance that we will be able to generate a profit
from operations in the future or that funding for future operating losses will
be available at the times, in the amounts, or at the cost necessary to continue
operations. If we are unable to operate at a profit or obtain funding
for losses, we may default upon our outstanding debt, which could result in loss
of substantially all our assets to foreclosure.
See
“Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources”
We
may lose substantially all our assets if we default on the payment of our
outstanding debt.
Certain
of our indebtedness to banks is secured by substantially all our
assets. We have been unable to make principal payments on this
indebtedness in the past and the bank has deferred such payments until October,
2010. There is no assurance that we will be able to make principal
payments in the future or that the bank will continue to defer the principal
payments on this debt. If we are unable to pay this indebtedness when
due or refinance this debt on terms that are acceptable, the bank could
foreclose upon our assets and sell them to satisfy the debt, in which event we
may not be able to continue to operate our business. In addition, the
amount that we receive from the sale of our assets in a foreclosure would likely
be substantially less than the amount we would receive for such assets if they
were sold in an orderly manner and may not be sufficient to discharge the entire
amount of the debt to the bank. No amount is reflected on our balance
sheet for the effect of a foreclosure sale of our assets.
See
“Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources”
We
will incur additional operating expenses as a public company.
We will
incur additional operating expenses as a public company relating to the
preparation of audited financial statements, preparation and filing of periodic
reports with the Securities and Exchange Commission, distribution of information
statements or proxy materials in connection with meetings of our stockholders,
and compliance with other corporate governance requirements. Among
other things, we are required to document and test the effectiveness of our
internal control over financial reporting in accordance with an established
internal control framework and to report our conclusions as the effectiveness of
our internal control over financial reporting. We will retain
attorneys, accountants and other service providers to assist us in complying
with these additional requirements and 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. Failure to adequately and timely
address the additional requirements of public companies could result in material
fines and penalties.
See
“Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources”
The
automotive service industry is highly competitive.
We
compete for customers with new and used automobile dealerships, national and
franchised specialty repair facilities and service centers, and local full
service repair and service providers. The principal competitive
factors are location, name recognition, cost and reputation for quality
services. Many of our competitors have significant financial
resources, affiliation with automobile manufacturers, or retail parts operations
and do not rely solely on providing automotive maintenance and repair
services. Other competitors are recognized as specialists in oil
changes, tune ups, brake repairs and service, muffler and exhaust systems,
transmission overhauls and other narrow service areas. We also
compete with many of the same providers for qualified automotive technicians on
the basis of compensation, insurance and other benefits, and availability of
training. Competition for customers and employees may require us to
pay higher costs for qualified technicians or parts but prevent us from
increasing our charges for the work we perform.
See
“Business –
Competition”
5
Changes
in automotive technology could reduce the demand for our services and require
additional capital expenditures or training.
Automobile
design is rapidly changing and manufacturers are producing vehicles that use
alternative fuels, hybrid propulsion systems, and other advanced
technologies. In addition, manufacturers are producing vehicles that
are more durable, require fewer repairs, and have longer maintenance
intervals. A few manufacturers offer extended service as part of the
purchase price of a new automobile and extended warranty periods during which
most repairs and services are performed by the authorized
dealers. Continued development of more durable and fault tolerant
vehicles, longer warranty and service policies, and extended service intervals
for normal maintenance could have an adverse effect on our business by reducing
the amount of repairs and maintenance performed by independent
facilities. In addition, new automobile technologies could require us
to replace or update our diagnostic tools and equipment, acquire additional
tools and equipment, or provide additional training to our
technicians. Such additional costs may be material and could
adversely affect our results of operations.
See
“Properties”
We
are dependent on the availability of certain key personnel.
Our
future success depends upon the continued service of Michael “Mike” Murphy and
Tracy Maurstad, the individuals primarily responsible for the design and
execution of our business operations. We do not have an employment
contract with either Mike or Tracy and either or both of them could terminate
their participation in the business at any time or start a competitive business
in the same trade area. Likewise, we do not have key person life
insurance on either Mike or Tracy and would find it difficult to hire a
successor if either Mike or Tracy died or became totally
disabled.
See
“Directors and Executive Officers”
Availability
and cost of qualified automotive technicians could adversely affect our
operations.
Trained
and experienced automotive technicians are in high demand and move from employer
to employer to obtain higher pay, better benefits and additional
training. We compete with new and used automobile dealerships,
captive service operations at large fleet operators and independent repair and
maintenance facilities for qualified and experienced automotive
technicians. In addition, turnover among our technicians adversely
affects our productivity and profitability because we must either hire a
replacement technician with similar training and experience or invest in
additional training of a less experienced technician. There is no
assurance that we will be able to hire a sufficient number of technicians with
the training and experience necessary at a cost that makes our operations
profitable.
See
“Business – Company
Competition”
Environmental
regulations could result in increased costs.
Our
locations handle new and used automotive lubricants and fluids in the normal
course of performing vehicle maintenance and repairs. As a result, we
are subject to various federal, state and local environmental laws and
regulations dealing with the transportation, storage, presence, use, disposal
and handling of hazardous materials and hazardous wastes and discharge of storm
water. If any of these substances were improperly released by us or
by the people we contract for transportation and disposal, we could be
responsible for remediation costs, property damages and penalties, which could
be material and have an adverse effect on our financial condition. In
addition, government regulation of hazardous materials is subject to change as a
result of new legislation, regulations and judicial or administrative
interpretations. Any changes could result in additional risks or
increase the cost of our operations.
See
“Business – Government
Regulation”
Franchise
regulation could adversely affect our expansion plans.
We
commenced franchise operations in 2010. Franchise operations are
subject to various federal and state laws and regulations relating to the offer
and termination of franchises and the relationship between franchisor and
franchisee. Changes or amendments to these laws may make continued
operation of a franchise business less attractive. Failure to comply
with these laws and regulations could result in liability to franchisees, fines
and penalties, which could have an adverse effect on our financial
condition. In addition, government regulation of franchise operation
is subject to change as a result of new legislation, regulations and judicial or
administrative interpretations. Any changes could result in
additional risks or increase the cost of franchise operations.
See
“Business – Government
Regulation”
There
is no assurance that we will sign enough franchise agreements for our franchise
operations to be profitable.
We
recently commenced franchise operations and have two operating franchise
locations. The success of each franchise location is largely
dependant upon the efforts of the individual franchisee and local economic
conditions. In addition, we compete with other businesses, both
within and outside of the automotive maintenance and repair industry, for
franchisees. There is no assurance that our franchisees will be
successful or that we will be able to obtain enough franchisees that possess the
necessary skill, knowledge, and finances for our franchise operations to be
successful. If our franchise operations are not successful, we could
lose some or all of the money we have invested in it.
See
“Business – Franchise
Operations”
Two
of our stockholders can exert control over matters requiring stockholder
approval.
Mike
Murphy, our President and a member of our board of directors, and Thomas E.
Kubik beneficially own 87.1% of our outstanding common stock. They
can control all matters requiring approval by our stockholders, including the
election of directors, approval of mergers and consolidations, sale of all or
substantially all our assets, and amendment to our Articles of Incorporation or
bylaws. In addition, they have the power to prevent or cause a change
in control on terms that other stockholders do not approve or agree
with. The existence of a controlling block may also deter others from
making any attempt to gain control through acquisition of our outstanding shares
without the consent of our controlling stockholders. As a result, our
stockholders are unlikely to benefit from any tender offer or other unsolicited
attempt to gain control of our common stock.
See
“Security Ownership of
Certain Beneficial Owners and Management”
6
There
is currently no market for our common stock, and we expect that any market that
does develop will be illiquid and extremely volatile.
There
currently is no market for our common stock. The lack of a market may
impair the ability of our stockholders to sell shares at the time they wish to
sell or at a price considered to be reasonable. If a market for our
common stock develops in the future, we anticipate that such market would be
illiquid and highly volatile because of the limited numbers of shares available
for sale, limited following by financial analysts, and fluctuations in our
earnings and prospects. Furthermore, our stock price may be impacted
by factors that are unrelated or disproportionate to our operating performance
which include stock market fluctuations and general economic and political
considerations.
See
“Market Price of and Dividends on the Registrant’s Common Equity and
Related Stockholder Matters”
We
do not anticipate dividends will be paid on our common stock.
We do not
intend to pay dividends on outstanding shares of our common stock. We
expect to use future earnings, if any, to fund our existing operations and
business growth.
See
“Market Price of and
Dividends on the Registrant’s Common Equity and Related Stockholder
Matters”
Our
bylaws and the Nevada Revised Statutes contain provisions that limit the
liability and provide indemnification for our officers and
directors.
As
permitted by Nevada law, our bylaws provide that the officers and directors will
only be liable to us for acts or omissions that constitute actual fraud, gross
negligence or willful and wanton misconduct. We may be prevented from
recovering damages from our officers and directors for liabilities incurred in
connection with their good faith acts for us. In addition, our bylaws
provide that we will indemnify our officers and directors from certain
liabilities that they may incur as a result of actions they take in connection
with the operation of our business. Any such indemnification could
result in a significant cost and deplete our financial
resources.
See
“Indemnification of Directors and Officers”
None.
Our
operations are conducted at one owned and five leased locations in the greater
Las Vegas, Nevada, metropolitan area. We also lease the “Henderson”
location described below, which is subleased by us to a
franchisee. Each location includes office space and waiting area,
four to nine service bays and related parking, driveways and access
areas. The following table contains information on each of our
facilities:
|
Location
|
Total Square Feet
|
Service
Bays
|
Owned or Lease
Expiration Date
|
|||
|
5833
West Tropicana Avenue
Las
Vegas, Nevada 89103
(“Tropicana”)
|
2,900
|
5
|
Owned
|
|||
|
3665
South Durango
Las
Vegas, Nevada 89147
(“Durango”)
|
2,100
|
4
|
April
2011
|
|||
|
4430
North Decatur
Las
Vegas, Nevada 89031
(“Decatur”)
|
3,000
|
6
|
March
2012
|
|||
|
704
South Boulder Highway
Henderson,
Nevada 89015
(“Henderson”)
|
3,000
|
6
|
July
2012
|
|||
|
500
South Buffalo
Las
Vegas, Nevada 89145
(“Buffalo”)
|
3,000
|
6
|
July
2012
|
|||
|
8550
West Sahara Avenue
Las
Vegas, Nevada 89117
(“Sahara”)
|
3,800
|
7
|
March
2013
|
|||
|
2640
Sunridge Heights Parkway
Henderson,
Nevada 89052
(“Green
Valley”)
|
4,200
|
9
|
March
2012
|
7
None
Our
common stock is not listed on any securities exchange or admitted to trading on
the bulletin board or other inter-dealer market or quotation
system. As of May 31, 2010, there are no outstanding options or
warrants to purchase, or securities convertible into, shares of our common stock
and we have not adopted any compensation plans under which shares of our common
stock are authorized to be issued. We have not agreed to
register any shares of our common stock for sale under the Securities Act of
1933.
As of May
31, 2010, we had outstanding 30,747,100 shares of common stock held by 35
stockholders of record, of which 4,535,000 shares may be sold under Rule
144. Upon the expiration of 90 days after the effective date of this
registration statement, an additional 26,000,000 shares of our common stock held
by our officers and directors will be eligible for sale under Rule 144, subject
to our continued compliance with reporting obligations and the notice
requirements, volume limitations and manner of sale provisions as set forth in
that Rule.
Dividends
We have
not paid and do not expect to declare or pay dividends on our common
stock. We intend to use all retained earnings to fund future
growth. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including current financial condition, operating results and current and
anticipated cash needs.
Sales
of Unregistered Securities
Between
June 13, 2008, and July 15, 2008, we sold 750,000 shares of our common stock for
an aggregate purchase price of $375,000 in a private placement with friends,
family and other persons with whom we had prior substantial
relations. The offering was exempt from the registration requirements
of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2)
of the Act because there was no public solicitation for the sale of our common
stock, the existence of a prior relationship between the stockholders and our
executive officers, and the imposition of restrictions on the resale of the
common stock.
On April
8, 2008, we issued 1,250,000 shares of our common stock to GoPublicToday.com,
Inc. in exchange for consulting services relating to our efforts to become a
fully reporting publicly traded company and subsequent compliance with reporting
and governance requirements. The offering was exempt from
registration requirements of the Act pursuant to Section 4(2) of the Act because
there was no public solicitation for this sale and the shares have restrictions
on subsequent transfer.
Between
April 29, 2008, and September 5, 2008, we issued a total of 1,635,000 shares of
our common stock to employees and various consultants in exchange for services
rendered and to be rendered. The offering was exempt from the
registration requirements of the Act pursuant to Section 4(2) of the Act because
there was no public solicitation for this sale and the shares have restriction
on subsequent transfer.
Between
November 2008 and November 2009, we sold 112,100 shares of our common stock for
an aggregate purchase price of $112,100 in an offering registered with the
Nevada Secretary of State, Securities Division. The offering was
exempt from the registration requirements of the Act pursuant to Rule 504 of
Regulation D under the Act. No underwriter was involved in the
offering.
On March
12, 2010, we sold 100,000 shares of our common stock for an aggregate purchase
price of $50,000 in a private placement with a friend of our
President. The offering was exempt from the registration requirements
of the Act pursuant to Section 4(2) of the Act because there was no public
solicitation for the sale, the prior relationship between the stockholder and
our President, and the imposition of restrictions on resale of the common
stock.
Not
Applicable.
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 elsewhere in this registration
statement. 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 “Risk
Factors”.
8
Overview
We
operate full service automotive maintenance and repair service shops in six
company-owned locations in the greater Las Vegas, Nevada, metropolitan area and
have one franchise location in Las Vegas, Nevada, and one franchise location in
St. Louis, Missouri. Expansion is planned through the establishment
of additional locations that we will operate and by granting franchises to
independent businesses. As used in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, “fiscal 2010” means
the twelve months ended March 31, 2010, and “fiscal 2009” means the twelve
months ended March 31, 2009.
Results
of Operations
Net sales during fiscal 2010, were
$4,808,994, a decrease of $169,462, or 3.4%, over net sales of $4,978,456 for
fiscal 2009. The decrease in net sales was due primarily to the
continuing recession during fiscal 2010 and the continued deferral by consumers
of maintenance and repair on personal automobiles. In addition, the
sale of our “Henderson” location to a former employee and conversion of that
location to a franchise location in the fourth quarter of fiscal 2010 resulted
in a decrease in net sales from company operated locations for fiscal 2010 that
was offset by an increase in net sales from franchise operations of $175,000 for
2010.
Cost of goods sold during fiscal 2010
was $4,283,579, a decrease of $442,685, or 9.4%, compared to cost of goods sold
of $4,726,264 for fiscal 2009. Cost of goods sold as a percentage of
sales improved to 89.1% for fiscal 2010 compared to 94.9% for fiscal
2009. The reduction in cost of goods sold, both in absolute terms and
as a percentage of sales, was primarily because we renegotiated the leases
relating to our “Durango” and “Henderson” locations during fiscal 2010 to reduce
the minimum rents and the conversion of our “Henderson” location to franchise
operation. In addition, there was no material cost of goods sold
associated with the revenue from franchise operations included in net sales
during fiscal 2010 so the addition of $175,000 in revenue from franchise
operations contributed to the improvement in cost of goods sold as a percentage
of sales. The improvement in cost of goods sold as a percentage of
sales more than offset the effects of the decline in net sales and resulted in
gross profit for fiscal 2010 of $525,415, an increase of $273,223, or 108.3%,
compared to gross profit of $252,192 for fiscal 2009.
Selling, general and administrative
expenses during fiscal 2010 were $602,081, a decrease of $891,491, or 59.7%,
compared to selling, general and administrative expenses during fiscal 2009 of
$1,493,572. The reduction in selling, general and administrative
expenses was primarily the result of a decline in professional fees of $835,903
(71.9%). The decline in professional fees during fiscal 2010 occurred
because of the reduction in stock-based compensation, which was $222,222 for
fiscal 2010 compared to $1,146,203 for fiscal 2009. Stock-based
compensation for 2009 included the issuance of 1,250,000 shares of stock with a
fair value of $625,000 to GoPublicToday.com, Inc. in connection with consulting
services relating to becoming a public company; the issuance of 1,000,000 shares
of stock with a fair market value of $500,000, of which $203,703 was recognized
in fiscal 2009; the issuance of 200,000 shares of stock having a fair value of
$100,000 to Robert Handal in connection with consulting services relating to
business development; the issuance of 400,000 shares of stock having an
aggregate fair value of $200,000 to accounting firms for bookkeeping and tax
services; and the issuance of 35,000 shares of stock having an aggregate fair
value of $17,500 to consultants that provided human resources, business
valuation and other services. Stock-based compensation for 2010
consisted of the recognition of certain shares issued to Bobby Vavla for
consulting services following the registration of our common stock with the
state of Nevada in 2009. In addition to the decrease in professional
fees, advertising expenses declined by $38,532 (38.0%), reflecting deferral of
certain advertising expenses.
Despite the decline in net revenue,
losses from operations improved to a loss of $76,666 for fiscal 2010 compared to
a loss from operations of $1,241,380 for fiscal 2009. The improved
results are primarily the result of the increase in gross profits, the inclusion
of revenue from franchise operations, and the decline in selling, general and
administrative expenses. Interest expense remained relatively
constant at $205,475 for fiscal 2010 compared to $201,583 for fiscal
2009. Although interest-bearing debt during fiscal 2010 declined
slightly, the shift of indebtedness from debt payable to third parties to debt
payable to related parties resulted in a slight increase in the interest rates
payable that offset the decrease in total interest-bearing debt. Net
losses for fiscal 2010 were $282,141 ($0.01 per share) compared to $1,442,963
($0.05 per share) for fiscal 2009.
Liquidity
and Capital Resources
We had
cash on hand as of March 31, 2010 of $111,658, an increase of $43,367 compared
to cash on hand as of March 31, 2009 of $68,291. Our operating
activities during fiscal 2010 used $10,518, which was funded with net cash
provided by financing activities of $53,885 during fiscal 2010, and resulting in
a net increase in cash of $43,367 during fiscal 2010. Cash used by
operating activities were the result of our net losses for fiscal 2010 of
$282,141, which included $238,308 in non-cash compensation expenses and non-cash
depreciation expenses. Changes in balance sheet items contributed
$33,313 to cash provided by operating activities and include an increase of
$47,771 in accounts payable and other accrued expenses and a $7,517 decrease in
accounts receivable. The cash provided by these balance sheet changes
was partially offset by a $21,975 increase in prepaid expenses. Cash
provided by financing activities during fiscal 2010 included proceeds of
$162,100 from issuance of shares of our common stock. We used the
proceeds from sale of common stock to fund a net decrease in outstanding debt to
related parties of $25,000 and a net decrease in other long-term debt of
$93,908.
9
Cash used
by operating activities for fiscal 2010 declined $179,956 compared to cash used
by operating activities for fiscal 2009. The decline was primarily
the result of the net loss before depreciation and non-cash compensation
expenses of $43,831 for fiscal 2010 compared to net loss before depreciation and
non-cash compensation expenses of $260,997 in fiscal 2009. Cash
provided by financing activities for fiscal 2010 decreased $129,664 compared to
cash provided by financing activities for fiscal 2008. The decrease
is the direct result of the sale of 750,000 shares of our common stock in a
private placement during fiscal 2009 compared to a smaller state-registered
offering and private placement of 212,100 shares during fiscal
2010.
Cash from
or used in investing activities was not material in any period.
As of
March 31, 2010, we had outstanding obligations to banks and other unrelated
persons in the amount of $1,697,661 and obligations payable to stockholders and
related parties in the amount of $548,792. Substantially all our
assets are subject to a security interest and mortgage to secure the repayment
of the obligations to banks and other unrelated persons. During
fiscal 2010, we restructured the principal payments under one of our obligations
to postpone principal payments until October 2010 but did not change the
original maturity date. Also during fiscal 2010, we made principal
payments on obligations to banks and other unrelated persons of $25,000 and we
borrowed $50,000 under a new line of credit with an unrelated
party. We expect to make payments on our obligations to banks and
other unrelated persons of $770,895 in fiscal 2011, $84,960 in fiscal 2012,
$93,417 in fiscal 2013, $102,018 in fiscal 2014, $162,180 in fiscal 2015, and
$1,032,983 after fiscal 2015.
We lease
property in six locations under non-cancelable operating leases. 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. We made lease payments of $630,927 in fiscal
2010. We will be required to make minimum payments under existing
leases of at least $614,920 in fiscal 2011, $551,869 in fiscal 2012, $444,351 in
fiscal 2013, $159,062 in fiscal 2014, $139,113 in fiscal 2015, and $720,409
after 2015.
Since
April 1, 2009, we have required cash of approximately $400,000 per month and we
generated cash from operating activities of approximately $407,000 per
month. Our cash requirements during this period included
non-recurring costs relating to the commencement of franchise operations,
conducting a state-registered offering of our common stock, and registration of
our common stock under the Exchange Act, none of which we expect to continue
during fiscal 2011. 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 approximately $75,000 in additional costs relating to franchise operations
during 2011. 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
believe our revenues and gross profit will increase during the next 12 months as
the economy improves and consumers undertake deferred maintenance and
repairs. We do not expect a material increase in our selling, general
and administrative expenses despite the additional costs relating to being a
public company because we do not anticipate a need for additional personnel, the
state-registered offering and registration of our common stock under the
Exchange Act have been completed. We do not expect to incur any
material capital expenditures during the next 12 months.
We
believe that cash available at March 31, 2010, together with cash generated from
operating activities during fiscal 2011 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 do not
have any 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 investors.
Material
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principals generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of any contingent assets and
liabilities. We base our estimates on various assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about carrying values of assets and liabilities that
are not readily apparent from other sources. On an ongoing basis, we
evaluate our estimates. Actual results may differ from these
estimates if our assumptions do not materialize or conditions affecting those
assumptions change.
10
We
believe the following material accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements:
Long-Lived
Assets.
ASC 360,
Accounting for the Impairment or
Disposal of Long-Lived Assets,
requires us to periodically review the
carrying amounts of our property and equipment to determine whether current
events or circumstances indicate that such carrying amounts may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of undiscounted cash flows expected to result
from the use and eventual disposition of the asset. If it is
determined that an impairment loss has occurred, the loss is measured as the
amount by which the carrying amount of the long-lived asset exceeds its fair
value.
Impairment of
Goodwill.
Goodwill represents the difference, if any, between
the purchase price paid for an acquisition and the fair value of the net assets
acquired in a business combination. Goodwill is tested for impairment
at the reporting unit level (operating segment or one level below an operating
segment) annually, unless an event occurs that indicates a potential impairment
exists.
The
performance of the impairment test involves a two-step process. The
first step involves comparing the fair value of the applicable reporting unit
with its aggregate carrying value, including goodwill. We generally
determine the fair value of our reporting unit using the income approach
methodology of valuation that includes the discounted cash flow
method. This valuation method requires a projection of revenue and
operating expenses over a five year period. In addition, management
estimates the appropriate discount rate which, as of March 31, 2010, was
determined to be 7.5% as this approximates interest rate on the third party debt
and advances from stockholders. If the carrying amount of a reporting
unit exceeds the reporting unit’s fair value, we perform the second step of the
goodwill impairments test to determine the amount of impairment
loss. The second step involves comparing the implied fair value of
the affected reporting unit’s goodwill with carrying value of that
goodwill.
Our
annual impairment test was performed on March 31, 2010, and indicated our
goodwill was not impaired. At March 31, 2010, our recorded goodwill
was approximately $1.2 million which has been assigned one reporting
unit. Changes in our projections, a decrease in our revenue estimates
or an increase in the discount rate could decrease the estimated fair value of
our reporting unit and result in a future impairment of goodwill.
Not
Applicable
The
financial statements included on pages F-1 through F-9 of this report are
incorporated into this item.
None
Evaluation
of Disclosure Controls and Procedures
Our
management has evaluated, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Based on that evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and
procedures were not effective in ensuring that information required to be
disclosed in our Exchange Act reports is (1) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and (2) accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act. Our internal control system is designed to provide
reasonable assurance to our management, the board of directors and investors
regarding reliable preparation and presentation of published financial
statements. Nonetheless, all internal control systems, no matter how
well designed, have inherent limitations. Even systems determined to
be effective as of a particular date can only provide reasonable assurance with
respect to reliable financial statement preparation and
presentation.
A
material weakness in internal control over financial reporting is a control
deficiency (within the meaning of the Public Company Accounting Oversight Board
(United States) Auditing Standard No. 5), or a combination of control
deficiencies, that result in there being a reasonable possibility that a
material misstatement in the annual or interim financial statements would not be
prevented or detected.
11
Our
management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control — Integrated Framework
(COSO). Based on our assessment, we believe that, as of March 31,
2010, our internal control over financial reporting was ineffective based on
those criteria because we do not maintain an effective control
environment. Specifically,
our board
of directors consists of two persons, who are also our only executive officers,
and no other members.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report. Management’s report is deemed
furnished, rather than filed, for purposes of liability under Section 18 of the
1934 Act.
Changes
in Internal Control Over Financial Reporting.
There
have been no changes in our internal control over financial reporting during the
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Our
most recent assessment resulted in identifying the material weaknesses noted
above.
None
Our
executive officers and directors, and their ages and positions as of March 31,
2010, are as follows:
|
Name
|
Age
|
Position
|
||
|
Michael
R. Murphy
|
54
|
President,
Director
|
||
|
Tracy
Maurstad
|
|
48
|
|
Secretary,
Treasurer and Director
|
Michael “Mike” R. Murphy
has
been an entrepreneur and small business operator for more than 25
years. He has been our principal stockholder and served as our
President and as one of our directors since we were incorporated in June,
2002. Before founding MK Automotive, Inc. in 2002, Mr. Murphy founded
MK Systems, Inc. in 1983 and served as the Chief Executive Officer from 1983
until he sold a majority of his interest in 2002. MK Systems, Inc. is
a sales engineering company representing manufacturers of air handling and
related process components and systems, including fans, blowers, air curtains,
dampers, silencers and heat exchangers, and a designer and fabricator of custom
heating and ventilation packages for industrial processes. As the
founder and Chief Executive Officer of MK Systems, Inc., Mr. Murphy had
responsibility for the development of a sales and service operation dealing with
complex mechanical systems, recruiting and training skilled engineers,
designers, salespersons and technicians, and managing the financial requirements
of the company. He was also responsible for or supervised others that
were responsible for maintaining relationships with suppliers, pricing and
scheduling installations, and resolving customer disputes. Mr. Murphy
sold a majority of his interest in MK Systems, Inc. in 2002. Mr.
Murphy and Ms. Maurstad jointly created our business model and are jointly
responsible for day to day operation.
Tracy Maurstad
has been a
programmer and software designer for more than 20 years. She has
served as our Secretary and Treasurer and as a director since we were
incorporated in June, 2002. Ms. Maurstad developed MK Manager™, our
proprietary software application, which we use in each of our stores and license
to our franchisees. Ms. Maurstad began developing billing,
bookkeeping and scheduling software systems at MK Systems, Inc. and gained
expertise by writing progressively more complex programs necessary to support
the business of MK Systems, Inc. Since 2002, Ms. Maurstad has been
responsible for managing our billing, invoicing, costing and sourcing operations
and providing technical support to users of MK Manager
TM
. Ms.
Maurstad and Mr. Murphy jointly created our business model and are jointly
responsible for day to day operation.
Both Mr.
Murphy and Ms. Maurstad have more than five years experience in the operation of
the Company and were principally involved in developing the Company’s business
model. Mr. Murphy’s operating experience and Ms. Murstad’s
programming expertise, which represent the two principal components of the
business model, together with their financial commitment to the Company in the
form of personal investment of time and money, support the conclusion that each
should each be a director of the Company.
Mike
Murphy and Tracy Maurstad are married. No other family relationship
exists among our directors, officers and principal
stockholders.
12
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers and persons who own more than 10% of a registered class
of our equity securities to file various reports with the Securities and
Exchange Commission concerning their holdings of, and transactions in,
securities we issued. Each such person is required to provide us with
copies of the reports filed. Based on a review of the copies of such
forms furnished to us and other information, we believe that, during the fiscal
year ended March 31, 2010, none of our officers, directors or owners of 10% of
any class of our securities failed to report transactions in our securities or
reported transactions in our securities.
Code
of Ethics
We have
not adopted a Code of Ethics applicable to our principal executive officer,
principal financial officer, principal accounting officer or
controller. Management is in the process of reviewing the
requirements of an effective Code of Ethics and intends to propose the adoption
of an appropriate Code of Ethics at the next meeting of our board of
directors.
Committees
of the Board of Directors
None of
our directors are independent. We do not have a formal Nominating,
Audit, or Compensation Committee of our board of directors because our board of
directors consists of two persons. All of the functions of the
Nominating, Audit, Compensation Committee are performed by the full board of
directors. Neither of our directors qualifies as an Audit Committee
Financial Expert.
The
following table sets forth information concerning the compensation earned during
our last two fiscal years by our principal executive officer. No
other employee received total compensation during any of our last two fiscal
years in excess of $100,000.
|
SUMMARY COMPENSATION TABLE
|
||||||||||||||||||
|
Name and Principal Position
|
Year
|
Salary ($)
|
Bonus($)
|
All Other
Compensation ($)
(1)
|
Total ($)
(1)
|
|||||||||||||
|
Mike
Murphy
|
2010
|
$ | 115,183 | - | - | $ | 115,183 | |||||||||||
|
President
|
2009
|
$ | 123,183 | - | - | $ | 123,183 | |||||||||||
|
|
(1)
|
Does
not include perquisites and other personal benefits or property unless the
aggregate amount of such compensation is $10,000 or
more.
|
We have
not entered into any employment or other agreements with our chief executive
officer regarding compensation, granted equity-based compensation or incentive
compensation awards to our chief executive officer, or provided any retirement
plan or benefits to our chief executive officer.
Director
Compensation
We
reimburse our directors for their reasonable expenses incurred in attending
meetings of our board of directors but do not otherwise provide compensation to
our directors in such capacity. Our Restated Articles of
Incorporation and bylaws contain provisions that allow us to indemnify our
directors and director nominees against liabilities and other expenses incurred
as the result of defending or administering any pending or anticipated legal
issue in connection with their service to us if it is determined that any such
director or nominee acted in good faith and in a manner which he reasonably
believed was in our best interest.
The
following table lists the beneficial ownership of shares of our common stock by
(i) all persons and groups we know to own beneficially more than 5% of
outstanding shares, (ii) each of our directors, nominees and named executive
officers, and (iii) all our directors and executive officers as a
group. Information is as of May 31, 2010, and is based on our books
and records and information obtained from each individual. Unless
otherwise stated, the business address of each individual or group is the same
as our principal executive office and shares of common stock are owned solely by
the person indicated.
|
Name and Address of Beneficial
Owner
|
Title or Group
|
Amount and
Nature of
Beneficial
Ownership
(1)
|
Percent of Class
(2)
|
|||||||
|
Thomas
E. Kubik
|
5%
Stockholder
|
10,920,000 | 36.6 | % | ||||||
|
Michael
R. Murphy
|
President
and Director
|
15,080,000 |
(3)
|
50.5 | % | |||||
|
Tracy
Maurstad
|
Secretary,
Treasurer and Director
|
15,080,000 |
(3)
|
50.5 | % | |||||
|
All
Directors and Executive Officers as a group
|
15,080,000 | 50.5 | % | |||||||
13
|
|
(1)
|
As
of May 31, 2010, there were 29,847,100 shares of our common stock
outstanding. The number of shares of common stock owned are
those “beneficially owned” as determined under the rules of the SEC,
including any shares of common stock as to which a person has sole or
shared voting or investment power and any shares of common stock which the
person has the right to acquire within 60 days through the exercise of any
option, warrant or right. More than one person may be deemed to be a
beneficial owner of the same
securities.
|
|
|
(2)
|
The
percentage of beneficial ownership by any person as of a particular date
is calculated by dividing the number of shares beneficially owned by such
person, which includes the number of shares as to which such person has
the right to acquire voting or investment power within 60 days, by the sum
of the number of shares outstanding as of such date plus the number of
shares as to which such person has the right to acquire voting or
investment power within 60 days. Consequently, the denominator
used for calculating such percentage may be different for each beneficial
owner. As of May 31, 2010, no person was entitled to acquire
shares of our common stock within 60
days.
|
|
|
(3)
|
Michael
R. Murphy and Tracy Maurstad are married and 15,080,000 shares of our
common stock owned of record by Michael R. Murphy are beneficially owned
by Michael R. Murphy, directly, and by Tracy Maurstad,
indirectly.
|
Michael
R. Murphy, our President and a director and controlling stockholder, has made
advances to us. The advances are unsecured and bear interest at the
rate of 7.5% per annum. Mr. Murphy made advances of $25,000 and
received payments of $75,000 in principal and $0 in interest during fiscal
2009. Mr. Murphy did not make any advances to us but received
payments of $25,000 in principal and $0 in interest during fiscal
2010. As of May 31, 2010, we owed Mr. Murphy $79,263 in advances and
$126,520 in interest.
Thomas
Kubik, the holder of more than 5% of our outstanding stock, has made advances to
us. The advances are unsecured and bear interest at the rate of 7.5%
per annum. Mr. Kubik did not make any advances to us and we did not
make any payments to Mr. Kubik during fiscal 2009 or fiscal 2010. As
of May 31, 2010, we owed Mr. Kubik $164,894 in advances and $87,551 in
interest.
We
contract with Tracy Maurstad, our Secretary and Treasurer and director and the
wife of Michael R. Murphy, for computer support services. We paid Ms
Maurstad approximately $11,000 in fiscal 2009 and approximately $9,900 in fiscal
2010 for computer support services. We intend to continue contracting
with Ms. Maurstad for computer support services.
The
following table sets forth the aggregate fees paid to MaloneBailey, LLP for
audit services rendered in connection with the audits and reviews of our
consolidated financial statements and reports for fiscal 2009 and fiscal
2010.
|
Year Ended March 31,
|
||||||||
|
Description of Fees
|
2010
|
2009
|
||||||
|
Audit
Fees
|
$ | 17,500 | $ | 20,000 | ||||
|
Non-Audit
Fees
|
- | - | ||||||
|
Tax
fees
|
- | - | ||||||
|
All
Other Fees
|
- | - | ||||||
The board
of directors has instructed MaloneBailey, LLP that any fees for non-audit
services must be approved by the board of directors before they may be
incurred. We did not incur any non-audit fees to MaloneBailey, LLP
during fiscal 2010.
14
The
following financial statements are filed as part of this report:
|
Report
of Independent Accountant dated as of June 29, 2010
|
F-1
|
|
|
Balance
Sheets as of March 31, 2010, and March 31, 2009
|
F-2
|
|
|
Statements
of Operations for the years ended March 31, 2010, and March 31,
200
|
F-3
|
|
|
Statement
of Stockholders’ Equity (Deficit) for the years ended March 31, 2010, and
March 31, 2009
|
F-4
|
|
|
Statements
of Cash Flows for the years ended March 31, 2010, and March 31,
2009
|
F-5
|
|
|
Notes
to Financial Statements as of March 31, 2010, and March 31, 2009, and for
the years then ended
|
F-6
|
The
following documents are filed as exhibits to this report.
|
Exhibit No.
|
Description
|
||
|
3.1
|
Amended
and Restated Articles of Incorporation of MK Automotive, Inc., dated April
1, 2008 (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
3.2
|
Amended
and Restated Bylaws of MK Automotive, Inc., dated as of March 27, 2008
(incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
4.1
|
Form
of MK Automotive, Inc. Certificate of Common Stock, $.001 par value per
share (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.1
|
Commercial
Lease, dated April 1, 2008, between MK Automotive, Inc. and Robbie Handal
or his designee relating to 500 Buffalo, Las Vegas, Nevada (incorporated
by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.2
|
Commercial
Lease, dated March 15, 2007, between MK Automotive, Inc. and Robert Handal
or his designee relating to 4430 North Decatur, Las Vegas, Nevada
(incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.3
|
Commercial
Lease, dated November 11, 2005, between MK Automotive, Inc. and Robbie
Handal or his designee relating to 8550 W. Sahara, Las Vegas, Nevada
(incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.4
|
Shopping
Center Lease, dated May 1, 2009, between MK Automotive, Inc. and DMEP
Global Plaza West, LLC & DMEP Global Plaza West 1-8, LLC relating to
3665 S. Durango, Las Vegas, Nevada (incorporated by reference to the
Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.5
|
Shopping
Center Lease, dated April 27, 1999, between Drews Auto, Inc. and Southrim
Properties, LLC relating to 700 South Boulder Highway, Henderson, Nevada,
together with Second Amendment to Shopping Center Lease, dated May 15,
2009, between Kaufman Boulder Marketplace (as successor to Southrim
Properties, LLC) and MK Automotive, Inc. as successor to Drews Auto, Inc.
(incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.6
|
Commercial
Lease, dated March 15, 2007, between MK Automotive, Inc. and Robert Handal
or his designee relating to 2640 Sunridge Heights Parkway, Henderson,
Nevada (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.7
|
Promissory
Note, dated December 23, 2005, in the original principal amount of
$500,000 payable to First Choice Bank, as amended (incorporated by
reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.8
|
Promissory
Note, dated May 7, 2007, in the original principal amount of $200,000
payable to First Choice Bank, as amended (incorporated by reference to the
Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.9
|
Promissory
Note, dated April 1, 2008, in the original principal amount of $300,000
payable to Robbie Handal (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.10
|
Amended
Contract for Services, dated October 16, 2008, between MK Automotive, Inc.
and GoPublicToday.com, Inc. (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.11
|
Consulting
Services Agreement, dated April 2, 2008, between MK Automotive, Inc. and
Bobby Vavla (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.12
|
Asset
Purchase Agreement, dated April 1, 2008, between MK Automotive, Inc. and
Robert Handal (incorporated by reference to the Company
’
s Form 10
filed on March 22, 2010).
|
||
|
10.13
|
Business
Equity Purchase Agreement, dated February 16, 2010, between MK Automotive,
Inc. and Romulo Roderiques
(incorporated
by reference to the Company’s Form 10/A filed on May 4,
2010).
|
||
|
10.14
|
Area
Developer Agreement, dated November 16, 2009, between MK Automotive, Inc.
and Henry Antolak (incorporated by reference to the Company’s Form 10/A
filed on May 4, 2010).
|
||
|
10.15
|
Franchise
Agreement, dated February 16, 2010, between MK Automotive, Inc. and R
& R Auto, Inc. (incorporated by reference to the Company’s Form 10/A
filed on May 4, 2010).
|
||
|
10.16
|
Franchise
Agreement dated November 17, 2009, between MK Automotive, Inc. and AZ
Development L.L.C. (incorporated by reference to the Company’s Form 10/A
filed on May 4, 2010).
|
||
|
10.17
|
Promissory
Note, dated May 7, 2007, in the original principal amount of $1,120,000,
payable to First Choice Bank (incorporated by reference to the Company’s
Form 10/A filed on May 4, 2010).
|
||
|
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
15
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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: June
30, 2010
|
MK
AUTOMOTIVE, INC.
|
|
|
By:
|
/s/
Michael R. Murphy
|
|
|
Michael
R. Murphy
|
||
|
President
and Chief Executive
Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Michael R. Murphy
|
President,
Chief Executive Officer and Director
|
June
29, 2010
|
||
|
(Principal
Executive Officer)
|
||||
|
Michael
R. Murphy
|
||||
|
/s/
Tracy Maurstad
|
Treasurer,
Chief Financial Officer and Director
|
June
29, 2010
|
||
|
(Principal
Financial Officer) (Principal Accounting Officer)
|
||||
|
Tracy
Maurstad
|
16
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
MK
Automotive, Inc.
Las
Vegas, Nevada
We have
audited the accompanying balance sheets of MK Automotive, Inc. (a Nevada
Corporation) as of March 31, 2010 and 2009, and the related statements of
operations, changes in stockholders’ deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of March 31, 2010
and 2009, and the results of its operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
MaloneBailey,
LLP
www.malonebailey.com
Houston,
Texas
June 30,
2010
F-1
MK
Automotive, Inc.
March
31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
|
$ | 111,658 | $ | 68,291 | ||||
|
Accounts
receivable
|
28,088 | 35,605 | ||||||
|
Prepaid
expenses and other current assets
|
35,432 | 13,457 | ||||||
|
Total
current assets
|
175,178 | 117,353 | ||||||
|
PROPERTY
AND EQUIPMENT
|
||||||||
|
Building
|
480,620 | 480,620 | ||||||
|
Furniture,
fixtures and equipment
|
158,079 | 158,079 | ||||||
| 638,699 | 638,699 | |||||||
|
Less
- accumulated depreciation
|
(207,727 | ) | (191,641 | ) | ||||
| 430,972 | 447,058 | |||||||
|
Land
|
919,380 | 919,380 | ||||||
| 1,350,352 | 1,366,438 | |||||||
|
GOODWILL
|
1,218,379 | 1,218,379 | ||||||
|
Total
assets
|
$ | 2,743,909 | $ | 2,702,170 | ||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable - trade
|
$ | 181,032 | $ | 136,969 | ||||
|
Accrued
expenses and other current liabilities
|
209,325 | 229,512 | ||||||
|
Accrued
interest - related party
|
214,256 | 190,359 | ||||||
|
Line
of credit
|
103,288 | 92,594 | ||||||
|
Advances
from shareholders
|
244,157 | 269,157 | ||||||
|
Current
portion of long-term debt - related party
|
103,062 | 141,276 | ||||||
|
Current
portion of long-term debt - third party
|
423,676 | 99,330 | ||||||
|
Total
Current Liabilities
|
1,478,796 | 1,159,197 | ||||||
|
LONG-TERM
LIABILITIES
|
||||||||
|
Long-term
debt - third party, net of current portion
|
1,273,985 | 1,573,543 | ||||||
|
Long-term
debt - related party, net of current portion
|
201,573 | 282,056 | ||||||
|
Total
Liabilities
|
2,954,354 | 3,014,796 | ||||||
|
STOCKHOLDERS'
DEFICIT
|
||||||||
|
Common
stock, $0.001 par value, 50,000,000 shares authorized;
29,847,100
|
||||||||
|
and
29,635,000 shares issued and outstanding
|
29,847 | 29,635 | ||||||
|
Additional
paid in capital
|
1,935,784 | 1,551,674 | ||||||
|
Accumulated
deficit
|
(2,176,076 | ) | (1,893,935 | ) | ||||
|
Total
stockholders' deficit
|
(210,445 | ) | (312,626 | ) | ||||
|
Total
liabilities and stockholders' deficit
|
$ | 2,743,909 | $ | 2,702,170 | ||||
The
accompanying footnotes are an integral part of these financial
statements
F-2
MK
Automotive, Inc.
For
the Years ended March 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
Net
Sales
|
$ | 4,808,994 | $ | 4,978,456 | ||||
|
Cost
of Goods Sold
|
4,283,579 | 4,726,264 | ||||||
|
Gross
Profit
|
525,415 | 252,192 | ||||||
|
Selling,
general and administrative expenses
|
||||||||
|
Salaries,
wages and employee benefits
|
126,816 | 143,510 | ||||||
|
Advertising
|
62,980 | 101,512 | ||||||
|
Bank
charges
|
73,749 | 69,921 | ||||||
|
Professional
fees
|
327,414 | 1,163,049 | ||||||
|
Bad
debt
|
11,390 | 15,580 | ||||||
| 602,081 | 1,493,572 | |||||||
|
Loss
from operations
|
(76,666 | ) | (1,241,380 | ) | ||||
|
Other
expense
|
||||||||
|
Interest
expense
|
205,475 | 201,583 | ||||||
|
Net
loss
|
(282,141 | ) | (1,442,963 | ) | ||||
|
Basic
and diluted earnings (loss) per share
|
(0.01 | ) | (0.05 | ) | ||||
|
Weighted
average shares outstanding
|
29,726,353 | 29,202,110 | ||||||
The
accompanying footnotes are an integral part of these financial
statements
F-3
MK
Automotive
Statement
of Stockholders' Equity (Deficit)
For
the Years Ended March 31, 2010 and March 31, 2009
|
Additional
|
||||||||||||||||||||
|
Capital
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance,
March 31, 2008
|
26,000,000 | 26,000 | 34,106 | (450,972 | ) | (390,866 | ) | |||||||||||||
|
Stock
issued for cash
|
750,000 | 750 | 374,250 | - | 375,000 | |||||||||||||||
|
Stock
issued for services
|
2,885,000 | 2,885 | 1,143,318 | - | 1,146,203 | |||||||||||||||
|
Net
loss for the year
|
(1,442,963 | ) | (1,442,963 | ) | ||||||||||||||||
|
Balance,
March 31, 2009
|
29,635,000 | 29,635 | 1,551,674 | (1,893,935 | ) | (312,626 | ) | |||||||||||||
|
Stock
issued for cash
|
212,100 | 212 | 161,888 | 162,100 | ||||||||||||||||
|
Share-based
compensation
|
- | - | 222,222 | 222,222 | ||||||||||||||||
|
Net
loss for the year
|
(282,141 | ) | (282,141 | ) | ||||||||||||||||
|
Balance,
March 31, 2010
|
29,847,100 | 29,847 | 1,935,784 | (2,176,076 | ) | (210,445 | ) | |||||||||||||
The
accompanying footnotes are an integral part of these financial
statements
F-4
MK
Automotive, Inc.
For
the Years ended March 31, 2010 and 2009
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net
loss
|
$ | (282,141 | ) | $ | (1,442,963 | ) | ||
|
Adjustments
to reconcile net loss to net cash from operating
activities::
|
||||||||
|
Stock-based
compensation
|
222,222 | 1,146,203 | ||||||
|
Depreciation
|
16,086 | 35,763 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
7,517 | (2,948 | ) | |||||
|
Prepaid
expenses and other current assets
|
(21,975 | ) | (805 | ) | ||||
|
Accounts
payable - trade
|
44,061 | (26,174 | ) | |||||
|
Accrued
expenses and other current liabilities
|
3,712 | 100,450 | ||||||
|
Net
cash used in operating activities
|
(10,518 | ) | (190,474 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Advances
from shareholders
|
- | 25,000 | ||||||
|
Payment
of advances from shareholders
|
(25,000 | ) | (75,000 | ) | ||||
|
Proceeds
from (payments on) line of credit, net
|
10,693 | (2,238 | ) | |||||
|
Proceeds
from long-term debt
|
50,000 | - | ||||||
|
Repayments
of long-term debt
|
(143,908 | ) | (139,213 | ) | ||||
|
Sale
of common stock
|
162,100 | 375,000 | ||||||
|
Net
cash provided by financing activities
|
53,885 | 183,549 | ||||||
|
NET
INCREASE (DECREASE) IN CASH
|
43,367 | (6,925 | ) | |||||
|
CASH
AT BEGINNING OF PERIOD
|
68,291 | 75,216 | ||||||
|
CASH
AT END OF PERIOD
|
$ | 111,658 | $ | 68,291 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
|
Cash
paid during the year for interest
|
$ | 187,413 | $ | 179,398 | ||||
|
Income
taxes paid
|
- | - | ||||||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
|
||||||||
|
Acquisition
of business through issuance of debt
|
- | $ | 300,000 | |||||
The
accompanying footnotes are an integral part of these financial
statements
F-5
MK
AUTOMOTIVE, INC.
NOTES TO FINANCIAL
STATEMENTS
MK
Automotive, Inc. (“the Company”) operates a chain of full service automotive
repair and service shops serving customers in the greater Las Vegas, Nevada
metropolitan area. Further expansion is planned primarily through the
establishment of a nationwide franchise division.
The
Company was formed as a Nevada corporation on June 20, 2002.
Use of Estimates
– Management uses 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 these
estimates.
Accounts
receivable
– Accounts receivable is recorded net of any allowance for
expected losses. The allowance is estimated from historical performance and
projections of trends.
Property and
Equipment
– Property and equipment are stated at cost. Expenditures for
major renewals and replacements are capitalized. Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets, which range
from 5 to 39 years for financial reporting purposes. Expenditures for
maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the amounts applicable to such items are
removed from the related assets and accumulated depreciation accounts and any
resulting gain or loss is credited or charged to income.
Goodwill
–
Goodwill represents the excess of the cost of an acquired entity over the fair
value of the net amount assigned to assets acquired and liabilities assumed.
Goodwill is not required to be amortized but is tested annually for impairment
and more often if circumstances require. Based upon the Company’s review at
March 31, 2010 and 2009, no impairment was required.
Long-Lived Assets
–
The Company periodically reviews the carrying amounts of its property
and equipment to determine whether current events or circumstances indicate that
such carrying amounts may not be recoverable. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. If it is determined that an impairment loss has occurred, the loss is
measured as the amount by which the carrying amount of the long-lived asset
exceeds its fair value. At March 31, 2010 and 2009 no such impairment
exists.
Revenue
Recognition
– The Company recognizes revenue when persuasive evidence of
an arrangement exists, services have been rendered, or the sales price is fixed
or determinable, and collectability is reasonably assured. This
typically occurs when the automotive repair or service has been completed
according to specifications, tested, and he customer takes possession of the
completed vehicle.
Revenues
also include franchise royalties based upon a percentage of the gross revenue
generated by each franchised location and other franchise-related fees for
services provided to franchisees under the terms of their franchise agreements
(including, but not limited to, the initial franchisee fees and training
fees).
Income
Taxes
– The Company has adopted the provisions of FASB ASC Topic
740,
“Income Taxes.”
As
required under ASC 740, the Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at the
applicable tax rates. A valuation allowance is utilized when it is more likely
than not, that some portion of, or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Basic and Diluted
Loss Per Share
– The Company computes loss per share in accordance with
ASC 260, ‘‘Earnings per Share’’ which requires presentation of both basic and
diluted earnings per share on the face of the statement of operations. Basic
loss per share is computed by dividing net loss available to common shareholders
by the weighted average number of outstanding common shares during the period.
Diluted loss per share gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants using the
treasury method. Dilutive loss per share excludes all potential common shares if
their effect is anti-dilutive.
F-6
Reclassifications
– Certain prior year amounts have been reclassified to conform with the current
year financial statement presentation.
Recent Accounting
Pronouncements
– Effective July 1, 2009, we adopted the Financial
Accounting Standards Board Accounting Standards Codification ("ASC") 105,
"Generally Accepted Accounting Principles." ASC 105 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP for SEC
registrants. All guidance contained in the Codification carries an equal level
of authority. The Codification supersedes all existing non-SEC accounting and
reporting standards. The FASB will now issue new standards in the form of
Accounting Standards Updates ("ASUs"). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the changes in the Codification. References made to
FASB guidance have been updated for the Codification throughout this
document.
Long-term
debt at March 31, 2010 and 2009 consist of:
|
2010
|
2009
|
|||||||
|
Note
payable to a bank, with interest-only payment at the 3-year U.S. Treasury
Note rate plus 2.5% maturing on July 23, 2010; secured by accounts
receivable and other assets. The Company expects to
refinance this note at maturity to extend the due date beyond one
year
|
$ | 383,363 | $ | 383,363 | ||||
|
Note
payable to a bank, with 86 remaining principal and interest payments of
$8,359 and a balloon payment of $901,254 on May 7, 2017, with interest at
the 5-year U.S. Treasury Note rate plus 2.75%; secured by certain real
property and accounts receivable.
|
1,072,602 | 1,089,510 | ||||||
|
Note
payable to a bank, with interest-only payments at 7.5% through October
2009, then 54 monthly principal and interest payments of $2,899 with
interest at 7.5%, then 37 monthly payments of $2,774 ending on May 7, 2017
maturity date, with interest at the 5-year U.S. Treasury Note rate plus
2.75%; secured by a 2
nd
mortgage on real property and accounts receivable.
|
191,696 | 200,000 | ||||||
|
Note
payable to an unrelated individual with interest at 5%; maturing August 1,
2014; accrued interest and principal payable at the maturity
date
|
50,000 | - | ||||||
|
Related
party loans (see Note 4)
|
548,792 | 423,332 | ||||||
| 2,246,453 | 2,096,205 | |||||||
|
Less
– current maturities
|
(770,895 | ) | (240,606 | ) | ||||
| $ | 1,475,558 | $ | 1,855,599 | |||||
Payments
of long-term debt are expected to be made as follows:
|
2011
|
$ | 770,895 | ||
|
2012
|
84,960 | |||
|
2013
|
93,417 | |||
|
2014
|
102,018 | |||
|
2015
|
162,180 | |||
|
Thereafter
|
1,032,983 | |||
| $ | 2,246,453 |
In May
and December 2009 one of the Company’s notes payable were amended to postpone
certain principal payments though the original maturity date did not
change. The amendments were accounted for as debt modifications since
the amended note agreements were not substantially different than the original
note agreement due to the present value of the change in cash flows being less
than 10% and because there is no change in the creditor.
In April
2008, the Company issued a promissory note to an employee for $300,000 to
finance the acquisition of the Buffalo location. The loan carries
interest at 10% and is due on December 31, 2017. As of March 31,
2010, the outstanding balance is $248,207. Of that amount $46,634 is
included in the current portion and $201,573 is included in long-term debt in
the balance sheets.
F-7
In April
2007, the Company borrowed $304,007 from a shareholder. The loan carries
interest from 8.25% to 10.2%. As of March 31, 2010, the outstanding
balance was $56,428 and is included in current portion of long-term debt in the
balance sheets.
The
Company has unsecured advances from the controlling shareholders which are
subject to interest of 7.5%. As of March 31, 2010, the outstanding
balance for these advances amounted to $244,157.
In
addition, one of the Company’s directors also provided computer support services
to the Company. Total expenses incurred for such services for the years ended
March 31, 2010 and 2009 amounted to approximately $10,000 and $12,000,
respectively.
Effective
March 31, 2008, the Company terminated its “S” Corporation status. As
of March 31, 2010, the Company has a net operating loss carry forward of
$505,258 that may be available to reduce future years’ taxable income through
2030. Future tax benefits which may arise as a result of these losses
have not been recognized in these financial statements, as their realization is
determined not likely to occur and accordingly, the Company has recorded a
valuation allowance for the deferred tax asset relating to these tax loss
carry-forwards.
The
components of the deferred tax asset, the statutory tax rate, the effective tax
rate and the elected amount of the valuation allowance are indicated
below:
|
March
31, 2010
|
March
31, 2009
|
|||||||
|
Statutory
Tax Rate
|
34 | % | 34 | % | ||||
|
Deferred
Tax Asset
|
$ | 20,067 | $ | 100,000 | ||||
|
Valuation
Allowance
|
$ | (20,067 | ) | $ | (100,000 | ) | ||
|
Net
Deferred Tax Asset
|
$ | — | $ | — | ||||
The
changes in the valuation allowance for the years ending March 31, 2010 and 2009
were $79,933 and $100,000, respectively. The effective rate differs
from the statutory rate due to the valuation allowance.
The
Company leases property in 6 locations under non-cancelable operating
leases. While all of the agreements provide for minimum lease
payments, some provide for additional rentals contingent upon prescribed sales
volumes or are net leases which require the Company to pay additional rent
relative to real estate taxes and common area maintenance. Most of the leases
contain renewal options. The leases call for escalating rent payments and as
such, the Company is recognizing the rental expense on a straight-line basis
over the lease term. As a result, at March 31, 2010 and 2009, a deferred rental
obligation of $140,256 and $199,713 is recorded.
The
following is a schedule of future minimum lease payments required under the
above leases at March 31, 2010:
|
2011
|
$ | 614,920 | ||
|
2012
|
551,869 | |||
|
2013
|
444,351 | |||
|
2014
|
159,062 | |||
|
2015
|
139,113 | |||
|
Later
years
|
720,409 |
Minimum
lease payments exclude contingent rentals, additional rent and rentals under
renewal options, which as of March 31, 2010 are not reasonably assured of being
exercised.
On April
1, 2008, the Company increased its authorized capital stock to 50,000,000 shares
to reflect a 10,400:1 forward stock split and increased the par value to $.001
per share.
On
various dates in April and August 2008, the Company issued 2,885,000 common
shares to various parties, valued at $1,146,203, as payment of services. These
shares were considered as earned based on the performance of the related
services or achievement of certain milestones as set out in the corresponding
agreements.
On
various dates in June and July 2008, the Company sold 750,000 shares for cash at
$.50 a share for a total of $375,000.
On
various dates in July, August and September 2009, the Company sold 112,100
shares for cash for $1.00 a share for a total of $112,100.
On
January 12, 2010, the Company sold 100,000 shares for cash for $.50 a share for
a total of $50,000.
A total
of 1,000,000 shares were issued for services on April, 29, 2008 for services
performed over a 27 month period using the PPM price of $.50/share at the grant
date for a total value of $500,000. In the current year, the Company
recognized an expense of $222,222 relating to services. As of March 31, 2010,
$74,778 has not been recognized.
F-8
On March
1, 2010, the Company sold a Franchise for a purchase price of $150,000 for a
property located in Nevada. The agreement is for a term of 10 years
with the option to renew the agreement for an additional 10
years. Under the terms of the agreement, the franchisor is to pay the
Company an initial franchise fee of $30,000, a licensing fee of $150 a month and
a 6% royalty fee on gross sales. In June 2010 a new franchise was
opened in St. Louis under the same terms as noted above.
In June,
2010 a new franchise was opened in St. Louis for a purchase price of $150,000,
$30,000 of which relates to the initial franchise fee. The agreement
is for a term of 10 years with the option to renew the agreement for an
additional 10 years. Under the terms of the agreement, the franchisor
is to pay the Company an initial franchise fee of $30,000, a licensing fee of
$150 a month and a 6% royalty fee on gross sales.
F-9
EXHIBIT
INDEX
|
Number
|
Description
|
|
|
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 Chief Executive Officer, and Principal Financial
Officer, under Section 906 of the Sarbanes-Oxley Act of
2002.
|
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [removed and Reserved.]Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesNote 1 - Nature Of The BusinessNote 2 - Summary Of Significant Accounting PoliciesNote 3 - DebtNote 4 - Related Party TransactionsNote 5 - Income TaxesNote 6 - LeasesNote 7 - Stockholders EquityNote 8 FranchisingNote 9 - Subsequent Events