Maison Luxe, Inc. - Quarter Report: 2010 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended December 31, 2010

¨ 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)

Nevada (State or Other Jurisdiction of Incorporation or Organization)		43-1965656 (I.R.S. Employer Identification No.)

5833 West Tropicana Avenue Las Vegas, Nevada (Address of principal executive offices)		89103 (Zip Code)

(702) 227-8324 (Registrant’s Telephone Number, Including Area Code)

N/A (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes ý No

There were 29,847,100 shares of issuer’s Common Stock outstanding as of December 31, 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. These uncertainties and other factors are more fully described under Part I, Item 1A of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 6, 2010 and include:

the continued availability of key personnel

consumer acceptance of franchised operations in the automotive repair business

location and appearance of owned and franchised outlets

availability and cost of qualified automotive technicians

ability to attract and retain qualified technicians, managers and franchisees

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements, and you are advised to consult any further disclosures made on related subjects in our future filings.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7
Item 4.	Controls and Procedures	7

PART II
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7
Item 6.	Exhibits	7

PART I

Item 1. Financial Statements.

MK Automotive, Inc.

Balance Sheets

(Unaudited)

December 31, 2010 and March 31, 2010

	December 31,			March 31,
ASSETS	2010			2010
CURRENT ASSETS
Cash	$	53,499		$	111,658
Accounts receivable		32,890			28,088
Prepaid expenses and other current assets		48,278			35,432
Total current assets		134,667			175,178

PROPERTY AND EQUIPMENT
Building		480,620			480,620
Furniture, fixtures and equipment		158,079			158,079
		638,699			638,699
Less - accumulated depreciation		(219,686	)		(207,727	)
		419,013			430,972
Land		919,380			919,380
		1,338,393			1,350,352
GOODWILL		1,218,379			1,218,379
Total Assets	$	2,691,439		$	2,743,909

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable – trade	$	247,786		$	181,032
Accrued expenses and other current liabilities		153,216			209,325
Accrued interest – related party		223,738			214,256
Line of credit		97,821			103,288
Advances from shareholders		224,357			244,157
Current portion of long-term debt – related party		77,549			103,062
Current portion of long-term debt – third party		573,053			423,676
Total Current Liabilities		1,597,520			1,478,796

LONG-TERM LIABILITIES
Long-term debt – third party, net of current portion		1,087,949			1,273,985
Long-term debt – related party, net of current portion		166,505			201,573
Total Long-Term Liabilities		1,254,454			1,475,558
Total Liabilities		2,851,974			2,954,354
STOCKHOLDERS’ DEFICIT
Common stock, $0.001 par value, 50,000,000 shares authorized; 29,847,100 shares issued and outstanding		29,847			29,847
Additional paid in capital		1,991,340			1,935,784
Accumulated deficit		(2,181,722	)		(2,176,076	)
Total Stockholders’ Deficit		(160,535	)		(210,445	)
Total Liabilities and Stockholders’ Deficit	$	2,691,439		$	2,743,909

The accompanying footnotes are an integral part of these unaudited financial statements.

MK Automotive, Inc.

Statements of Operations

(Unaudited)

For the Three and Nine Months ended December 31, 2010 and 2009

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2010			2009			2010			2009

Net Sales	$	1,041,988		$	1,078,434		$	3,432,412		$	3,549,786
Cost of Goods Sold		980,808			1,031,074			2,934,088			3,274,890
Gross Profit		61,180			47,360			498,324			274,896

Selling, general and administrative expenses
Salaries, wages and employee benefits		29,831			32,688			88,808			110,078
Advertising		13,203			14,660			34,162			47,315
Bank charges		18,901			23,975			59,552			62,963
Professional fees		22,739			188,245			182,695			245,028
Bad debt		5,787			3,284			7,717			2,574
		90,461			262,852			372,934			467,958

Income (loss) from operations		(29,281	)		(215,492	)		125,390			(193,062	)

Other income (expense)
Interest income		577			-			1,760			-
Interest expense		(49,691	)		(72,327	)		(132,796	)		(153,719	)
Total other expense		(49,114	)		(72,327	)		(131,036	)		(153,719	)

Net loss		(78,395	)		(287,819	)		(5,646	)		(346,781	)

Basic and diluted earnings per share		(0.00	)		(0.01	)		(0.00	)		(0.01	)

Weighted average shares outstanding		29,847,100			29,747,100			29,847,100			29,694,952

The accompanying footnotes are an integral part of these unaudited financial statements.

MK Automotive, Inc.

Statements of Cash Flows

(Unaudited)

For the Nine Months ended December 31, 2010 and 2009


	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(5,646	)	$	(346,781	)
Adjustments to reconcile net loss to net cash from operating activities:
Stock-based compensation		55,556			166,667
Depreciation		11,959			26,824
Changes in operating assets and liabilities:
Accounts receivable		(4,802	)		(8,409	)
Prepaid expenses and other current assets		(12,846	)		7,874
Accounts payable - trade		66,754			67,331
Accrued expenses and other current liabilities		(46,627	)		(17,036	)
Deferred income		-			20,004
Net cash provided (used) by operating activities		64,348			(83,526	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock		-			112,100
Payment of advances from shareholders		(19,800	)		(25,000	)
Proceeds of shareholder loans		30,000			-
Proceeds (payments) on line of credit, net		(5,566	)		7,505
Proceeds of long-term debt		-			50,000
Repayments of long-term debt		(127,141	)		(59,377	)
Net cash provided (used) in financing activities		(122,507	)		85,228

NET INCREASE (DECREASE) IN CASH		(58,159	)		1,702

CASH AT BEGINNING OF PERIOD		111,658			68,291

CASH AT END OF PERIOD	$	53,499		$	69,993

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest	$	124,880		$	129,259
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 unaudited financial statements.

MK AUTOMOTIVE, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited interim financial statements of MK Automotive, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the SEC and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in MK Automotive’s Annual Report on Form 10-K for the year ended March 31, 2010 filed on July 6, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the year ended March 31, 2010, as reported in the Form 10-K have been omitted.

Note 2. Related Party Transactions

On October 8, 2010, the Company borrowed $30,000 from a shareholder. The loan carries interest of 8%. On February 6, 2011, the agreement was modified to amend the terms of the agreement to payable on demand. As of December 31, 2010, the outstanding balance of $30,000 is included in current portion of long-term debt – related party.

Note 3. Stockholders’ Equity

On November 16, 2010, the Company granted 900,000 common shares to four employees and service providers as payment for services. The shares are valued at $765,000 based on fair value at the date issued. The shares are scheduled to vest in 36 monthly installments beginning June 1, 2011, based on criteria set in the corresponding agreements. Shares are not outstanding but held in escrow during the vesting period. As of December 31, 2010, no expense has been recognized.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 6, 2010. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K.

Overview

We operate full service automotive maintenance and repair service shops in nine 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. The term “fiscal 2010” refers to the twelve months ended March 31, 2010, and the term “fiscal 2011” refers to the twelve months ending March 31, 2011.

Results of Operations

Three Months Ended December 31, 2010 compared to the Three Months Ended December 31, 2009

Net sales for the three months ended December 31, 2010 were $1,041,988, a decrease of $36,446, or 3.4%, over net sales of $1,078,434 for the three months ended December 31, 2009. The decrease in net sales was due primarily to the continuing recession during fiscal 2011 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 the three months ended December 31, 2010 that was offset by an increase in net sales from franchise operations of $16,099 for the three months ended December 31, 2010.

Cost of goods sold during the three months ended December 31, 2010 was $980,808, a decrease of $50,266, or 4.9%, compared to cost of goods sold of $1,031,074 for the three months ended December 31, 2009. Cost of goods sold as a percentage of sales improved to 94.1% for the three months ended December 31, 2010 compared to 95.6% for the three months ended December 31, 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 related 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 the three months ended December 31, 2010 so the addition of $16,099 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 the three months ended December 31, 2010 of $61,180, an increase of $13,820, or 29.2%, compared to gross profit of $47,360 for the three months ended December 31, 2009.

Selling, general and administrative expenses during the three months ended December 31, 2010 were $90,461, a decrease of $172,391, or 65.6%, compared to selling, general and administrative expenses during the three months ended December 31, 2009 of $262,852. The decrease was primarily due to a decrease in professional fees. Professional fees decreased by $165,506 (87.9%) due to a decrease in stock-based compensation for consulting services. Bank charges decreased by $5,074 (21.2%) as a result of decreased credit card sales. Salaries, wages and employee benefits decreased by $2,857 (8.7%), reflecting salary reductions at the corporate executive and administrative level in response to recessionary pressures, and advertising expenses decreased by $1,457 (9.9%), reflecting the deferral of certain advertising expenses. These decreases were offset by an increase in bad debts of $2,503 (76.2%) reflecting an increase in uncollectible receivables due to the continuing recession.

Despite the decline in net revenue, losses from operations improved to $78,395 for the three months ended December 31, 2010 compared to a loss of $287,819 for the three months ended December 31, 2009. The improved results are primarily the result of the decrease in selling, general and administrative expenses. Interest expense for the three months ended December 31, 2010 was $49,691, a decrease of $22,636 or 31.3% compared to interest expense of $72,327 for the three months ended December 31, 2009. The decline in interest expense is a result of a decrease in indebtedness. Net loss for the three months ended December 31, 2010 was $78,395 ($0.00 per share) compared to a loss of $287,819 ($0.01 per share) for the three months ended December 31, 2009.

Nine Months Ended December 31, 2010 compared to the Nine Months Ended December 31, 2009

Net sales for the nine months ended December 31, 2010 were $3,432,412, a decrease of $117,374, or 3.3%, over net sales of $3,549,786 for the nine months ended December 31, 2009. The decrease in net sales was due primarily to the continuing recession during fiscal 2011 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 the nine months ended December 31, 2010 that was offset by an increase in net sales from franchise operations of $61,171 for the nine months ended December 31, 2010.

Cost of goods sold during the nine months ended December 31, 2010 was $2,934,088, a decrease of $340,802 or 10.4%, compared to cost of goods sold of $3,274,890 for the nine months ended December 31, 2009. Cost of goods sold as a percentage of sales improved to 85.5% for the nine months ended December 31, 2010 compared to 92.3% for the nine months ended December 31, 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 the nine months ended December 31, 2010 so the addition of $61,171 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 the nine months ended December 31, 2010 of $498,324, an increase of $223,428, or 81.3%, compared to gross profit of $274,896 for the nine months ended December 31, 2009.

Selling, general and administrative expenses during the nine months ended December 31, 2010 were $372,934, a decrease of $95,024, or 20.3%, compared to selling, general and administrative expenses during the nine months ended December 31, 2009 of $467,958. The decrease in selling, general and administrative expenses was primarily the result of a decrease in professional fees of $62,333 (25.4%). The decrease in professional fees during the nine months ended December 31, 2010 occurred because of a decrease in stock-based compensation of $111,111. Stock-based compensation consisted of $55,556 for the nine months ended December 31, 2010 compared to $166,667 for the nine months ended December 31, 2009. The decrease was also attributable to a $109,537 reduction in expenses related to going public, offset by increases in franchise development and public compliance costs. In addition to the decrease in professional fees, salaries, wages and employee benefits decreased by $21,270 (19.3%), reflecting salary reductions at the corporate executive and administrative level in response to recessionary pressures. Advertising expenses decreased by $13,153 (27.8%), reflecting the deferral of certain advertising expenses, and bank charges decreased by $3,411 (5.4%). Decreases were offset by an increase in bad debts of $5,143 (199.8%) reflecting an increase in uncollectible receivables due to the continuing recession.

Despite the decline in net revenue, losses from operations improved to $5,646 for the nine months ended December 31, 2010 compared to $346,781 for the nine months ended December 31, 2009. The improved results are primarily the result of the increase in gross profits and the decline in selling, general and administrative expenses. Interest expense for the nine months ended December 31, 2010 was $132,796, a decrease of $20,923 or 13.6% compared to interest expense of $153,719 for the nine months ended December 31, 2009. Interest-bearing debt outstanding during the nine months ended December 31, 2010 declined slightly compared to interest-bearing debt outstanding during the nine months ended December 31, 2009. Net loss for the nine months ended December 31, 2010 was $5,646 ($0.00 per share) compared to a loss of $346,781 ($0.01 per share) for the nine months ended December 31, 2009.

Liquidity and Capital Resources

We had cash on hand as of December 31, 2010 of $53,499, a decrease of $58,159 compared to cash on hand as of March 31, 2010 of $111,658. Our operating activities during the nine months ended December 31, 2010 provided $64,348. Cash provided by operating activities was the result of a net loss of $5,646 for the nine months ended December 31, 2010 which was offset by $67,515 in non-cash compensation and depreciation expenses and changes in balance sheet items of $2,479. Changes in balance sheet items include an increase of $20,127 in accounts payable and other accrued expenses, a $4,802 increase in accounts receivable, and an increase of $12,846 in prepaid expenses and other current assets. We used net cash from operating activities and $58,159 of the cash available at December 31, 2010 to reduce outstanding advances from related parties, reduce the amount outstanding under our line of credit of line, and repay long-term debt.

As of December 31, 2010, we had outstanding obligations to banks and other unrelated persons in the amount of $1,758,823 and obligations payable to stockholders and related parties in the amount of $468,411. Substantially all of our assets are subject to a security interest and mortgage to secure the repayment of the obligations to banks and other unrelated persons. During the three months ended December 31, 2010, we received $30,000 in loan proceeds from a shareholder.

We lease property in nine 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.

Since April 1, 2010, we have required cash of approximately $376,000 per month and we generated cash from operating activities of approximately $395,000 per month. The difference was used primarily to reduce our outstanding indebtedness. 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 fiscal 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 expect revenue to increase during the next 12 months as consumers undertake deferred maintenance and repairs. In addition, we believe our gross profit will continue to increase during the next 12 months as a result of increased franchise operations. We do not expect to incur any material capital expenditures during the next 12 months.

We believe that cash available at December 31, 2010, together with cash generated from operating activities will be sufficient to fund our cash requirements for the next 12 months, including all debt service, lease payments and additional expenses relating to being a public company. If funds from operations and available cash are not sufficient, we may borrow additional funds from related parties, defer salaries payable to executives, refinance or renegotiate our existing indebtedness, incur additional indebtedness to banks or unrelated parties, delay payments to our vendors, delay advertising and other expenses, or sell or close some of our operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 5. Unregistered Sales of Equity Securities and Use of Proceeds.

On November 16, 2010, the Company’s Board of Directors approved the grant of 900,000 restricted shares of the Company’s Common Stock to four employees and service providers. The grant was exempt from the registration requirements of the Securities Act of 1933 (the “Act”) because there was no sale of the shares within the meaning of Section 2(a)(3) of the Act, as interpreted by the Commission. All shares subject to the grants were issued without contribution by the grantee, vest over a period of 42 months and are subject to restrictions on transfer without registration.

Item 6. Exhibits.

The following documents are filed as exhibits to this report.

Exhibit No.	Description

4.1*	Form of Restricted Stock Bonus Award.
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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 14, 2011	MK AUTOMOTIVE, INC.

	By:	/s/ Michael R. Murphy
		Michael R. Murphy
		President and Chief Executive Officer

EXHIBIT INDEX

Number	Description
4.1	Form of Restricted Stock Bonus Award
31.1	Certification of our President and Chief Executive Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of our Principal Financial Officer, under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of our President and Principal Executive Officer and Principal Financial Officer, under Section 906 of the Sarbanes-Oxley Act of 2002.