MVE Smart Move,

As filed with the Securities and Exchange Commission on November 7, 2008

Registration No.       

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Smart Move, Inc.

(Exact name of registrant as specified in its charter)

 

 

5990 Greenwood Plaza Blvd, #2 Suite 390

Greenwood Village, CO 80111

(720) 488-0204

(Address, including zip code, and telephone number, including area code of registrant’s principal executive office)

 

Chris Sapyta

President and Chief Executive Officer

5990 Greenwood Plaza Blvd, #2 Suite 390

Greenwood Village, CO 80111

(720) 488-0204

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copy of all communications to:

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:   þ

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

EXPLANATORY NOTE

 

Information regarding the securities of Smart Move, Inc. set forth in the prospectus included in this registration statement has not been adjusted to reflect a reverse stock split our Board of Directors may elect to implement pursuant to a proposal approved by our stockholders at a special meeting of the stockholders held on October 27, 2008. The number of units registered on this registration statement has been estimated in anticipation of the implementation of such reverse stock split. By pre-effective amendment, the number of Units registered will be adjusted to achieve an aggregate offering of approximately $9,000,000 and the information set forth in the prospectus regarding our securities will be updated to reflect such action by our Board of Directors.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 7, 2008

 

PRELIMINARY PROSPECTUS

 

Smart Move, Inc.

4,000,000 Units

each Unit consisting of one share of common stock

and one Class A warrant

and one Class B warrant

 

We are offering 4,000,000 Units, each Unit consisting of one share of our common stock and one Class A Warrant and one Class B Warrant. Each redeemable Class A Warrant entitles the holder to purchase one share of our common stock at an exercise price equal to 150% of the closing market price of the common stock on the date of this prospectus and is subject to redemption as described in this prospectus. Each non-redeemable Class B Warrant entitles its holder to purchase one share of our common stock at an exercise price equal to 200% of the closing market price of the common stock on the date of this prospectus.

 

Initially, only the Units will trade. The common stock and the warrants will begin trading separately on the 30th calendar day following the date of this prospectus. Once separate trading in the common stock and Class A and Class B warrants begins, trading in the Units will cease, and the Units will be delisted.

 

Our common stock is traded on the American Stock Exchange under the symbol “MVE.” No public market currently exists for the Units being sold in this offering. We intend to apply to list the Units and Class A and Class B Warrants on the American Stock Exchange under the symbols “MVE.U,” “MVE.WSA” and “MVE.WSB,” respectively.

 

On November 5, 2008, the last reported sales price of our common stock as reported on the American Stock Exchange was $0.12 per share. The public offering price for the Units offered hereby will be determined by negotiation between us and the representative of the underwriters based upon market conditions on the day we price the Units.

 

Investing in our Units involves risks. See “Risk Factors” beginning on page 6 for a discussion of certain factors that should be considered by prospective purchasers of our Units.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

We have also agreed to pay Paulson Investment Company, Inc., the representative of the underwriters of this offering (the “Representative”), a non-accountable expense allowance equal to 3% of the gross proceeds of this offering and to issue to the Representative a warrant covering 400,000 Units, identical to the Units offered by this prospectus, having an exercise price per Unit equal to 120% of the initial Unit public offering price. Additionally, we have granted the underwriters a 45-day option to purchase up to an additional 600,000 Units to cover over-allotments.

 

Paulson Investment Company, Inc.

 

 

 

 

 

The date of this prospectus is          , 2008.

 

METROPOLITAN LOCATIONS CURRENTLY SERVED

BY SMART MOVE, INC.

 

 

The SmartMove ^® and SmartVault ^® names, designs and logos are trademarks and service marks of Smart Move, Inc. This Prospectus also includes trade names, trademarks and service marks of other companies and organizations.

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

TABLE OF CONTENTS

 

 

Until          , 2008, (the 25 ^th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to make available a prospectus. This is in addition to the obligation of dealers to make available a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

PROSPECTUS SUMMARY

	•	competitive pricing;
	•	superior security;
	•	scheduling flexibility and expedited service;
	•	more customer options; and
	•	full-coverage insurance.

	•	Capturing additional individual consumers through new website leads and online referrals;
	•	Accessing additional corporate clients through corporate human resources departments that manage employee relocations;

	•	Expanding current “private label” programs with Atlas Van Lines and Bekins A-1, and developing new private label programs with others, including Unigroup, Budd Van Lines and New World Van Lines;
	•	Broadening alliances with leading third party relocation companies such as Cartus and Global Mobility Solutions;
	•	Expanding our affiliate program with local moving companies and local storage operators to generate additional bookings;
	•	Growing commercial shipping applications for our vaults; and
	•	Pursuing potential household goods moving for military personnel.

 

THE OFFERING

Securities Offered		4,000,000 Units, with each Unit consisting of one share of our common stock, one Class A redeemable common stock purchase warrant and one Class B non-redeemable common stock purchase warrant. Each warrant is exercisable to purchase one share of our common stock.
Common stock outstanding after this offering		21,460,111 shares (22,060,111 shares if the over-allotment option is exercised in full).
Warrants:
Number of Class A warrants to be outstanding after this offering		4,000,000
Exercise terms		Each Class A warrant entitles its holder to purchase one share of common stock at an exercise price equal to 150% of the closing market price of the common stock on the date of this prospectus at any time after the warrants become separately tradable.
Expiration date		, 2013
Redemption		We may redeem some or all of the Class A warrants at any time after six months from the date of this prospectus, at a price of $0.25 per warrant, on 30 days’ notice to the holders, only if (i) our common stock has closed at 200% or more of the Unit offering price on five consecutive trading days, and (ii) only if the common stock underlying the warrants is then registered for issuance.
Number of Class B warrants to be outstanding after this offering		4,000,000
Exercise terms		Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price equal to 200% of the Unit offering price at any time after the warrants become separately tradable.
Expiration date		, 2013
Redemption		The Class B warrants are not redeemable.
Use of proceeds		We intend to use the net proceeds from this offering to repay outstanding indebtedness, to increase sales and marketing activities and for general corporate purposes.
Proposed AMEX symbols		Units: MVE.U Class A Warrant: MVE.WSA Class B Warrant: MVE.WSB
Risk factors		You should consider carefully all of the information set forth in this prospectus and, in particular, the specific risks described under “Risk Factors” below before deciding whether or not to invest in our securities.

	•	22,066,547 shares issuable upon the exercise of outstanding warrants at a weighted average exercise price of $2.62 per share;
	•	6,395,083 shares issuable upon conversion of outstanding convertible notes at a weighted average conversion price of $1.69 per share;
	•	1,135,483 shares reserved for issuance upon exercise of outstanding options awarded at a weighted average exercise price of $3.37 under our 2006 Equity Incentive Plan, as amended, and
	•	400,000 shares included in Units issuable upon exercise of the Representative’s warrant and an additional 800,000 shares issuable upon the exercise of warrants included in the Units issuable upon the exercise of the Representative’s warrant.

 

SUMMARY FINANCIAL DATA

										Six Months				Six Months
		Year Ended				Year Ended				Ended				Ended
		December 31,				December 31,				June 30,				June 30,
		2006				2007				2007				2008
										(Unaudited)				(Unaudited)
Historical Statements of Operations Data:
Sales		$	4,184,554			$	5,810,898			$	2,292,119			$	2,892,425
Cost of moving and storage			4,827,273				6,337,360				2,665,131				2,893,396
Depreciation, amortization and impairment			1,104,590				4,417,954				1,310,725				1,374,519
Gross loss			(1,747,309	)			(4,944,416	)			(1,683,737	)			(1,375,490	)
Operating loss			(8,595,388	)			(11,378,404	)			(4,965,710	)			(4,682,271	)
Net loss			(9,869,676	)			(12,805,559	)			(3,978,898	)			(6,231,123	)
Basic and diluted loss per share		$	(1.77	)		$	(1.21	)		$	(0.39	)		$	(0.51	)
Weighted average shares outstanding			5,584,420				10,623,167				10,324,861				12,282,926

		At December 31,				At June 30,
		2007				2008
						(Unaudited)
Balance Sheets Data:
Cash		$	369,189			$	156,433
Working capital (deficit)		$	(2,735,568	)		$	(5,949,347	)
Total assets		$	17,263,746			$	16,279,865
Long-term obligations, less current maturities and discounts		$	6,498,698			$	6,870,015
Total liabilities		$	10,441,748			$	14,433,852
Shareholders’ equity		$	6,821,998			$	1,846,013

 

You should carefully consider and evaluate all of the information contained in this prospectus, including the following risk factors, before deciding to invest in our securities. Any of these risks could materially and adversely affect our business, financial condition and results of operations, which in turn could adversely affect the price of the Units, our common stock and warrants.

 

Risks Related to our Business and Industry

 

We have a history of operating losses and expect to incur losses for the foreseeable future.

 

We generated our first revenues in June 2005. We have sustained losses since our inception. We had an accumulated deficit as of June 30, 2008 of $20.2 million. We have also had negative cash flows from operating activities since inception. We have historically funded our operations through the sale of equity and debt securities. You must consider our prospects in light of the risks, expenses and challenges of attempting to introduce a new service in a mature and established market.

 

Our current financial condition may impair our ability to operate or grow our business.

 

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

 

Our financial statements as of December 31, 2007 and June 30, 2008, have been prepared on the assumption that we are a going concern and that we will be able to realize our assets and discharge our liabilities in the normal

course of business; however, certain events and conditions cast substantial doubt on this assumption. We have incurred net losses since our inception and we anticipate that we will continue to operate in a deficit position for the foreseeable future. These circumstances raise substantial doubt in our ability to continue as a going concern.

 

Because of our loss from operations, and our need for additional financing in order to fund 2008 and 2009 operations, our independent registered public accountants included an explanatory paragraph in their opinion on our financial statements for the year ended December 31, 2007 expressing substantial doubt about our ability to continue as a going concern.

 

We have not made required principal or interest payments to purchasers of certain convertible promissory notes which may give rise to an event of default under the terms of such notes.

 

We have not made required interest payments to purchasers of certain convertible promissory notes issued in September 2005, July 2006, August 2007, November 2007 and January 2008. As of June 30, 2008, the aggregate amount of interest in arrears was $715,531. As a result of such non-payment, pursuant to the terms of the notes, such failure to pay may be an event of default or the holders of such convertible notes may have the right to accelerate the balance of the principal and interest. If acceleration occurs, we would not be able to repay our debt and it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing were available to us, it may not be available on acceptable terms. As result, we may have to take measures that could have a negative effect on our stockholders or we may not be able to continue as a going concern.

 

We will need additional financing to fund any expansion of our business into additional geographic areas and we do not have commitments for additional financing.

 

We estimate that it requires approximately $135,000 to open a new metropolitan service area. While we have no current plans to open additional service areas, if we did we do not have commitments for the required capital. As a practical matter, our growth if any will therefore be limited to increasing the number of moves in existing service areas. New metropolitan areas that we currently do not serve could become attractive move destinations, and we may be unable to service such areas because of our limited capital.

 

Our outstanding convertible securities, options and warrants may impair our ability to obtain additional equity financing.

 

The existence of outstanding convertible securities, options and warrants may adversely affect the terms at which we could obtain additional equity financing. Although these securities are not presently “in the money,” the holders of these convertible securities, options and warrants may in the future have the opportunity to profit from a rise in the market price of our common stock and to exercise their securities at a time when we could obtain equity capital on more favorable terms than those contained in these securities.

 

We have a limited operating history and we have not operated through a recessionary business cycle, and may not be able to estimate our future revenue or the effect a decline in the economy will have on our business operations.

 

We have a limited operating history, and as such we have not been through an economic business decline. As a result, we may not be able to adequately predict the effects a recession will have on our sales and costs. Our budgeted revenues are based on our expectations, relationships with van lines and internet marketing programs and other sales channels. The effect of an economic downturn on our results cannot be fully anticipated. Based on general business trends in our industry that have occurred in historic economic downturn periods, we would expect that our business could suffer a significant decline in revenues.

 

General economic conditions, industry cycles, financial, business and other factors affecting our operations, many of which are beyond our control, may affect our future performance.

 

General economic conditions, industry cycles, financial, business and other factors may affect our operations and our ability to make principal and interest payments on our indebtedness. In particular, the current severe downturn in the economy has affected our industry as companies are deferring the relocation of employees and

individuals are deferring relocations in part because of the difficulty displaced workers have selling their existing homes. If we cannot generate sufficient cash flow from operations in the future to service our debt, we may, among other things, be required to take one or more of the following actions:

 

 

These measures might not be sufficient to enable us to service our indebtedness. In addition, any financing, refinancing or sale of assets might not be available on economically favorable terms, which may prevent us from future expansion and growth in new markets and, thus, negatively affect our business and financial condition.

 

Our business plan is unproven, and our financial results will suffer if consumers do not adopt our moving solution.

 

Due to our limited operating history, it is too early to determine if our target consumers, which include a wide spectrum of customers seeking various moving services, will adopt our moving solution in sufficient numbers and as readily as we anticipate. If consumers do not react favorably to our solution, or if it takes us longer to develop customers than we have planned, our revenues and our financial operating results will suffer.

 

We cannot predict effectiveness of our third party marketing alliances, and revenue from these sales channels may not materialize.

 

As an early stage company, we have little historical information to assist management in identifying the factors and trends that may influence the Company’s future results. As we expand our sales channels, we will depend on partners in connection with the timing, as well as the effectiveness, of a number of our marketing initiatives.

 

As a result of our limited operating history, we may not be able to estimate correctly our future operating expenses, which could lead to cash shortfalls.

 

We have a limited operating history and, as a result, our historical financial data may be of limited value in estimating future operating revenues and expenses. Our budgeted expense levels are based in part on our expectations concerning future revenues. However, the amount of these future revenues depends on the choices and demand of individuals and various entities, which are difficult to forecast accurately.

 

The results of our operations could cause our stock price to decline.

 

Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause our stock price to fall. Each of the following risk factors may affect our operating results including (but not limited to):

 

 

 

A disruption in the service of our third-party carrier could result in significant loss of revenue and increased capital expense.

 

We depend on several third-party cartage companies to provide the local and long-haul transport services we require. With the exception of UPS Freight, which handles a majority of our long distance hauls and local pickups and deliveries, we do not have written agreements with these third-party cartage companies, and our arrangements with these service providers may be terminated at any time. Although we have a contract with UPS Freight, we cannot ensure that UPS Freight will be able to consistently make pickups and deliveries for our customers in the time and manner we may request or require in the future. Our month-to-month agreement with UPS Freight may be terminated by either party to the agreement upon 90 days written notice to the other party. If our arrangement with UPS Freight is terminated, we will attempt to contract with alternative cartage companies to provide the services we currently outsource from UPS Freight. Any material changes in our primary carrier relationships or our local pick-up and delivery arrangements would disrupt our business operations. In the event we are required to pursue new sources for these services or to purchase and maintain equipment and facilities we currently outsource, our results of operations could suffer due to delay in procuring acceptable alternative shipping arrangements and our access to available capital resources may be further limited.

 

We expect our business to continue to be highly seasonal, which can cause dramatic fluctuations in our cash flow and could require us to incur additional debt or raise additional capital.

 

We expect that a significant portion of our revenue (as much as 50%, based on our experience to date and certain industry data) will be generated in the four months of June through September. We expect that this seasonality will result in dramatic fluctuations in our operating results from quarter to quarter. Most of our operating expenses, including general and administrative costs and debt service, are fixed and do not vary with the volume of our business. As a result, in the slower months it may be difficult to manage cash flow to meet our operating needs. If we fail to manage cash flow in anticipation of these quarterly fluctuations, or if the fluctuations vary significantly from our expectations, we may be required to incur additional debt, which will impair our profitability, or raise additional capital, which will be dilutive to our stockholders.

 

We could be held liable for damages under environmental laws or be required to clean up contamination caused by hazardous materials transported or stored in our containers.

 

We require our customers to agree in writing not to store hazardous materials in our containers. However, we do not inspect the containers to make sure they do not contain hazardous materials. If hazardous materials are stored in our containers and leak or otherwise cause a dangerous situation, we could be held liable for damages, be required to clean up the leak and suffer adverse publicity. We do not intend to carry insurance covering these occurrences. To date, no environmental-related claims have been asserted against us. However, a significant hazardous materials event could negatively impact our results of operations, disrupt our business, cause adverse publicity and subject us to significant liability and increase the risk of litigation, all which could harm our business and the trading price of our securities.

 

We currently have limited human resources, and the effective management of our anticipated growth will depend on our ability to attract and retain skilled personnel.

 

We expect that any significant expansion of our business may place a strain on our limited managerial, operational and financial resources. Our future success will depend in large part on our ability to attract, train and retain additional skilled management, logistics and sales personnel. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. If we are unable to attract and retain skilled personnel, our operating results could be harmed, we may fail to meet our reporting and contractual

obligations, and existing and potential stockholders may lose confidence in our business, all of which would harm our business and the trading price of our securities.

 

We are dependent on our management team and the loss of our key executives and employees would harm our business.

 

Our success is dependent, in large part, upon the continued services of Chris Sapyta, our Chief Executive Officer, and other members of our senior management team who have worked closely on the development or implementation of our business plan. There is no guarantee that any of the members of our management team will remain employed by us. While we have employment agreements with our CEO and CFO, their continued services cannot be assured. We do not maintain key person life insurance on any of our officers. The loss of our senior executives, particularly, would harm our business.

 

We encounter substantial competition from other moving companies, most of whom have greater resources than us.

 

The U.S. household moving and storage industry is serviced by approximately 10,000 providers. In this highly fragmented industry, the 20 largest providers control approximately 35% of the revenue. Many of our competitors are larger than we are and have much longer operating histories. As a result, we expect that many of our competitors have greater financial and human resources and more established sales and marketing capabilities than we have. Existing or future competitors with greater resources could readily duplicate certain of our services or business model.

 

We do not have any patent-protected technologies that would preclude or inhibit competitors from entering our market.

 

We consider the design of our containers to be proprietary and have negotiated exclusive ownership rights to the design of the containers from the manufacturer. The container design, however, is not currently patented. Since the container design is not patented and may not be patentable, we rely on a combination of contractual and confidentiality procedures to protect our design. Despite our efforts to protect our design, it would be relatively easy for our competitors to copy certain aspects of our design or independently develop similar containers. Accordingly, our container design may not provide an effective barrier to entry against our competitors.

 

Our ability to capture a meaningful share of our target market and achieve a profitable level of operations is dependent upon our ability to establish and maintain our brand name.

 

We believe that continuing to build awareness of our brand name is critical to achieving widespread acceptance of our business. We believe that brand recognition is a key differentiating factor among providers of moving services. In order to maintain and build brand awareness, we must succeed in our marketing efforts. If we fail to successfully promote and maintain our brand, incur significant expenses in promoting our brand and fail to generate a corresponding increase in revenue as a result of our branding efforts, or encounter legal obstacles which prevent our continued use of our brand name, our business and the value of your shares could be materially adversely affected. In addition, our brand may be used by third parties unaffiliated with us which, in turn, may also harm our business and our ability to expand and achieve a profitable level of operations.

 

We may be unable to protect our trademarks or other proprietary intellectual property rights, which will harm our business.

 

Our future success may depend upon the protection of our brand names, Smart Move and Go Smart Move. If we are unable to protect our rights in the Smart Move brand, a key element of our strategy of promoting SmartMove as a brand could be disrupted and our business could be adversely affected. We may not be able to detect all unauthorized uses of our trademarks or take all appropriate steps to enforce our intellectual property rights. In addition, the validity, enforceability and scope of protection of our trademarks and related intellectual property is uncertain and still evolving. The laws of other countries in which we may market our goods and services in the future are uncertain and may afford little or no effective protection of our intellectual property.

We previously completed a private placement of debt that included beneficial conversion features. These features will have the effect of reducing our reported operating results while the debt remains outstanding.

 

In July 2006, we issued $5,000,000 in Units of secured convertible debentures and warrants. Certain of the conversion features of such issue allowed for the reduction in conversion price upon the occurrence of stated events and constitute a “beneficial conversion feature” for accounting purposes. In August 2007 and November 2007, we issued convertible notes. The November 2007 Notes also included a “beneficial conversion feature.” The accounting treatment related to the beneficial conversion feature will have an adverse effect on our results of operations while such notes are outstanding. The notes mature in June 2011, September 2009 and November 2008. This accounting will result in an increase in interest expense in all reporting periods during the term of the debt.

 

We have completed a placement of debt that included a derivative liability feature. That feature will have the effect of reducing or increasing our reported operating results during the term of the debt based upon numerous assumptions of which one is the price of our stock.

 

In future periods, while the January 2008 Notes and related common stock purchase warrants remain outstanding, we generally expect to report a gain on derivative liability as our stock price declines, and a loss on derivative liability as our stock price increases (assuming other assumptions used to estimate fair value remain constant). The non-cash gain or loss reported upon re-measurement of our embedded derivative liability may not be indicative of the operating results of our core business activities, but could significantly affect our future reported basic earnings or loss per share depending on numerous factors, including the volatility of our stock price.

 

We are subject to impairment of our long-lived assets that could affect future net income.

 

We have made a significant investment in long-lived assets such as containers, GPS equipment and forklifts and flatbed trailers. In accordance with applicable accounting standards, we periodically assess the value of long-lived assets in light of current circumstances to determine whether impairment has occurred. If an impairment should occur, we would reduce the carrying amount to our fair market value and record an amount of that reduction as a non-cash charge to income, which could adversely affect our net income reported in that quarter in accordance with generally accepted accounting principles. As of September 30, 2008, we have recorded an impairment of approximately $360,000 for certain GPS units that are not currently installed in our containers. We cannot definitively determine the extent of impairments that may occur in the future, and if impairments do occur, what the timing might be or the extent to which any impairment might have a material adverse effect on our financial results.

 

We have had a material weakness in our system of internal control. We may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. In connection with their evaluation of our disclosure controls and procedures during 2007 and the year ended December 31, 2007 and the two quarters of 2008, our management determined that our controls did not operate effectively on a continuous basis throughout the reporting period which resulted in a material weakness in internal controls.

Provisions in our charter documents or Delaware law might discourage, delay or prevent a change of control of our Company, which could negatively affect your investment.

 

Our Amended and Restated Certificate of Incorporation and Bylaws contain provisions that could discourage, delay, or prevent a change of control of our Company or changes in our management that our stockholders may deem advantageous. These provisions include:

 

 

These and other provisions in our organizational documents could affect your rights as a stockholder in a number of ways, including making it more difficult for stockholders to replace members of our Board of Directors. Because our Board of Directors is responsible for appointing members of our management team, these provisions could in turn affect any attempt to replace current members of management. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock. We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay, or prevent a change of control of our Company. See “Description of Securities.”

 

We have a risk of a possible future delisting of our shares from the American Stock Exchange that could affect our stock price and your ability to sell our stock.

 

On June 20, 2008, we received a notice from the American Stock Exchange advising us that we do not meet AMEX’s continued listing standards. On September 5, 2008, AMEX staff notified us that the plan we had submitted to regain compliance had been accepted, and that we must become compliant by December 22, 2008 or AMEX could institute delisting procedures. We will be able to maintain the listing of our common stock and listed warrants on the AMEX during the plan period, provided that our updates to AMEX reflect that we are making progress consistent with the plan, which includes raising additional working capital. If a delisting from AMEX were to occur, the common stock may trade on the OTC Bulletin Board. This alternative market is generally considered to be less efficient than, and not as broad as, AMEX. If our common stock were to be delisted from AMEX, the price of our common stock and the ability of holders to sell their stock would be adversely affected.

Risks Related to this Offering

 

There is a limited public market for our securities, and our stock price could be volatile and could decline following this offering, resulting in a substantial loss in your investment.

 

Prior to this offering, there has been a limited amount of trading in the public market for our securities. An active trading market for our securities may never develop or if it develops it may not be sustained, which could affect your ability to sell your securities and could depress the market price of your securities. In addition, the public offering price of the Units will be determined through negotiation between us and the Representative based upon market conditions and may bear no relationship to the price at which the Units will trade upon completion of this offering.

 

The stock market can be highly volatile. As a result, the market price of our securities can be similarly volatile, and investors in our securities may experience a decrease in value, including decreases unrelated to our operating performance or prospects. The market price of our Units, common stock and warrants after the offering will likely vary from the initial offering price and is likely to be highly volatile and subject to wide fluctuations in response to various factors, many of which are beyond our control. These factors include:

 

 

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The public offering price of the Units is substantially higher than the net tangible book value per share of our common stock immediately after this offering. If you purchase our Units in this offering, you will incur an immediate dilution of $      per share of common stock ($      if the over-allotment option is exercised by the underwriters) in net tangible book value per share from the price you paid, based on an assumed initial offering price of $      per Unit, of which $      is attributed to each share of common stock.

 

We have significant market overhang which could adversely affect the trading price of our common stock.

 

As of June 30, 2008 on a proforma basis, we had (i) 17,460,111 shares of common stock outstanding, (ii) 1,135,483 shares of common stock issuable upon exercise of outstanding options, (iii) 22,066,547 shares of common stock issuable upon exercise of outstanding warrants and (iv) 6,395,083 shares of common stock issuable upon conversion of the principal amount of our outstanding convertible debentures. If all the outstanding options, warrants and convertible debentures were exercised or converted, as applicable, by their holders, then an additional 29,597,113 shares of common stock would be outstanding. This would represent an approximately 63% increase in our outstanding common stock. The convertible debentures are convertible, and the outstanding options and warrants are exercisable, at prices currently above the public trading prices of our common stock. However, in the event that even a portion of these outstanding options and warrants were to be exercised, or a portion of the convertible debentures were to be converted, the resulting dilution could depress the trading price of our common stock.

 

The redemption of the Class A warrants issued in this offering may require potential investors to sell or exercise the Class A warrants at a time that may not be advantageous for a resale of the underlying shares of common stock.

 

Commencing six months from the date of this prospectus and until the expiration of the warrants, we may redeem all outstanding warrants, in whole but not in part, upon not less than 30 days’ notice, at a price of $0.25 per

warrant, only if (i) the closing sale price of our common stock equals or exceeds 200% of the public offering price per Unit for five consecutive trading days preceding our redemption announcement and (ii) only if the common stock underlying the warrants is registered for issuance. In the event we exercise our right to redeem the warrants, the warrants will be exercisable until the close of business on the date fixed for redemption in such notice. If any warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder thereof will be entitled only to the redemption price of $0.25 per warrant.

 

Notice of redemption of the warrants could force holders to exercise the warrants and pay the exercise price at a time when it may be disadvantageous for them to do so or to sell the warrants at the current market price when they might otherwise wish to hold the warrants or accept the redemption price.

 

We have substantial discretion as to how to use the offering proceeds, and the use of these proceeds may not produce favorable results.

 

While we currently intend to use the net proceeds of this offering as set forth in “Use of Proceeds” we have substantial discretion in these regards and therefore we may choose to use the net offering proceeds for different purposes. The effect of the offering will be to increase capital resources available to our management, and our management will allocate these capital resources as it determines is necessary or appropriate in order to enhance stockholder value. You will be relying on the judgment of our management with regard to the use of the net proceeds of this offering, and the results of their investments may not be favorable.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Some of the information in this prospectus contains forward-looking statements within the meaning of the federal securities laws. These statements are only predictions and you should not place undue reliance on them. Forward-looking statements typically are identified by use of terms such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,” “estimate,” “predict,” “potential,” “continue,” and similar words, although some forward-looking statements are expressed differently. All forward-looking statements address matters that involve risks and uncertainties. There are many important risks, uncertainties and other factors that could cause our actual results, as well as trends and conditions within the markets we serve, levels of activity, performance, achievements and prospects to differ materially from the forward-looking statements contained in this prospectus. You should also carefully consider all forward-looking statements in light of the risks and uncertainties set forth under “Risk Factors” and elsewhere in this prospectus. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise.

 

In light of the significant uncertainties inherent in the forward-looking statements made in this prospectus, particularly in view of our early stage of operations, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives, future results, levels of activity, performance or plans will be achieved.

 

The public offering price of the Units offered by this prospectus will be determined by negotiation between us and the Representative of the underwriters, based upon market conditions on the day we price the Units. The offering price stated on the cover page of this prospectus does not necessarily reflect the price at which the common stock currently trades and should not be considered an indication of the actual value of the Units. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the Units, or the common stock and warrants contained in the Units, can be resold at or above the public offering price.

USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $      (or approximately $      if the underwriters’ over-allotment option is exercised in full) from the sale and issuance of 4,000,000 Units at a price of $      each and after deducting estimated underwriting discounts and other estimated expenses of approximately $     .

 

We intend to use the net proceeds of this offering as follows:

 

 

Debt retirement  — The indebtedness to be retired is the outstanding balance of $3,655,000 owing on our January 2008 Secured Notes that bear interest at 11% per annum and are due January 15, 2010, and $275,000 owing on the November 2007 Notes that bear interest at 12% and are due October 31, 2008.

 

Sales and marketing  — The projected application of net proceeds consists of increasing print and internet advertising (including fees paid for internet leads acquired through web portals), establishing new sales channels and direct sales activities.

 

Working capital  — The use of proceeds will include operating expenses, accounts payable and working capital reserves.

The amounts and timing of our actual expenditures will depend on numerous factors, including the results of our sales, our marketing activities, competition and the amount of cash generated or used by our operations. The amount and timing of our actual expenditures may vary substantially from the foregoing estimates. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the balance of the net proceeds. Pending the application of proceeds for the uses as described above, we intend to invest the net proceeds in certificates of deposit, short-term obligations of the United States government, or other money-market instruments that are rated “investment grade” or its equivalent.

DIVIDEND POLICY

 

We have never declared or paid cash dividends on our capital stock and we do not anticipate declaring or paying any cash dividends for the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business.

 

The following table sets forth our capitalization as of June 30, 2008. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and accompanying notes included elsewhere in this prospectus.

 

For purposes of the presentation of information in the table below:

 

 

PRICE RANGE OF COMMON STOCK

 

Our common stock is traded on the AMEX under the symbol “MVE”. The following table sets forth the range of high and low sales prices per share as reported on the AMEX for the periods indicated.

 

 

The last reported sale price of our common stock on AMEX on November 5, 2008 was $0.12 per share. There were approximately 1,180 holders of record of our common stock as of September 18, 2008.

DILUTION

 

If you invest in our Units, the book value of your common stock will be diluted to the extent of the difference between the public offering price attributable to each share of common stock and the adjusted net tangible book value per share of our common stock immediately following the completion of this offering. For the purposes of the dilution computation and the following tables, we have allocated the full purchase price of a Unit to the share of common stock included in the Unit and nothing to the warrants.

 

The pro forma net tangible book value of our common stock as of June 30, 2008 was $2,611,973 (calculated as net tangible book value at June 30, 2008 of $1,846,013 including $690,000 of net proceeds received in an August 2008 equity offering less a derivative liability of $550,000 and net debt conversion into equity of $625,960). Net tangible book value per share before this offering has been determined by dividing pro forma net tangible book value (book value of total assets less intangible assets, less total liabilities) by the number of pro forma shares of common stock outstanding as of June 30, 2008 (calculated as 12,399,623 shares outstanding as of June 30, 2008 including 5,060,488 shares issued subsequent to June 30, 2008 from equity offerings, director grants and debt conversions for total shares outstanding of 17,460,111). After (i) giving effect to the sale of our Units in this offering at an estimated public offering of $      per Unit, (ii) deducting underwriting discounts and commissions, the non-accountable expense allowance payable to the representative of the underwriters and estimated offering expenses payable by us, our pro forma adjusted net tangible book value as of June 30, 2008 would have been $      or $      per share. This represents an immediate increase in net adjusted tangible book value of $      per share to existing holders of common stock and an immediate dilution of $      per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assuming the underwriters exercise their over-allotment option in full, existing stockholders would have an immediate increase in adjusted pro forma adjusted tangible book value of $      per share and investors in this offering would incur an immediate dilution of $      per share or     %.

 

There are no warrants, options or convertible debt that have an exercise price below the public offering price.

 

The following table summarizes, on a pro forma basis after the closing of this offering, the differences in total consideration paid by persons who are stockholders prior to completion of this offering and by persons investing in this offering:

 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this filing.

 

Note on Financial Statement Presentation

 

Information regarding our securities has not been adjusted to reflect a reverse stock split that our Board of Directors may elect to implement pursuant to a proposal approved by our stockholders at a special meeting of the stockholders on October 27, 2008 granting discretionary authority to the Board of Directors to effect a reverse stock split within a range of one-for-ten and one-for-fifteen.

 

History and Overview

 

Upon completion of our initial public offering in December 2006, we merged with our predecessor entity, A Smart Move, L.L.C., which had been providing containerized moving services in a limited number of locations since June 2005. Currently, we provide containerized moving services in 60 of the largest metropolitan centers in the United States from the terminals of our primary transportation provider, UPS Freight. We utilize UPS Freight for most of our outsourced transportation requirements in order to obtain rapid market penetration with less infrastructure than traditional movers.

 

In early 2007, we began a new strategic partnership with a national van line that was also a stockholder. In planning discussions for the 2007 moving season with this van line, we were advised by this entity that we should prepare to handle over 3,000 moves in less than six months. Therefore we ordered the necessary containers to meet this projected demand for the 2007 summer moving season. The van line continued to believe, as late as May 2007, that its projected moving volumes would materialize, but by mid-summer 2007, it became evident that these volumes and cash flow would not occur. We, however, had already committed to manufacturing purchase orders that were in progress or complete and could not be canceled. This commitment to build over 4,000 vaults represented a capital outlay of over $9,000,000.

 

As a result, we invested in an excess of approximately 2,500 or $5,000,000 of SmartVaults above our actual requirements. Our cash position was therefore reduced substantially below levels originally projected for 2007, and we were required to raise additional capital.

 

As both a management and financial tool, we seek to differentiate our moves based on five stages of completion. The first stage is the delivery of the empty SmartVault container to the moving customer. The second stage is the pick up of the fully loaded container from the customer. The third stage is the intercity transport of the loaded container to the UPS terminal in the destination city. The fourth stage is the delivery of the loaded container to the customer destination address. Stage five is the final stage, retrieval of the empty vaults from the destination, indicating completion of all required services and triggering revenue recognition. A “move in progress” is a contracted customer move which has yet to reach the final stage five, but for which we have delivered vaults and taken possession of the customer’s goods. The costs associated with moves in progress are reflected as deferred costs and any cash collected on a move in progress is reflected as deferred revenue. At December 31, 2007, we had $1,081,631 of moves in progress. At June 30, 2008, we had $2,294,000 of moves in progress compared to $1,171,000 at June 30, 2007. Included in moves in progress was deferred revenue which at December 31, 2007, June 30, 2008 and June 30, 2007 was $456,247, $827,356 and $228,239, respectively.

 

Recent Financial Results

 

For the six months ended June 30, 2008 sales were $2,892,425, compared to $2,292,119 in the same period during 2007, representing an increase of 26%. The net loss for the six months ended June 30, 2008 was $6,231,123 compared to a net loss of $3,978,898 for the six months ended June 30, 2007, an increase of 57%. The net loss in the more recent period is principally due to significant noncash expenses. Total noncash expenses for the first six

months of 2008 were approximately $2,000,000 compared to approximately $237,000 in the first six months of 2007. The noncash expenses for 2008 consisted primarily of depreciation expense of $1,443,816, amortization of debt discounts of $935,470 and a loss on debt extinguishment of $361,981 related to the payment in kind of the July 2006 Notes. These 2008 noncash expenses were reduced by a noncash gain on value of derivative liability of $851,915 related to the January 2008 Notes. The noncash expenses for 2007 were comprised primarily of $1,254,281 of depreciation expense and $1,371,057 of amortization of debt discounts and were reduced by a noncash deferred income tax benefit of $2,367,000.

 

Financial Condition

 

At June 30, 2008, we had a working capital deficit of $5,949,347 and an accumulated deficit of $20,217,617. We previously have incurred significant debt in order to fund our business. At June 30, 2008, we had $15,118,122 of outstanding long-term debt and $188,639 in equipment based capital lease financing.

 

As of September 30, 2008, we were in default with respect to $6,779,153 or approximately 45% in principal amount of our outstanding convertible promissory notes. Our significant debt requires us to use our limited cash flow for the payment of these debt obligations. These large debt service payments as well as the amounts of interest converted to equity have caused us to incur significant interest expense which has increased our historical net loss and will increase our current and future net loss.

 

Management’s Plan

 

Our revenues and cash flows are not adequate to enable us to meet our present or anticipated obligations; therefore we need to raise additional funds to cover the projected shortfall through commercial loans, equipment leasing transactions or additional public or private offerings of our securities. We are currently investigating additional funding opportunities, and are in discussion with various potential lenders and investors who might be able to provide financing. We have no current commitments for additional financing, and there can be no assurance that any private or public offering of debt or equity securities or other funding arrangements could be effected on a timely basis or to an extent sufficient to enable us to continue to satisfy our capital requirements and continue in operations. If we continue to fail to demonstrate an ability to generate sufficient revenue to meet our obligations and sustain our operations, our ability to continue to raise capital may be impaired and we may not be able to continue as a going concern.

 

Management’s plan for achieving profitability includes reducing operating costs and increasing revenue through expansion of existing, and development of new, revenue opportunities, including the following:

 

 

Management believes increased revenue will permit economies of scale as our operating costs are not expected to increase in direct proportion to revenue.

 

Seasonality

 

Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our peak revenue period (by as much as 50%, based on our experience to date) typically is the four months of June through September. Most of our operating expenses, including general and administrative costs and debt service, are fixed and do not vary with the volume of our business.

Critical Accounting Policies; Use of Estimates

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that we believe are both significant and that require us to make subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences, which are of a limited duration given our status as an early stage company. Actual results may differ from our current and previous estimates. The following is a discussion of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements for 2007 and 2008. For a further discussion on the application of these and other accounting policies, see Note 2 to our audited financial statements for the year ended December 31, 2007 included elsewhere in this prospectus.

 

Revenue and Cost Recognition.   We recognize service revenue and expenses only upon completion of the applicable contract for our services. This policy involves deferring direct and incremental moving expenses, including freight and handling costs and the related revenue, until completion of the services covered by a given contract. We recognize advance billings and the related deferred revenue for contracts in process on a net basis. Advanced billings and related deferred revenue for services that have not been completed in the amount of approximately $418,531 and $351,059 have not been recognized on our balance sheet at June 30, 2008 and December 31, 2007, respectively. As of June 30, 2008, we also deferred expenses of $952,258 on contracts in process and deferred revenue of $827,356 with respect to cash payments we received on contracts in process in accordance with this policy. As of December 31, 2007, we had deferred expenses of $517,485 on contracts in process and deferred revenue of $456,247 with respect to cash payments we received on contracts.

 

We incur costs as each move is completed and generally receive payment for the full move upon completion and final delivery of services. As a consequence, we also defer expenses which may exceed advance payments we receive on contracts for which the services remaining to be performed will not be completed until after the end of a given month. The deferral of these associated costs is necessary to properly match revenue with corresponding direct and incremental moving expenses.

 

Credit Risk.   Our standard payment terms are such that the entire balance is due at the earlier of the 28th day after the containers are delivered to the customer for loading or one day prior to when the containers are delivered to the customer’s final destination point. We seek to mitigate the credit risk associated with our services rendered prior to payment by extending credit terms with respect only to those limited trade accounts receivable of the customers we deem creditworthy. At December 31, 2007, we had an allowance of $45,000 compared to $32,000 at June 30, 2008 for estimated credit losses. We continually review the adequacy of our allowance for doubtful accounts and adjust it, as necessary, based upon current knowledge of the customers’ circumstances.

 

Impairment of Long-Lived Assets.   We have adopted the provisions of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,” which requires that long-lived assets, including identifiable intangibles, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluate the recoverability of long-lived assets based on estimated undiscounted future cash flows and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived asset. If impaired, the long-lived asset is written down to its estimated fair value. When alternative courses of action to recover the carrying amount of a long-lived asset are under consideration, a probability-weighted approach is used for developing estimates of future undiscounted cash flows. If the carrying value of the long-lived asset is not recoverable based on these estimated future undiscounted cash flows, the impairment loss is measured as the excess of the asset’s carrying value over its fair value, such that the asset’s carrying value is adjusted to its estimated fair value. The assumptions used by management in its projections of undiscounted cash flows involve judgment about material estimates of future revenue and customer acceptance.

 

During the second quarter of 2007, the Company was notified by its GPS analog providers that the Federal Communications Commission had ruled that service providers of analog signals would be allowed to discontinue service when the so-called “analog sunset” took effect in February 2008. As of March 1, 2007, the

Company had 2,660 analog GPS units in service. Beginning March 1, 2007, these units were depreciated over their remaining eleven month useful life to February 2008. This accelerated rate of depreciation resulted in an increase of $460,550 in depreciation for the year ended December 31, 2007. During the quarter ended June 30, 2007, the Company impaired $75,094 full net book value of 333 analog GPS units that were no longer in use, were not being depreciated and had no known salvage value.

 

During the quarters ended June 30, September 30, and December 31, 2007, the Company also retired and recycled a portion of its inventory of the older prototype SmartVault Version I units that were damaged, and recorded an asset impairment of $48,970, $281,947 and $258,552, respectively, as these components were recycled. The remaining prototype SmartVault Version I containers are used exclusively in a local storage environment. During the fourth quarter of 2007, the Company performed a strategic review of the Version I vaults used in local storage. Due to the limited financial capital resources available to develop revenue, management assessed the recoverability of these Version I vaults and determined an impairment of $875,000. This impairment reflects the amount by which the carrying value of the Version I vaults exceeds their estimated fair values determined by their estimated future discounted cash flows. The impairment loss was recorded as a component of “Cost of moving and storage” for the year ended December 31, 2007. As of June 30, 2008, management determined that no further impairment existed.

 

Stock Based Compensation.   We adopted our 2006 Equity Incentive Plan (“Plan”) prior to our initial public offering and the concurrent forward one for two stock split. We were authorized to issue up to 1,400,000 shares of common stock under the Plan pursuant to options, rights and stock awards. The number of shares authorized for issuance under the Plan was increased to 1,900,000 shares by a vote of stockholders at our annual meeting on June 24, 2008. The Plan is administered by the Compensation Committee of the Board of Directors. The exercise price of options granted under the Plan is determined by the Compensation Committee of the Board of Directors at an amount no less than the estimated fair value of our common stock at the date of grant.

 

Effective January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. Stock based compensation is recognized on a straight-line basis over the requisite service period. The amount of compensation expense recognized for options with a graded vesting schedule equals no less than the portion of the award that is vested. SFAS 123R supersedes our previous accounting under APB 25 for periods beginning on or after January 1, 2006. We recognized compensation expense related to options of $200,147 for the year ended December 31, 2007. Compensation costs related to share-based payments that vested during the six months ended June 30, 2008 and 2007 and recognized in the Statements of Operations was $115,800 and $96,982, respectively.

 

In 2007, directors who were not employees of Smart Move received as part of their compensation for services as directors an annual grant of restricted shares of our common stock having a fair market value of $10,000 at the beginning of the year, determined as the average closing price of a share of the Company’s common stock for each day during the month of December preceding the grant date. These stock grants vest as to one-half of the shares at June 30 and as to the other half at December 31 of each year. The Company expenses these stock grants using the straight-line method over the vesting term and recognized $40,000 of compensation expense during the twelve months ended December 31, 2007. Beginning in January of 2008, the compensation increased to $15,000 per non-employee director or a total of $60,000 per year, based on the current composition of our Board of Directors. The Company has recognized $30,000 of expense for the six months ended June 30, 2008 and $20,000 for the six months ended June 30, 2007, relating to the vested portion of restricted stock grants made to non-employee directors in January 2008 and 2007 respectively.

 

We expect that equity-based compensation expense for fiscal 2008 and 2009 from all existing awards to employees, officers and directors will be approximately $285,000 per year. This amount represents both stock option awards and restricted stock grants. The performance-based portion of the 342,000 options to purchase shares of common stock issued to our CEO and CFO in September of 2006 are not included in the equity-based compensation expense described above because management has determined that the attainment of the performance targets specified in the employment agreements is not probable. In the event that subsequent developments indicate that the attainment of the performance targets has become probable, our equity-based compensation

expense would increase for 2008. Any future significant awards or changes in the estimated forfeiture rates of stock options and stock grants may impact these estimates. 114,000 of these options were subject to vesting at September 30, 2007 and 114,000 were subject to vesting at September 30, 2008, and the total of 228,000 have been forfeited as the performance conditions were not satisfied at the vesting dates.

 

Nonemployee Options, Warrant and Convertible Debenture Valuation and Accounting.   We apply SFAS No. 123R in valuing options granted to consultants and estimate the fair value of such options using the Black-Scholes option-pricing model. The estimated fair value is recorded as consulting expense as services are provided. Options granted to consultants for which vesting is contingent based on future performance are measured at their then current estimated fair value at each period end, until vested.

 

We issued warrants as part of our convertible debentures and other financings. We value the warrants using the Black-Scholes pricing model based on estimated fair value at issuance and the estimated fair value is recorded as debt discount. The debt discount is amortized to interest expense over the life of the debenture, using the effective interest method, assuming the debenture will be held to maturity. If the debenture is converted to equity prior to its maturity date, any debt discount not previously amortized is also charged against equity except for any beneficial conversion which is charged to expense. We also apply EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” which requires us to estimate the fair value of the as converted shares upon the conversion of the convertible debentures and record a beneficial conversion (debt discount) if the value of the converted shares is greater than the conversion price.

 

The use of the Black-Scholes model requires that we estimate the fair value of the underlying equity instruments issuable upon the exercise of options and warrants and the conversion of convertible debt into equity. In determining the fair value of our options, warrants and convertible debentures we utilize the market price for our shares and valuations prepared by independent valuation consultants.

 

In accordance with EITF No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock,” options, warrants and convertible debentures with registration rights deemed outside of our control are reflected as liabilities and marked to estimated fair value in our financial statements.

 

Income Taxes.   Our annual tax rate is determined based on income, statutory tax rates and the tax effect of items treated differently for tax purposes than for financial reporting purposes. Tax law requires some items to be included in the tax return at different times than the items reflected in the financial statements. As a result, the annual tax rate reflected in the financial statements is different than the rate reported on our tax return. Some of these differences are permanent, such as expenses that are not deductible in the tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.

 

Inherent in determining the annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. Significant management judgments are required for the following items:

 

 

Derivatives.   The Company follows the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” along with related interpretations EITF No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and EITF No. 05-2 “The Meaning of

‘Conventional Convertible Debt Instrument’ in Issue No. 00-19”. SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the balance sheet as either an asset or liability measured at its fair value, with changes in the derivative’s fair value recognized currently in earnings unless specific hedge accounting criteria are met. The Company values these derivative securities under the fair value method at the end of each reporting period (quarter), and their value is marked to market at the end of each reporting period with the gain or loss recognition recorded against earnings. The Company continues to revalue these instruments each quarter to reflect their current value in light of the current market price of our common stock. The Company utilizes the Black-Scholes option-pricing model to estimate fair value. Key assumptions of the Black-Scholes option-pricing model include applicable volatility rates, risk-free interest rates and the instrument’s expected remaining life. These assumptions require significant management judgment. We classify derivatives as either current or long-term in the balance sheet based on the classification of the underlying instrument, security or contract.

 

Business Acquisition.   In connection with management’s plans to increase revenue opportunities, on January 31, 2008, we acquired certain business assets of Star Relocation Network Alliance, Inc., including trademarks, trade names, a customer list and other intangible assets related to Star Alliance’s co-branded and private label move management programs offered to the real estate brokerage community, third party relocation companies and human resource departments of major companies. In exchange for the business assets, we issued 80,000 shares of common stock (fair value of $55,200) and warrants, exercisable for three years, to purchase 100,000 shares of common stock at an exercise price of $1.20 per share (fair value of $22,900). The acquisition has been accounted for as a business combination and the results of operation related to the business assets were not significant from the January 31, 2008 acquisition date. Had the business acquisition occurred on January 1, 2008, our results of operations and loss per share would not be significantly different from reported amounts. The purchase price has been substantially allocated to identifiable intangible assets and the resulting amortization, and any changes upon finalization of the preliminary allocation, is not expected to be significant to our results of operations.

Results of Operations

 

Comparison of the six months ended June 30, 2008 and 2007

 

 

 

nm — percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful

 

Sales.   The increase in sales can be attributed to increased direct consumer sales as well as increased revenue from third party corporate relocation companies, commercial customers and van lines. Average gross revenue per move (including storage) was $3,597 compared to $3,727 in the prior year. The decrease in revenue per move is due to our becoming more competitive with our pricing matrix and completing more small moves so far in 2008.

 

Cost of moving and storage (exclusive of depreciation and amortization) and gross loss.   Cost of moving and storage consisted primarily of the cost of freight transportation to move containers. Our cost of moving and storage for the six months ended June 30, 2008 was $4,267,915, resulting in a gross loss including depreciation and amortization of $1,375,490 (gross loss percentage of 48%), compared to the six months ended June 30, 2007 during which our cost of moving and storage was $3,975,856, resulting in a gross loss including deprecation and amortization of $1,683,737 (gross loss percentage of 73%). Our gross loss decreased $308,247 in the more recent period due to a reduction in variable costs of moving and storage, principally our freight costs. Depreciation expense of $1,374,519 for the six months ended June 30, 2008 increased by $63,794 over the prior period.

 

Our gross loss percentage has been negatively affected by our high depreciation costs associated with the operational fixed assets necessary to establish our national presence. Our gross loss (excluding depreciation and amortization) as a percentage of sales decreased in 2008 (100%) from 2007 (116%) due to our concentration on reducing costs, upgrades of our software and additional personnel to monitor costs and consolidation of loads to take advantage of full truck load freight rates. Included in our costs of moving and storage (exclusive of depreciation

and amortization) are repositioning and furniture pad expenses. During the six months ended June 30, 2008, we incurred repositioning costs and furniture pad purchases to provide stock to the new van lines with which we began doing business. We believe that our repositioning and furniture pad costs will decrease in the future, as these costs are incurred to place the assets into position for use. In the six months ended June 30, 2008 and 2007, we incurred repositioning costs and furniture pad expenditures of $249,912 and $432,873, respectively.

 

As we concentrate on sales growth and improved execution in logistics management, our gross margins are expected to improve as a result of reductions in freight costs achieved by economies of scale, and through enhancements to our logistics software which has reduced costs previously attributed to missed shipment deadlines. In addition, we are reducing warehouse costs and labor costs on our full service moves by expanding our network of third party warehouse and labor providers. By increasing the size of our fleet of containers in service, we also expect to lower repositioning expenses.

 

Selling, general and administrative expense.   Selling, general and administrative expenses consist primarily of salaries, related benefits, and fees for professional services. Selling, general and administrative expenses were $3,306,781 for the six months ended June 30, 2008, compared to $3,281,973 for the six months ended June 30, 2007, an increase of $24,808. The major component of selling, general and administrative expenses for the six months ended June 30, 2008 was salaries and wages of $1,351,525 (including non-cash compensation of $115,800) compared to salaries and wages for the six months ended June 30, 2007 of $1,055,798 (including non-cash compensation of $96,982) or an increase of $295,727. This increase was offset by an decrease in legal and accounting expenses of $186,362, and a decrease in advertising and marketing expenses of $144,983. We expect selling, general and administrative expenses to increase modestly as we focus our efforts on sales growth. It is our expectation that these expenses will continue to decrease as a percentage of revenue if we are successful in expanding our sales.

 

Total other expense.   Other expense consisted primarily of interest expense, interest income and, in 2008, gain on value of derivative liability and a loss on debt extinguishment. Interest expense for the six months ended June 30, 2008 was $2,043,080 compared to $1,639,918 for the six months ended June 30, 2007. The increase is directly attributable to higher debt levels to fund our operating loss. Interest income for the six months ended June 30, 2008 was $4,294 compared to $259,730 in the prior six month period. For the six months ended June 30, 2008, the Company reported a gain on value of derivative liability of $851,915 and a loss on debt extinguishment of $361,981.

 

Loss before income taxes.   We reported a loss before income taxes of $6,231,123 for the six months ended June 30, 2008, compared to a loss before income taxes of $6,345,898 for the six months ended June 30, 2007. The decrease in the loss before income taxes is attributable primarily to a gain on value of derivative liability of $851,915 which was offset by an increase in interest expense of $403,162 and a loss on debt extinguishment of $361,981. In future periods while the January 2008 Notes and related common stock purchase warrants remain outstanding, we generally expect to report a gain on derivative liability if our stock price declines, and a loss on derivative liability if our stock price increases (assuming other assumptions used to estimate fair value remain constant). The non-cash gain or loss reported upon re-measurement of our embedded derivative liability may not be indicative of the operating results of our core business activities, but could significantly affect our future reported basic earnings or loss per share depending on numerous factors, including the volatility of our stock price.

 

For the six months ended June 30, 2007, we recorded an income tax benefit of $2,367,000, compared to none for the same period in 2008, as the income tax benefits resulting from our conversion from a limited liability company to a taxable corporation were fully utilized in 2007. Since the deferred tax liability has been reduced to zero, we will not recognize a tax benefit on additional net operating losses until we generate taxable income.

 

Net Loss.   We reported a net loss of $6,231,123 for the six months ended June 30, 2008 compared to a net loss of $3,978,898 for the six months ended June 30, 2007. The increase in the net loss is attributable primarily to the income tax benefit recognized in 2007. Net loss per basic and diluted share was $0.51 for the six months ended June 30, 2008 compared to $0.39 for the six months ended June 30, 2007. Net loss per share is based upon weighted average shares outstanding of 12,282,926 for the six months ended June 30, 2008 compared to 10,324,861 for the six months ended June 30, 2007. The increase in weighted average shares is primarily due to the shares issued in debt and interest conversions in January 2008.

Comparison of Years ended December 31, 2007 and 2006

 

 

 

nm — percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful

 

Sales.   Sales increased $1,626,344 during the year ended December 31, 2007, as compared to 2006. The increase in revenues can be attributed to operating in 60 cities during the entire twelve months ended December 31, 2007 compared to 40 cities for the majority of 2006, as well as increased revenue from commercial and national van lines in 2007 compared to a minimal amount of revenue from such sources in 2006. In 2007, we completed 1,628 moves compared to 1,462 in 2006. In 2007 our average gross revenue per move (including storage revenue) was approximately $3,500 compared to approximately $2,800 in 2006.

 

Total cost of moving and storage.   Total cost of moving and storage consisted primarily of the freight transportation to move our containers. Our cost of moving and storage for the year ended December 31, 2007 was $10,755,314, resulting in a gross loss of $4,944,416, compared to the total cost of moving and storage for the year ended December 31, 2006 of $5,931,863, resulting in a gross loss of $1,747,309. Our gross loss increased by $3,197,107 in the more recent year. The increase in the gross loss is attributable to an increase in depreciation expense due to the additional forklifts and flatbed trailers required for the 60 cities in operation for a full twelve months in 2007 , and additional SmartVaults being placed into service during 2007. Included in cost of moving and storage for the year ended December 31, 2007 was $2,878,391 of depreciation on our SmartVaults, forklifts, GPS units and flat bed trailers, compared to depreciation of $1,104,590 for the year ended December 31, 2006. During the year ended December 31, 2007, we recorded total fixed asset impairments of $1,539,563, comprised of an asset impairment of $75,094 on 333 analog GPS units that were no longer in use, $589,469 on certain Version I vaults that

were damaged, and $875,000 on Version I vaults used in local storage. The impairment of the Version I vaults resulted from our decision in the fourth quarter of 2007 not to invest any of our limited financial resources in the storage only business. Due to our limited revenue growth potential, we reported an impairment on these assets of $875,000.

 

Our gross loss percentage was negatively affected by our high depreciation costs associated with the operational fixed assets necessary to establish the national expansion. Our gross loss (excluding depreciation, impairment and amortization) as a percentage of sales decreased from 2006 to 2007 due to our focus on reducing costs, upgrades of our software, additional personnel to monitor costs, and consolidation of loads to take advantage of full truck load freight rates. Included in our costs of moving and storage are repositioning and furniture pad expenses. Our repositioning and furniture pad costs increased from the prior year as these costs were incurred to place the containers into position for use. For the year December 31, 2007, we incurred repositioning costs and furniture pad expenses of $657,348 (representing 11% of sales).

 

Selling, general and administrative expenses.   Selling, general and administrative expenses consisted primarily of salaries, related benefits and fees for professional services. Selling, general and administrative expenses were $6,433,988 for the year ended December 31, 2007, compared to $6,848,079 for the year ended December 31, 2006, or a decrease of $414,091. The majority of the change is comprised of salaries and wages for year ended December 31, 2007 of $2,274,470 (including $284,180 of non-cash compensation) compared to salaries and wages for year ended December 31, 2006 of $4,286,340 (including non-cash compensation of $2,690,836) or a decrease of $2,011,870, offset by increases in legal and accounting expenses of $648,306, an increase in advertising and marketing expenses of $401,210, director fees of $115,000, and bad debts of $136,156 due to outdated collection policies that have been subsequently changed. In prior periods, our transportation providers administered arrangements by which funds due from customers paying by certified check were remitted to us. A significant portion of the increase in the bad debts is due to procedural problems or delays in remittance or collection of certified funds. All payments by check are currently required to be remitted directly to the Company prior to delivery of the containers to the ultimate destination point.

 

Also included in total selling, general and administrative expenses was depreciation and impairment expense of $193,348 for the year ended December 31, 2007, compared to depreciation expense of $99,395 for the year December 31, 2006. Selling, general and administrative expenses increased modestly as we transitioned from our national rollout to focus on sales growth.

 

During the period October 1, 2005 to December 31, 2005, we invested $151,930 in convertible notes of a service company, which provided us moving and handling services. We intended to supplement our moving services with those loading and unloading services provided by the service company to address the needs of our customers who sought full service moves. We originally intended to provide this entity with working capital loans up to $210,000 to maintain the service company’s operations until March 2006. However, the service company was not able to maintain budgeting necessary to reach a breakeven position and we discontinued the funding after providing an additional $47,000 in January 2006. During the first quarter of 2006, we determined that the convertible note value had been impaired as the service company was not able to execute its business plan and the future collection of the notes receivable was doubtful. Accordingly, we recorded impairment for 100% of the notes receivable balance at September 30, 2006.

 

Included in total selling, general and administrative expenses for the year ended December 31, 2006 was the write off of $602,262 of deferred offering costs as a result of the withdrawal of a prior registration statement in July 2006.

 

Other expense.   Other expense consisted primarily of interest expense, interest income and, in 2007, a loss on extinguishment of debt. Interest expense for the year ended December 31, 2007 was $2,754,027. This amount in 2007 included total non-cash interest of $2,027,978 comprised of $1,371,057 of non-cash interest from the amortization of debt discounts, including $870,523 from the expensing of the unamortized beneficial conversion discount upon the conversion of the January 2006 Notes to equity, and $250,437 of stock and warrants issued as inducements to convert accrued interest of $406,484 into equity. During 2006, we incurred $1,614,331 of interest expense, which included $351,754 of non-cash interest from the amortization of debt discounts and $161,140 of inducements to convert debt to equity. The increase was directly attributable to higher debt levels to fund our

equipment purchases and operating loss. In the fourth quarter of 2007, the Company negotiated an interest deferral on the 2005 Notes and the waiver of scheduled principal payments on $2.7 million of the $3 million face amount of the notes. For accounting purposes, this caused the 2005 Notes to be deemed an extinguishment, and the Company recorded a non-cash loss of $1,328,565. Interest income for the year ended December 31, 2007 was $288,437 compared to $107,043 in the prior year.

 

Loss before income taxes.   We reported a loss before income taxes of $15,172,559 for the year ended December 31, 2007, compared to a net loss of $10,102,676 for the year ended December 31, 2006. The increase in the loss before income taxes was attributable primarily to an increase in depreciation expense of approximately $1,836,959, an increase in impairments of $1,570,358, an increase in interest expense of $1,139,696, and a non cash loss on extinguishment of debt of $1,328,565. These increases were offset by a reduction in total selling, general and administrative expenses (excluding depreciation and impairment) of approximately $508,044.

 

Income tax benefit.   For the year ended December 31, 2007, we recorded an income tax benefit of $2,367,000 compared to $233,000 in the prior year as we were a limited liability company treated as a partnership for income tax purposes until December 6, 2006. The tax benefit was a result of the reduction in the deferred tax liability originally recognized when we became a taxable corporation in December 2006. The deferred tax liability was reduced to zero, and we will not recognize a tax benefit on additional net operating losses until we generate taxable income and the use of the net operating losses is more likely than not.

 

Net loss.   We reported a net loss of $12,805,559 for the year ended December 31, 2007, compared to a net loss of $9,869,676 for the year ended December 31, 2006. The principal reasons for the increased net loss were attributable to an increase in depreciation expense of approximately $1,836,959, an increase in impairments of $1,570,358, an increase in interest expense of $1,139,696, and a non cash loss on extinguishment of debt of $1,328,565. These increases were offset by a reduction in total selling, general and administrative expenses (excluding depreciation and impairment) of approximately $508,044. Net loss per basic and diluted shares was $1.21 for the year ended December 31, 2007, compared to $1.77 for the year ended December 31, 2006. Net loss per share was based upon weighted average shares outstanding of 10,623,167 for the year ended December 31, 2007, compared to 5,584,420 for the year ended December 31, 2006. The increase in weighted average shares was primarily due to the shares issued in conjunction with the December 2006 initial public offering and the conversion of debt and interest expense to common stock in 2006 and 2007.

 

Liquidity and Capital Resources

 

From inception through June 30, 2008, we have financed our operations through the private placement of our equity securities for gross proceeds of approximately $7,000,000, the private placement of convertible debentures for gross proceeds of $11,500,000, bank and capital lease financing for equipment purchases totaling $2,700,000, and the public sale of our securities in our initial public offering for net proceeds of approximately $14,300,000. At June 30, 2008 we had a working capital deficit of $5,900,000.

 

Recent Financing Activity

 

We anticipated at that we would need a total of $2,500,000 subsequent to March 31, 2008 to sustain our operations through the end of 2008. Since June 30, 2008, we have raised a total of approximately $1,055,000. In July and August of 2008 we sold $355,000 in secured convertible note units pursuant to our May 2008 private placement offering. The notes mature on the third anniversary of funding, bear interest at 11% per annum and are secured by 800 SmartVaults. In August 2008, we received new cash funding of $750,000 for the purchase of 2,343,760 restricted shares of our common stock. We estimate that the proceeds of this offering, when combined with cash receipts from operations and debt restructuring, will be sufficient to fund our operations and capital requirements through mid-2009. We are currently investigating additional funding opportunities.

 

Management cannot provide any assurance that we will be able to obtain loans or raise sufficient money through the sale of our equity securities or otherwise. If we are not able to raise adequate funding, we will be unable to continue in business in our current form if at all. If we are able to raise funding in the equity markets, our stockholders will suffer significant dilution and the issuance of securities may result in a change of control.

We currently have a significant amount of debt outstanding that likely will increase if we are successful in securing additional funding. Our level of debt could significantly affect our business by: (i) making it more difficult for us to satisfy our obligations, including making scheduled principal and interest payments under our debt obligations; (ii) limiting our ability to obtain additional financing; (iii) requiring us to dedicate a portion of our cash flow from operations to payment of debt, thereby reducing the availability of our cash flow for other purposes; and (iv) limiting our flexibility to maintain operations and pursue future opportunities.

 

Cash Flows

 

Net cash used in operations was $3,873,882 for the six months ended June 30, 2008 compared to $2,807,401 for the six months ended June 30, 2007. Cash was consumed by the net loss of $6,231,123, reduced by non-cash expenses of approximately $2,134,970 and reduced by changes in operating assets of $222,271. For the six months ended June 30, 2007 cash used in operations was consumed by the net loss of $3,978,898, reduced by non-cash expenses of $237,278 and reduced by changes in operating assets of $934,219.

 

Net cash used in operations was $5,579,441 for the twelve months ended December 31, 2007. Cash was consumed by the net loss of $12,805,559, reduced by non-cash expenses of $3,040,944 for depreciation, $1,371,057 of amortization of debt discounts, loss on debt extinguishment of $1,328,565, $284,180 of non-cash compensation, impairments of $1,570,358, bad debts of $168,014, and shares and warrants issued as inducements to convert debt to equity of $250,437, offset by a non-cash cost of a deferred income tax benefit of $2,367,000. Cash was also consumed by increases in accounts receivable of $126,846, an increase in contracts in process of $149,597, an increase in packing supplies of $94,437 and an increase in prepaid and other assets of $31,434. Cash consumed was reduced by an increase in accounts payable of $934,247, an increase in accrued interest of $704,847, and an increase in deferred revenue of $342,783.

 

Investing Activities

 

For the six months ended June 30, 2008 net cash outflows from investing activities consisted of the purchase of office equipment of $2,355, compared to the six months ended June 30, 2007 during which net cash outflows from investing activities of approximately $8,400,000 was attributable to purchases of property and equipment consisting primarily of SmartVaults, totaling $8,300,000, and deposits of $24,200.

 

For the year ended December 31, 2007 net cash used in investing activities of $10,080,373 was attributable to purchases of property and equipment totaling $10,041,173, and a deposit on an office lease of $39,200.

 

For the year ended December 31, 2006 net cash used in investing activities of $5,880,427 was attributable to purchases of property and equipment totaling $5,789,427, advancing $47,000 under a note receivable, and a deposit on an office lease of $44,000.

 

Financing Activities

 

For the six months ended June 30, 2008, financing activities consisted of issuance of notes payable for which net proceeds were received in the amount of $4,089,617, reduced by repayments on debt and capital leases of $426,136, resulting in net cash provided by financing activities of $3,663,481. For the six months ended June 30, 2007, financing activities consisted primarily of repayments on debt and capital leases of $374,855.

 

For the year ended December 31, 2007, we received proceeds from the sale of notes of $2,829,000 which were offset by note payable issuance cost of $233,395 and payments of debt and capital leases of $802,425.

 

For the year ended December 31, 2006, our financing activities consisted primarily of the issuance of common stock and membership interests generating $18,660,008 of proceeds. In addition, we received $6,832,500 from proceeds of notes payable, and $500,000 from proceeds of bank debt. The proceeds from these financing activities were offset by offering and issuance costs of approximately $3,540,000.

Contractual Obligations and Commitments

 

The following table identifies our long-term debt and contractual obligations as of June 30, 2008.

 

 

 

 

The Company is in arrears in the payment of the interest due on these notes. We are currently in discussion with the noteholders regarding a proposal to defer the amount of interest currently due and to restructure the obligations so that all interest that would otherwise become due during the remainder of 2008 and 2009 will instead be combined into a new convertible debt obligation. Until a definitive agreement is concluded with the noteholders, we have no assurance the proposed note restructuring will be implemented. The holders of the July 2006 Notes are parties to the Agreement Among Lenders involving holders of the Company’s 2005 Notes which provides that in order for acceleration of the debt upon any default to occur, the majority of the notesholders under all these notes must provide the Company with a written notice of acceleration.

 

Convertible Promissory Notes

 

The following table provides certain details of only our outstanding convertible promissory notes at June 30, 2008.

 

 

At June 30, 2008, the aggregate outstanding principal of secured and unsecured notes was $15,082,403. The notes bear interest ranging from 7% to 12% per annum.

 

2005 Notes and 2007 Deferred Interest Notes.   Interest on the September 2005 notes aggregating $3,000,000 in principal amount was payable semi-annually during the first two years after issuance. On the third anniversary of the 2005 notes issuance, the Company was required to begin making monthly principal payments on the notes on a five-year amortization basis. In November 2007, the holders of $2,700,000 of the 2005 notes agreed to waive and defer the monthly principal amortization in exchange for a reduced conversion price and other consideration in the form of warrants. In conjunction with amending and restating the terms of the 2005 notes, we issued convertible notes totaling $355,500 to certain of the 2005 note holders bearing interest at 12% per annum in exchange for their agreement to defer interest payments. The deferred interest notes mature in October 2010. As of June 30, 2008, the deferred interest amount was $59,250, the principal outstanding was $296,250, and we are in arrears in the payment of the interest due on a portion of these notes. We are currently in discussion with the note holders regarding a proposal to defer the amount of interest currently due and to restructure the obligations so that all interest that would otherwise become due during the remainder of 2008 and during 2009 will be rolled into a new convertible debt obligation. Until a definitive agreement is concluded with the noteholders, we have no assurance the proposed restructuring will be implemented. The holders of the Company’s 2005 Notes, the July 2006 Notes, and the August 2007 Notes, have entered into an Intercreditor Agreement and Stipulation which provides for pro rata sharing of collateral securing the respective notes. In addition, the holders of the 2005 Notes and the July 2006 Notes are parties to an Agreement Among Lenders which provides that no acceleration of maturity of indebtedness under any of the respective notes may occur upon a default unless a majority of the holders of all the notes issues a written notice to the Company.

 

2006 July Notes.   The July 2006 notes, in the amount of $5,000,000, require interest to be paid annually beginning June 30, 2007 for 5 years and all principal and any accrued and unpaid interest is due at maturity. The Company is in arrears in the payment of the interest due on these notes. We are currently in discussion with the noteholders regarding a proposal to defer the amount of interest currently due and to restructure the obligations so that all interest that would otherwise become due during the remainder of 2008 and during 2009 will instead be rolled into a new convertible debt obligation. Until a definitive agreement is concluded with the noteholders we

have no assurance the proposed restructuring will be implemented. The holders of the July 2006 Notes are parties to the Intercreditor Agreement and Agreement Among Lenders as described above.

 

2007 August Notes.   The August 2007 notes, in the amount of $1,217,500, bear interest at the rate of 12% per annum payable quarterly with principal due on September 1, 2009. These notes may be prepaid without penalty. We are in arrears in the payment of the interest due on these notes. We are currently in discussion with the noteholders regarding a proposal to defer the amount of interest currently due and to restructure the obligations so that all interest that would otherwise become due during the remainder of 2008 and during 2009 will instead be rolled into a new convertible debt obligation. Until a definitive agreement is concluded with the noteholders, we have no assurance the proposed restructuring will be implemented. The holders of the August 2007 Notes are parties to the Intercreditor Agreement and Stipulation with holders of the Company’s 2005 Notes and July 2006 Notes as described above.

 

2007 September Note and 2008 January Unsecured Note.   In September 2007 the Company issued a $540,000 unsecured promissory note bearing interest at 7% per annum payable quarterly. The principal amount is due September 2, 2010. The unsecured note was restructured in January 2008, and at that time the Company issued an additional convertible unsecured promissory note in the amount of $200,000 to the noteholder. The $200,000 unsecured note bears interest at 12% per annum payable quarterly and matures in January 2009. These Notes may be prepaid without penalty. Subsequent to June 30, 2008, these notes were converted to equity.

 

2007 November Notes.   The 2007 November notes, in the amount of $275,000, bear interest at 12% per annum. Interest and principal on this note was payable on the maturity date, October 31, 2008. The holders of our November 2007 Notes are secured by a second lien on certain assets held as security for the January 2008 secured note holders. The principal and interest on these notes remain unpaid, and we are proposing to the noteholders to defer the unpaid amount. Until a definitive agreement is concluded with the noteholders, we have no assurance the proposed deferral will be implemented.

 

January 2008 Notes.   In January 2008, the Company entered into secured promissory notes aggregating $3,655,000 that mature on January 15, 2010. The lenders purchased these notes at a price equal to 85% of the issue amount representing a 15% original issue discount. These notes are secured by a first lien on all of the Company’s assets except container assets and its container tool mold. The January 2008 notes bear interest at 11% per annum. Proceeds from these notes were used to retire debt to Silicon Valley Bank in the approximate amount of $358,778. The noteholders have agreed to defer the receipt of interest and principal payments until December 31, 2008. In addition, if the note is retired early, the noteholders have verbally agreed to waive the 20% cash prepayment penalty for a period of one year following this offering. Until a definitive agreement is concluded with the noteholders, we have no assurance the proposed deferral and waiver will be implemented.

 

2008 April Secured Notes.   In April 2008, the Company issued $750,000 of secured convertible notes with warrants that mature on June 30, 2011. The Notes bear interest at 12% per annum, and are secured by 500 containers. In the event the Company uses these containers as security for additional capital, the Company will issue the note holder additional warrants.

 

May and June 2008 Notes.   In May and June of 2008, the Company sold an aggregate of $150,000 secured convertible note units. The notes are due on the third anniversary of funding and bear interest at 11% per annum. Interest is payable quarterly in cash or kind (restricted shares) at the election of the Company during the first twelve months, and thereafter payable only in cash.

 

Due to the variable price provision of the January 2008 Notes, and as we are currently not in a financial position to redeem the balance of the payments due in cash, we potentially do not have the ability to issue a sufficient number of shares of common stock required to discharge our obligations under the current terms. Therefore, in accordance with EITF No. 00-19, at June 30, 2008, we have classified the January 2008 Note obligation as current on the balance sheet.

 

Additionally, if the Company does not have adequate shares to settle its obligations for the January 2008 notes, the Company is precluded from concluding it has sufficient authorized or issued shares to settle these contracts within the scope of EITF 00-19. The inability to settle the January 2008 notes has “tainted” financial instruments embedded in subsequent financings in a similar manner. It has been determined that the “toxic security” taints the

equity classification of subsequently issued contracts subject to EITF 00-19. Because of this EITF, these tainted securities are classified as current liabilities until the toxic security expires or is settled. As a result of this EITF, all of the aforementioned notes affected by this toxic security have been recorded as current liabilities on the balance sheet as of June 30, 2008.

 

The Company did not make certain scheduled interest payments for the quarter ended December 31, 2007, March 31, 2008 and June 30, 2008 as required under the terms of the August 2007 and 2005 Notes. The Company will be obligated to pay a default interest rate of 18% per annum on all outstanding principal amounts until the scheduled interest payments under the terms of the notes are paid current. As of June 30, 2008, $132,526 of interest on the August 2007 notes and approximately $83,000 of interest on the 2005 Notes were due and payable. As of the date of this filing, interest on these notes remains unpaid.

 

Subsequent to June 30, 2008, we did not make scheduled interest payments on the 2006 July Notes. In addition, the 2007 November Notes which were due October 31, 2008 have not been paid.

 

The convertible promissory notes described above will have substantial financial impact on our future financial statements in accordance with the accounting procedures of EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” and EITF No. 00-19 “Accounting for Derivative Financial instruments Indexed to, and Potentially Settled in a Company’s Own Stock.” As of June 30, 2008 we have allocated $6.4 million of the $15.1 million total debt to the detachable warrants and conversion feature. Our future financial statements will reflect interest expense calculated at an effective interest rate of 64% on the detachable warrants and conversion feature.

 

Controls and Procedures

 

As of December 31, 2007, and again at June 30, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of such year and period. During 2008, we adopted and will complete remediation measures. We have engaged an independent financial accounting firm to help us evaluate, account for and prepare financial statement disclosures for complex accounting transactions as well as to review its required SEC filings. In the future as such controls change in relation to developments in our business and financial reporting requirements, our evaluation and monitoring measures will also address any additional corrective actions that may be required.

 

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157,” which defers the effective date of Statement 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Earlier adoption is permitted, provided a company has not yet issued financial statements, including for interim periods, for that fiscal year. Effective January 1, 2008, we partially adopted SFAS No. 157 for financial assets and liabilities and certain non-financial assets and liabilities that are recognized and disclosed at fair value in the financial statements on a recurring basis and deferred adopting SFAS No. 157 for non-financial assets and liabilities recognized at fair value on a non-recurring basis until January 1, 2009.

 

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. As of

March 31, 2008, we did not elect the fair value option on any financial instruments or certain other items as permitted by SFAS 159.

 

In December 2007, the FASB issued Statement No. 141 (R) “Business Combinations.” This Statement establishes principles and requirements applicable to the manner in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. We do not believe the adoption will have a material impact on its financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”. SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We are currently assessing the impact of SFAS 161.

 

We provide an innovative, containerized method of transporting household and commercial goods securely and on a time-guaranteed basis. We currently provide moving services within markets encompassing over 92% of the U.S. population from terminals in the 60 largest metropolitan areas. Our operations are coordinated through the terminals of our primary transportation provider, UPS Freight. We believe that the superior security for customer goods, scheduling flexibility and expedited service our business model give us specific competitive advantages over the service offerings of traditional van lines that currently perform the majority of long distance moves in the U.S. In 2006, 2007 and the first six months of 2008, we completed 1,426, 1,628 and 804 moves, respectively.

 

We provide an innovative solution that addresses common problems experienced by consumers during moves. Our service model: (i) does not require customers to rent or drive trucks to the destination; (ii) provides ease of customer use of our standardized moving containers; and (iii) provides scheduling convenience and time savings that make the consumer’s moving experiences less stressful. Key benefits of our services include:

 

 

We can operate efficiently with only a small labor force and without a need for substantial investment of capital in transportation facilities that is typically required of national moving van service providers and their local agents. We contract with third party trucking companies for the required transportation services and focus our efforts on the range of moving management services we can provide using our containers. UPS Freight acts as our primary local cartage provider and takes responsibility for loading, unloading and transporting our SmartVaults in connection with our customer moves. Instead of contracting with large national van lines for our long distance transportation needs, we have elected to take advantage of the recurring excess load capacity of UPS Freight and other trucking logistics companies to ship our SmartVaults. These companies regularly ship a wide range of commercial products on a time-sensitive delivery basis and can ship our SmartVaults far more efficiently for our customers than traditional moving vans. They are willing to provide this service to us on a cost-effective basis because we enable them to use their own excess load and storage capacity more effectively.

 

Moving and Storage Industry Overview

 

The moving and storage industry in the United States encompasses over 8,000 service companies that collectively generate over $16.5 billion in annual revenues in the United States in 2007 according to a report published by the American Movers Association (AMSA). The most recognized names in the moving industry are major van line companies, such as United Van Lines, Allied Van Lines, Atlas Van Lines, Mayflower Van Lines, Wheaton Van Lines, and Bekins Van Lines. These national moving companies conduct their operations through an affiliated network of local agents throughout the country who undertake to provide the transportation of household goods through independent contractors they engage who actually own and operate the trucks, tractors and trailers used to provide the transportation services. These local agents book and carry out a move from origination to the new destination where the local agent in the new location completes these moves.

 

We believe that the traditional moving industry is facing significant challenges that will require changes to the industry’s prevailing business model. The moving industry must adapt to the high costs of fuel and the inefficiencies of shipping less than a full truck load (small moves that are under 8,000 pounds) long distances. In addition, an inherent characteristic of the traditional van line business model requires the local agents to share their revenue with the national brand company, while the local agents bear the vast majority of the capital investment, risk and customer issues. In order for the national van lines to operate efficiently and provide national service, they in turn must rely on the local agent network.

We believe that under the current conditions it is increasingly difficult for traditional moving companies to address the structural problems confronting the moving industry, as well as basic consumer issues and service problems, in the following key respects:

 

 

As a result of these problems we believe there is a significant opportunity in the moving industry to introduce and expand an alternative business model, i.e., containerized moving services, that deals with these concerns by offering improved and more efficient services on a cost-effective basis applying up-to-date logistics principles.

 

Smart Move Solution

 

For consumers of all types (individuals and commercial), our business model eliminates the underlying cause of many common problems experienced during moves. Our service model: (i) does not require customers to rent or drive trucks to the destination; (ii) provides ease of customer use with our standardized moving containers and our ground level loading capability; and (iii) provides scheduling convenience and time savings that reduce the stressful scenarios typically associated with consumer moves. Our business model and implementation strategy is designed to minimize these common problems and to improve our customers’ moving experience. Key aspects of our solution include:

 

 

Smart Move believes its solution also addresses many of the current problems in the moving industry by offering the following benefits:

 

 

 

We believe that we can provide customers a cost savings of from 15% to 20% relative to the costs of traditional movers (depending upon the type of move, service level, distance, origin and destination). These savings can be derived in part through our ability to afford customers the convenience and flexibility of packing their own goods which is made possible through our greater control over scheduling. In contrast to the traditional full service move, the Smart Move solution gives the consumer the time to pack and fill the container prior to shipment and to unload it upon arrival at the destination site. For example, in a traditional full service move, the customer must, generally, be ready to move out and have all goods loaded in one day. Then, upon arrival at his or her destination, the customer must accept the household goods on the assigned delivery date or pay additional fees. Consumers using our services, in contrast, can load, take delivery of containers, and ship their goods to the destination city to be stored at a local warehouse at no additional charge for up to 28 days. If additional storage time is required beyond the 28 days provided, we are able to furnish the required storage at a very competitive price of $2.00 per day, per vault. In addition, most insurance and liability claims arising in the moving industry relate to lost or missing goods. The Smart Move solution minimizes the risk of loss of a customer’s goods by allowing the customer to place his or her own lock on the vaults. As an added security feature, a secure seal is attached by UPS Freight to the vault at the time of shipment. Customers are thereby assured that their goods have not been touched or handled multiple times, as is often the case with moves handled by traditional movers.

 

Our Business Model

 

We believe that our business model allows us to operate on a cost-efficient basis with a small labor force and without the need for a substantial investment of capital in transportation facilities that is typically required of national moving van service providers and their local agents. We contract with third party trucking companies for the transportation services we require. We focus our efforts on providing specialized moving containers and asset tracking and management services associated with our use of these containers. UPS Freight acts as our primary local cartage provider and takes responsibility for loading, unloading and transporting our SmartVaults in connection with our customer moves. Instead of contracting with large national van lines for our transport needs, we have elected to take advantage of the recurring excess load capacity of UPS Freight and other trucking companies to ship our SmartVaults for long distance moves. These trucking logistics companies regularly ship a wide range of commercial products on a basis that generally involves time-sensitive delivery requirements. Consequently, they can ship our SmartVaults far more efficiently than moving vans and are willing to provide this service to us on a cost-effective basis because they are able to utilize their transportation capabilities more effectively by aligning our requirements to transport uniform size containers with their need to use available excess freight load capacity.

 

The principal elements of our business model include the following:

 

SmartVault Container.   The proprietary design of the SmartVault is a key component of our business model. Our corporate owned fleet of over 4,200 moving containers allows Smart Move to compete for long distance moving revenue and provides room to grow without further capital investment in vaults. The containerized service business model we developed was driven by our desire to scale rapidly without having to incur costly investment to acquire trucking and transportation infrastructure facilities.

 

The features of the SmartVault include:

 

 

 

The SmartVault’s sturdy weather resistant structure and its ability to be locked and secured by the customer also provide a high degree of protection from transit-related damage, tampering and theft. The risk of loss or excessive delay in transit is further reduced by our ability to monitor the location of each of our SmartVaults through the combined tracking functionality of bar-code scanning and our internal systems. The SmartVaults are additionally equipped with a global positioning system device (GPS) which can supplement the online tracking functionality. We are not currently using the GPS technology on the SmartVaults. The SmartVault’s security features and our tracking technology allow us to procure lower cost insurance against the loss or damage of goods during transit for us and our customers. Unlike the PODS container, a competitive container which can only be handled with special equipment, the SmartVault can be loaded on to any standard truck trailer or inter-modal container by forklift. The aluminum base enables the container to be used in additional vertical markets where wood containers are generally considered unsuitable for transport of goods, such as pharmaceutical, food and international shipments.

 

Strategic Outsourcing of Warehouse and Transportation Requirements.   Rather than building a costly infrastructure with associated continuing overhead and expansion costs, we maximize our operational leverage through outsourcing of trucking and warehouse infrastructure. Consequently, we avoid fixed costs for transportation and warehouse storage that conventional movers incur. National and regional freight carriers such as UPS Freight often cannot fill their trucks to capacity and consequently are able and willing to offer very competitive rates to move our vaults long distance in order to fill their unused trailer space. UPS Freight provides the vast majority of our pick-up and delivery needs within local markets. These local markets consists primarily of markets within an approximate 150-mile radius of 60 UPS terminals nationwide which allows us to provide moving services to approximately 92% of the U.S. population.

 

Our agreement with UPS Freight requires UPS Freight to perform a variety of functions with regard to our containers including, but not limited to, delivery, pick-up, line haul transportation and storage. We pay UPS Freight a set fee per trip, except for a fuel surcharge, which we pass on to our customer as part of the overall cost of the move. We also provide the trailer and forklift equipment for the local delivery. UPS Freight is required to provide on-going quality control inspections, training and safety consistent with our requirements. Our agreement with UPS Freight automatically renews on a monthly basis and is terminable by either party on 90 days notice. The current price terms continue through January 2009. We have the flexibility to use other similar logistics service providers to fill any gap, expand services or handle overflow situations to maintain our operating efficiencies and commitments. This enables us to control costs, remain flexible to meet customers’ needs and continue to grow revenue.

 

Interstate Focus.   Our model is designed to compete favorably in the interstate or non-local movement of household goods. The local storage and moving sector within our industry involves numerous companies in most urban areas which compete with one another mainly on the basis of price. In contrast, the interstate segment is primarily serviced by major van lines. Our model allows us the flexibility to provide relocation services between major markets efficiently, and allows us to expand our service area with little or no additional capital investment. Our focus on interstate moves allows us not only to capture revenue directly from moving consumers, but also to provide our container and logistics services offerings directly to national moving companies, corporate human resource departments and corporate relocation services.

 

Scalability and Efficient Logistics Management.   While UPS Freight remains our main strategic partner, we have established relationships with other major cartage providers in the logistics transport sector that can also meet our outsourcing requirements on a cost-effective basis. By actively expanding our service provider network, we create options and insulate ourselves from being dependent on just one logistics provider. This allows us to handle sales growth and deal with seasonal increased demands efficiently and on a timely basis. The flexibility afforded by our model is not only beneficial to our customers, but allows us to achieve operating leverage, maintain service levels, and consistently keep freight costs low by obtaining competitive bids. Our logistics objective is to maintain a sufficient number of locations from which containers can be accessed to allow movements within our network to be coordinated on the most cost-effective basis. Our proprietary fleet of SmartVaults allows positioning and redeployment of empty containers that are ready for next use to any other location within our network and avoids the

need for individual SmartVaults to be returned only to a base location. This allows freight cost and administrative efficiencies to be realized while fulfilling demand and reducing the length of empty back haul or repositioning. Our proprietary software allows us to efficiently plan and manage our fleet of SmartVault containers. Our software enables our logistics group personnel to monitor costs, compare rates and secure the least expensive freight bid for all shipments, making it possible to quickly identify opportunities to increase our gross margin. Our logistics group also uses the software technology to automatically issue bids for freight quotes every night, as well as to monitor the shipments each day and to combine loads for full truck load rates. These processes enable us to take advantage of the least expensive freight charges available for a given shipment.

 

Strategy and Revenue Generation

 

Our near term strategy is to increase revenues by simultaneously developing existing and new sales channels within the interstate segment of the broader moving and storage industry. We plan to focus on interstate or city-to-city moves because we believe we will be most competitive in meeting customers’ demands associated with these moves. We focus our marketing efforts on sales lead generation and the continued introduction of our moving concepts to individual consumers and corporate aggregators of moving services.

 

We are building a multi-faceted sales strategy and are diversifying our sales network through the following initiatives:

 

 

 

The acquisition of the Star Relocation Alliance, Inc. also allows us to continue the expansion of relationships with national van lines, and our agreement with RELO Direct, a nationwide association of over 700 of the leading real estate brokerage companies, gives us the opportunity to receive relocation leads from all over the country.

 

Potential Sales Opportunities

 

We also intend to pursue the following potentially attractive opportunities for our business model when resources permit:

 

 

Size of the Market Opportunity

 

The U.S. household moving and storage industry generated combined annual revenues of approximately $31 billion in 2005 (according to the American Movers and Storage Association, September 2005). We estimate the U.S. household moving industry alone represents revenues of approximately $16.5 billion annually, of which $13 billion is generated from the interstate relocation segment. The 20 largest national moving companies control only 35 percent of the market (according to the American Movers and Storage Association, September 2005).

According to the latest U.S. Census Bureau report, “Geographical Mobility 2006,” every year 40 to 42 million Americans move. This involves 17 million households utilizing moving services of some nature, whether it be a full service move or simply renting a truck for a self-move. Approximately 20% of those moves are regional in scope, involving a length of haul extending outside of a given county, but within the same state. Another 14% involve longer distance moves to another state or country. Our immediate target is the interstate market which is estimated at about 2,380,000 moves per year.

 

We currently operate in the top 60 cities with respect to their total moving activity. Significant synergies exist in serving these cities because over 80% of all moves are between these cities. The data we have received from the 10 largest national moving companies indicate that those companies provide over 500,000 interstate moves per year into and out of the top 30 cities. This data does not include any statistics regarding the number of self moves nor does it reflect second tier moving company activity. Consequently, we believe the market for these moves is actually larger.

 

Manufacturing Relationships

 

SmartVault components are currently manufactured by Orbis Corporation. We own the proprietary mold which Orbis uses in its plant to mold the components of the SmartVault, but we do not intend to engage in any manufacturing operations relating to these containers or container components. Pursuant to our manufacturing arrangements, Orbis may only utilize the mold for manufacture of SmartVaults on our behalf. We believe that HDPE is a widely available plastic product and that we are not dependent on a single or limited source of supply for this component.

 

Our Intellectual Property and Trademarks

 

Our competitive position is not dependent on the viability of patent protection. We protect our proprietary processes and trademarks through confidentiality agreements and through registrations of our key marks. We hold rights to the following United States trademarks:

 

 

We do not own any patents, copyrights or any other trademarks. We own the design and tooling mold used to manufacture the SmartVault and our manufacturing agreement prohibits the manufacturer from using the design mold to produce containers for anybody but us.

 

Competition

 

Our primary competitors include the national moving service providers, portable storage and moving service providers, and the truck rental companies described below. The discussion which follows reflects our own assessment of the competition and is based in part on our review of a variety of publicly available sources of information regarding these companies.

 

Major Van Lines.   These competitors include well known long distance moving companies such as United Van Lines, Atlas Van Lines, North American Van Lines, Allied Van Lines, Mayflower Van Lines, Bekins Van Lines and Wheaton Van Lines, each with annual revenues of $500 million to over $1 billion. Each of these companies provides a range of services within markets that include those in which we operate. These companies offer full service moves to consumers through their network of agents and have operations in a majority of the largest 100 cities in the United States. These van lines all operate and require their local agents to operate trucks and trailers to complete the moves required by their traditional customer base.

U-Haul.   U-Haul is North America’s largest do-it-yourself moving and storage operator. U-Haul rents trucks and trailers, and offers self-storage rooms, through a network of nearly 1,450 company-operated moving centers and approximately 14,500 independent U-Haul dealers. U-Haul serves more than 11 million do-it-yourself household moving customers annually.

 

PODS Enterprises, Inc.   PODS provides portable on demand storage and moving services in 47 states. PODS is a franchiser of protected franchise areas, with a reported 130,000 PODS containers in service as of June 2008. PODS is a private company that emphasizes local storage, but is believed to provide substantial intercity moving services.

 

Local Movers.   Local movers include thousands of existing small, local companies that perform moves only within their immediate local markets. The typical local mover has 15 employees or fewer, two to three trucks, and annual revenues of less than $1 million.

 

Although we believe that we offer superior flexibility, cost structure, asset pooling efficiencies and technology-enabled containers, we recognize that cost-driven entry barriers for this industry are relatively low. In addition, as more businesses become aware of our business model and services, we believe others may attempt to copy our concept. However, a competitor desiring to gain entry into this industry and to compete directly with us by offering a similar service would have to overcome the following obstacles:

 

 

We believe that we will need to continue to maintain superior quality moving containers and service standards, and plan to pursue an aggressive marketing program in order to maintain and expand our market share within market sectors in relation to these competitors.

 

Research and Development

 

During 2005 and 2006, we refined our container design based on our experiences, customer feedback and our ongoing logistics management activities. During 2007, we undertook additional development of our proprietary technology processes and software development activities. Management believes that these activities are necessary to enable us to maintain and enhance our competitive advantage over those participants in the moving industry that do not provide this service component.

 

Regulatory Matters

 

We are regulated by the Federal Motor Carrier Safety Administration (FMCSA). Under the FMCSA’s regulatory framework, we are considered a “freight forwarder.” As a freight forwarder, we must:

 

 

We believe that we are in compliance with all FMCSA requirements. In addition, we must comply with regulatory requirements imposed by the local and state authorities in each jurisdiction where we are deemed to conduct business to the extent we must obtain certain licenses and permits. We believe we are in compliance with all of these requirements.

 

Various federal and state labor laws govern our relationship with our employees, including minimum wage requirements, overtime, working conditions and immigration requirements. Significant additional government

imposed increases in minimum wages, paid leaves of absence and mandated health benefits, or increased tax reporting and tax payment requirements for employees could have an adverse effect on our results of operations.

 

Environmental Regulations.   As a provider of storage services, we are subject to a variety of federal, state and local governmental laws and regulations related to the storage, use and disposal of hazardous materials. We do not permit any users of our containers to store or discharge any toxic, volatile or otherwise hazardous chemicals and wastes. If and to the extent any toxic or hazardous materials are ever transported or stored in our containers, with or without our permission, we could be subject to fines or orders requiring us to cease operations. In addition, under some foreign, federal, state and local statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for the release or otherwise was not at fault. Any failure by us to control the use of or to restrict adequately the discharge of, hazardous substances could subject us to substantial financial liabilities, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition.

 

Facilities and Employees

 

Facilities.   We occupy our 6,360 square foot headquarter office facility in Denver, Colorado under a lease that terminates in April 2011 and calls for monthly payments of $8,799. We believe that our existing facilities are adequate to support our existing operations. We also lease a 48,500 square foot Denver warehouse under sub-lease arrangements which expire in June 2009 and call for monthly base rent payments of $13,359. We use this facility for our local storage operation, assembly and repair of the SmartVault containers and the warehousing and sales of moving boxes and supplies.

 

Other Facilities.   We do not own any of the moving or storage facilities that we use. In three of our markets, we use warehousing facilities provided by UPS Freight that are made available to us as a customer of UPS Freight. Risk of loss is borne by UPS Freight, whose insurance provides coverage in the event of damage or destruction of the vaults. We pay a daily storage charge for empty vaults under our master agreement with UPS Freight.

 

In 56 markets, we have separate warehouse arrangements with third parties to store empty vaults. The arrangements are each long term but can be cancelled by either party for any reason upon 45 days’ notice. Monthly storage charges are approximately $16 to $19 per vault. Warehouse space is plentiful in all of these markets and should any warehouse arrangement be terminated, we believe that alternative arrangements could be secured on a timely and cost-effective basis.

 

We occasionally provide long-term storage of full vaults for clients. When we enter into a long-term warehouse agreement for the client, we are the party to the warehouse agreement, and the containers and their contents are subject to the warehouse owner’s insurance coverage. We then have a separate agreement with our client to cover the warehouse cost.

 

Employees.   We currently employ 26 people, including 23 employees in our headquarters location in Colorado who perform corporate and administrative as well as sales and marketing functions. None of our employees are unionized or covered by a collective bargaining agreement.

 

Company Background

 

Smart Move, Inc. was incorporated in Delaware on December 5, 2005, as a wholly-owned subsidiary of its predecessor entity, A Smart Move, L.L.C., with which we merged on December 6, 2006 when we commenced our initial public offering. We currently conduct business in 34 states and in all but six states we operate under our corporate name, Smart Move, Inc. Our corporate name was not available in California, Connecticut, Texas, Illinois, Indiana and New Jersey, so we conduct business under the trade name “Go Smart Move” in those states.

MANAGEMENT

 

The following table sets forth the names, ages and positions of our directors and executive officers as of September 30, 2008:

 

 

 

 

The backgrounds of our directors and executive officers are described below:

 

Chris Sapyta has served as our Chief Executive Officer and as a director since our inception. Mr. Sapyta started A Smart Move, L.L.C. in August 2004 and served as its Managing Member until it merged with Smart Move, Inc. in 2006. In 1996, he founded MicroStar Keg Management L.L.C., a keg asset company with over 5 million keg assets under its management, and served as its President until 2004. From 2001 to 2004, Mr. Sapyta served as Senior Vice President of New Markets at TrenStar, Inc., MicroStar’s successor company. Mr. Sapyta received his B.A. degree in accounting from St. Mary’s University in 1982.

 

L. Edward Johnson, CPA, has served as a manager of A Smart Move, L.L.C. from August 2004 and as a director and our Chief Financial Officer since November 2005. In 2003 Mr. Johnson was a principal of Johnson & Co, a certified public accounting firm. Mr. Johnson received his B.B.A. degree in Accounting from Texas Tech University in 1974.

 

John J. Burkholder has served on our Board of Directors since February 2006. Mr. Burkholder is the principal of several companies engaged in real estate, hotel and resort development. Since 1997, he has served as Managing Director of Golf Lodging, LLC, a hotel resort development firm. He received a B.A. from Cornell University in 1968 and an MBA from Fordham University in 1972.

 

John Jenkins has served on our Board of Directors since February 2006. Mr. Jenkins was Chairman and Chief Executive Officer of SAN Holdings, a provider of data storage and management solutions to industry and government, from 2001 to March 2007. Mr. Jenkins holds a B.S.M.E. from the University of Washington, which he earned in 1973 and a J.D. from the University of Denver Law School, which he earned in 1977.

 

Kent Lund has served on our Board of Directors since February 2006. Mr. Lund currently serves as Executive Vice President and Chief Compliance Officer of George K. Baum & Company, an investment banking firm. During 2007, Mr. Lund served as a Director of SAN Holdings, Inc., a public company. From 2005 to 2007, he served as an independent business, legal and securities compliance consultant. From 2002 to 2005, Mr. Lund served as a Board member and/or Corporate Secretary of four affiliated financial services companies (Kirkpatrick, Pettis, Smith, Polian Inc., a FINRA member securities broker dealer, two registered investment advisers and a state chartered trust company). Mr. Lund earned a B.A. degree, magna cum laude, from Midland Lutheran College in 1977, a J.D. degree, with honors, from Drake University Law School in 1980 and a M.B.A. degree from the University of Colorado in 2005.

Jeff McGonegal has served on our Board of Directors since September 2008. Mr. McGonegal has, since June 2003, served as the Chief Financial Officer of AspenBio Pharma, Inc., (Nasdaq: APPY), a biotechnology research and development company. He also serves as Chief Financial Officer and currently as Chief Executive Officer of PepperBall Technologies, Inc., (formerly Security With Advanced Technology, Inc. (Nasdaq: PBAL)), a provider of hardware and software security related products. Mr. McGonegal is a director of Imagenetix, Inc., a publicly held company in the nutritional supplements industry. He received a B.A. degree in accounting from Florida State University in 1973. Mr. McGonegal is a certified public accountant licensed in the state of Colorado.

 

Pete Bloomquist has served as our Senior Vice President of Corporate Finance, Treasurer from 2006 to present. From July 1997 to 2006, Mr. Bloomquist was employed by Bathgate Capital Partners LLC, a full service investment bank, as manager in the corporate finance group. Mr. Bloomquist is a director of Global Casinos, Inc., a publicly held company in the gaming industry. He received his Bachelor of Science degree in Business Management with an emphasis in Accounting from the University of Northern Colorado in 1980.

 

Mike Ellis has served as our Senior Vice President of Operations since August 2004. From 1993 to 2004, Mr. Ellis was the President of Goff Moving and Storage, Inc., a private moving company serving the greater Denver, Colorado area, where he was responsible for the day-to-day operations, business planning, sales/forecasting and military consulting.

 

All officers of the Company, except Mr. Johnson, devote their full-time attention to our business. Mr. Johnson has agreed to devote a minimum of 20 hours per week to our business. No director or executive officer is related to any other of our directors or executive officers, and there are no arrangements or understandings between any director or officer and any other person that such person will be elected as a director or appointed an officer.

 

Board of Directors

 

Our Board of Directors currently consists of six members who are divided into three classes. Each year stockholders elect the members of one of the three classes to a three-year term. The terms of our Class I Directors (Messrs. Lund and Jenkins), Class II Directors (Messrs. Burkholder and McGonegal) and Class III Directors (Messrs. Johnson and Sapyta) expire in 2010, 2011 and 2009, respectively.

 

Mr. Lund, Mr. Jenkins, Mr. McGonegal and Mr. Burkholder qualify as independent directors in accordance with the standards set by AMEX as defined in Section 301 of the Sarbanes-Oxley Act of 2002, and under Rule 10A(3)(b)(1) of the Securities Exchange Act, as amended. Accordingly, as required by AMEX, our Board of Directors is comprised of a majority of independent directors.

 

Board Committees

 

Our Board of Directors has three Standing Committees: the Audit Committee, the Compensation Committee and the Nominating and Governance Committee, each composed entirely of persons the Board has determined to be independent Directors. Each Standing Committee operates pursuant to a written charter adopted by our Board of Directors which sets forth the Standing Committee’s role and responsibilities and provides for an annual evaluation of its performance by the Board of Directors. The charters of all three Standing Committees are available on our corporate website at www.gosmartmove.com together with the corporate governance principles developed by our Nominating and Governance Committee and adopted by our Board of Directors.

 

Audit Committee.   The Audit Committee assists the Board of Directors in overseeing the audit of our financial statements and the quality and integrity of our accounting, auditing and financial reporting processes. The Audit Committee has direct responsibility for the selection and engagement of our independent registered public accountants and for reviewing the scope of the annual audit, audit fees, results of the audit and auditor qualifications and independence. The Audit Committee also reviews and discusses with management and the Board of Directors such matters as accounting policies, internal accounting controls and procedures for preparation of financial statements. The Audit Committee’s responsibilities include reviewing the qualifications, independence and performance of the independent auditors who report directly to the Audit Committee. The Audit Committee retains, determines the compensation of, evaluates, and, when appropriate, replaces the Company’s independent auditors and pre-approves audit and permitted non-audit services.

The Audit Committee is required to establish procedures to handle complaints received regarding our accounting, internal controls or auditing matters. It is also required to ensure the confidentiality of employees who have expressed a concern regarding or otherwise reported questionable accounting or auditing practices. The Audit Committee may retain independent advisors, at the Company’s expense, that it considers necessary for the completion of its duties.

 

The members of the Audit Committee are Mr. McGonegal (Chair), Mr. Lund and Mr. Burkholder. The Audit Committee held seventeen meetings in 2007. Our Board of Directors has determined that all of the Audit Committee members meet the enhanced SEC independence requirements of audit committee members have the financial literacy to serve on the Audit Committee, and that Mr. McGonegal is an audit committee financial expert as defined in SEC regulations.

 

Compensation Committee.   The Compensation Committee oversees our executive compensation policies and programs. In accordance with its charter, the Compensation Committee reviews, approves and makes recommendations to the Board regarding the compensation level of our executive officers based on an evaluation of performance against corporate goals and objectives approved by the Compensation Committee. The Compensation Committee also reviews and approves the terms of written employment agreements with our executive officers, recommends compensation to be paid to our outside directors, considers the design and competitiveness of our compensation plans, administers our equity compensation plans and reviews disclosures to be filed with the SEC and distributed to our stockholders regarding executive compensation.

 

The Compensation Committee held five meetings in 2007. The members of the Compensation Committee are Mr. Jenkins (Chair), Mr. Lund, and Mr. McGonegal.

 

Nominating and Governance Committee.   The Nominating and Governance Committee administers and oversees all aspects of the Company’s corporate governance functions on behalf of the Board of Directors. The Nominating and Governance Committee oversees the evaluation of the performance of the Board and its committees, reviews and makes recommendations regarding succession plans for positions held by executive officers, and reports to the Board of Directors regarding the performance and effectiveness of the Standing Committees of the Board of Directors. The responsibilities of the Nominating and Governance Committee include developing and recommending corporate governance principles to the Board and periodically (at least annually) reviewing the adequacy of such principles and recommending appropriate changes to the Board.

 

The Nominating and Governance Committee proposes criteria to determine the qualifications to serve and continue to serve as a director. In fulfilling these responsibilities, the Nominating and Governance Committee identifies and reviews the qualifications of, and recommends to the Board: (i) individuals to be nominated by the Board for election to the Board by stockholders at each annual meeting of stockholders, (ii) individuals to be nominated and elected to fill any vacancy on the Board that occurs for any reason (including increasing the size of the Board) and (iii) appointments to committees of the Board. The Nominating and Governance Committee also reviews stockholder nominees of qualified candidates for election to the Board, if such nominations are within the time limits and meet other requirements established by our Bylaws.

 

The Nominating and Corporate Governance Committee held meetings in 2007. The members of the Committee are Mr. Burkholder (Chair), Mr. Lund, and Mr. Jenkins.

 

Indemnification and Limitation of Director and Officer Liability

 

Our Certificate of Incorporation includes provisions requiring us to indemnify our directors and officers to the fullest extent required by Delaware law against claims arising from their service in these capacities, provided they acted in good faith and that they reasonably believed their conduct or action was in, or not opposed to, our best interest.

 

In addition, our Certificate of Incorporation provides that no director will be liable to us or our stockholders for monetary damages for breach of certain fiduciary duties as a director. The effect of this provision is to restrict our

rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of certain fiduciary duties as a director, except that a director will be personally liable for:

 

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to our organizational documents and Delaware law, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

EXECUTIVE COMPENSATION

 

The following table summarizes all plan and non-plan compensation earned by or paid to our Chief Executive Officer, Mr. Sapyta, our Chief Financial Officer, Mr. Johnson, and Mr. Bloomquist, our Vice President of Corporate Finance, for our last two completed fiscal years. No other executive officer received total annual salary and bonus during those periods that exceeded $100,000.

 

SUMMARY COMPENSATION TABLE

 

 

 

 

The following table summarizes information related to grants of stock options made during the fiscal year ended December 31, 2007 to each of the named executive officers, adjusted to reflect our merger with A Smart Move, L.L.C., pursuant to which each outstanding individual membership interest converted into two shares of common stock immediately prior to the commencement of our initial public offering below:

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2007

 

 

 

Option exercises 2006 and 2007.   None of the outstanding options granted during fiscal 2006 or fiscal 2007 to our executive officers were exercised in fiscal 2007. In July 2006, certain options granted to Mr. Sapyta and Mr. Johnson by A Smart Move, L.L.C. were exercised into 162,000 shares of our common stock on a cashless basis, at a strike price of $4.50 per share. Pursuant to the determination of our Board of Directors, the subject options, upon the cashless exercise, were converted into 98,777 and 21,556 shares of our common stock issued to Mr. Sapyta and Mr. Johnson, respectively. In addition, during 2006, options to purchase 40,000 shares held by Mr. Johnson were exercised by cash purchase, generating cash proceeds to the Company totaling $25,000.

 

Employment agreements   We have entered into written employment agreements with Mr. Sapyta, our Chief Executive Officer, and Edward Johnson, our Chief Financial Officer. The employment agreements were entered into with our predecessor entity A Smart Move, L.L.C. and became applicable to Smart Move, Inc. upon our merger with A Smart Move, L.L.C. on December 6, 2006. Pursuant to the agreements, we agreed to pay Mr. Sapyta a base salary of $188,000 per annum and Mr. Johnson a base salary of $175,000 per annum, each which may be increased at the discretion of the Compensation Committee. The agreements are subject to an initial employment period until September 30, 2011 and will be extended to subsequent one year periods unless either party gives notice of non-renewal at least ninety days prior to the expiration of the employment period. The employment agreements also provide for bonuses based upon earnings before interest, taxes, depreciation and amortization, as well as the number of moves booked during the year.

 

Each of the employment agreements provides that if employment under the agreement is terminated by us without cause, we will pay a lump sum payment equal to one year of the base salary and will continue for two years following such termination to provide the benefits and perquisites that the officer was receiving at the time of the termination. In addition, upon a change of control, all options that have not yet vested and become exercisable will be deemed to have vested and to have become exercisable as of the time immediately preceding the change of control.

 

Director Compensation

 

Directors who are also our employees do not receive compensation for their services as directors. Our Board recently adopted the following compensation policy for our non-management directors for 2008. Directors receive an annual cash retainer of $22,000 paid in quarterly installments at the beginning of each quarter. Each non-employee director serving on one or more of our standing committees also receives a cash fee of $2,500 per committee per year, paid in quarterly installments at the beginning of each quarter. The chairpersons of our Compensation and Nominating and Governance Committees receive an additional annual cash payment of $5,000. The chairperson of our Audit Committee receives an additional annual cash payment of $12,000, and our Lead Director, appointed in February 2008, will receive additional compensation of $12,000 per year for services in that capacity, proportionately reduced to the extent the term of service is less than a full 12 months. Each non-employee director also will receive an annual grant of restricted shares of our common stock having a fair market value of $15,000 at the beginning of each year commencing in fiscal 2008, determined according to the average closing price of a share of our common stock for the month of December preceding the grant date.

All directors are reimbursed for their reasonable out of pocket expenses associated with attending meetings. In fiscal 2007, non-employee directors were compensated as follows:

 

 

 

 

2006 Equity Incentive Plan

 

In February 2006, we adopted our 2006 Equity Incentive Plan (the “Plan”) for our officers, directors, employees and outside consultants and advisors to align the interest of these persons with those of our stockholders and to provide incentives for these persons to exert maximum effort toward, and to contribute materially to, our success. The Plan became effective after the date of the merger on December 6, 2006. In June 2008, our stockholders approved an increase in shares reserved for issuance under the Plan from 1,400,000 shares to 1,900,000 shares.

 

The Plan is not subject to the provisions of the Employment Retirement Income Security Act and is not a “qualified plan” within the meaning of Section 401 of the Internal Revenue Code, as amended (the “Code”). The Plan is administered by our Compensation Committee, which has exclusive discretion to select the participants who will receive awards under the Plan and to determine the type, size and terms of each award.

 

Shares Subject to the Plan.   We may issue up to 1,900,000 shares under the Plan, subject to adjustment to prevent dilution from stock dividends, stock splits, recapitalization or similar transactions. Grants may be made in cash, in stock, or in a combination of the two, as determined by the Compensation Committee.

 

Awards under the Plan.   Under the Plan, the Compensation Committee may grant awards in the form of incentive stock options, nonqualified stock options, stock units, stock awards, stock appreciation rights and other stock-based awards.

 

Options.   The duration of any option shall be within the sole discretion of the Compensation Committee, except that any incentive stock option granted to a 10% or less stockholder or any nonqualified stock option must be exercised within ten years after the date the option is granted, and any incentive stock option granted to a greater than 10% stockholder must be exercised within five years after the date the option is granted. The exercise price of all options will be determined by the Compensation Committee, except that the exercise price of an option (including incentive stock options and nonqualified stock options) will be equal to, or greater than, the fair market value of a share of our stock on the date the option is granted, and incentive stock options may not be granted to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of our stock or any parent or subsidiary, as defined in section 424 of the Code, unless the price per share is at least 110% of the fair market value of our stock on the date of grant.

 

Stock Units.   The Compensation Committee may grant stock to an employee, consultant or non-employee director, on such terms and conditions as the Compensation Committee deems appropriate under the Plan. Each stock unit represents the right to receive a share of our stock or an amount based on the value of a share of our stock.

 

Stock Awards.   The Compensation Committee may issue shares of our stock to an employee, consultant or non-employee director under a stock award, upon such terms and conditions as the Committee deems appropriate under the Plan. The Compensation Committee may establish conditions under which restrictions on stock awards

shall lapse over a period of time or according to such other criteria as the Compensation Committee deems appropriate, including restrictions based upon the achievement of specific performance goals.

 

Other Awards.   Other awards may be granted that are based on or measured by our stock to employees, consultants and non-employee directors, on such terms and conditions as the Compensation Committee deems appropriate. Other stock-based awards may be granted subject to achievement of performance goals or other conditions and may be payable in our stock, cash, or a combination of the two.

 

Termination of Employment.   If the employment or service of a participant is terminated for cause, the options of such participant, both accrued and future, will terminate immediately. If the employment or service is terminated by either the participant or us for any reason other than for cause, death or disability, the options of the participant then outstanding shall be exercisable by the participant at any time prior to the expiration of the options or within three months after the date of such termination, whichever is shorter, but only to the extent of the vested options at the date of termination. If a participant becomes disabled or dies, his or her then outstanding options are exercisable at any time prior to the sooner of expiration of the options or one year after the date of termination of employment or service due to disability or death, but only to the extent of the vested options at the date of such termination. The terms and conditions regarding any other awards under the Plan will be determined by the Compensation Committee.

 

Termination or Amendment of the Plan.   Our Board of Directors may at any time terminate the Plan or amend the Plan as it deems advisable without stockholder action, unless stockholder approval is required by law. However, no termination or amendment will, without the consent of the individual to whom any option has been granted, affect or impair the rights of such individual.

 

The following table sets forth information as of September 18, 2008, as to the beneficial ownership of shares of our common stock by:

 

 

According to the rules and regulations of the SEC, shares that a person has a right to acquire within 60 days of September 18, 2008 are deemed to be outstanding for the purpose of computing the percentage of that person, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The percentage of beneficial ownership shown in the following table is based on 17,460,111 outstanding shares of common stock as of September 18, 2008 and 21,460,111 shares of common stock outstanding immediately after this offering.

 

Except as indicated in the footnotes to the table below, each stockholder named in the table has sole voting and investment power with respect to the shares shown in the table as beneficially owned by such stockholder.