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SPMI > SEC Filings for SPMI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for SPEEDEMISSIONS INC


13-Nov-2012

Quarterly Report


ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

Disclaimer Regarding Forward-Looking Statements

Our Management's Discussion and Analysis of Financial Condition and Results of Operations contain not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are statements we make based on our management's expectations, estimates, projections and assumptions and are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; emission certificate cost; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission. The above examples are not exhaustive and new risks emerge from time to time. For a further discussion of risk factors relating to our business, see Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2011.

Although the forward-looking statements in this quarterly report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Since our common stock is considered a "penny stock," we are not eligible to rely on the safe harbor for forward-looking statements provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and any references to these sections are for informational purposes only.

Overview

Speedemissions performs vehicle emissions testing and safety inspections in certain cities in which vehicle emissions testing is mandated by the Environmental Protection Agency ("EPA"). The federal government and a number of state and local governments in the United States (and in certain foreign countries) mandate vehicle emissions testing as a method of improving air quality. As of September 30, 2012, the Company operated 38 vehicle emissions testing and safety inspection stations under the trade names of Speedemissions (Atlanta, Georgia and St. Louis, Missouri); Mr. Sticker (Houston, Texas); and Just Emissions (Salt Lake City, Utah). The Company also operates four mobile testing units in the Atlanta, Georgia area. The Company manages its operations based on these four regions and has one reportable segment. We use computerized emissions testing and safety inspections equipment that test vehicles for compliance with vehicle emissions and safety standards. Our revenues are generated from the test or inspection fee charged to the registered owner of the vehicle. We do not provide automotive repair services.

On June 22, 2010, the Company announced the launch of its first iPhone application, Carbonga. Carbonga diagnoses an automobile's computer systems using the on board diagnostic port on vehicles that are 1996 or newer. Carbonga can check over 2,000 vehicle fault codes. We launched version two of Carbonga on February 16, 2011. Version two improved the speed and performance of the application and has additional features including the ability to receive vehicle safety recalls and Technical Service Bulletins for an annual subscription fee. Revenues from Carbonga have not been material to operating results.

During the quarter ended September 30, 2012 we formed a new company, SpeedEmissions Car Care, LLC, through which we will franchise our vehicle emissions and safety inspections store model. Franchises will be available to qualified store operators who have an interest in either a single or multi-location opportunity in select cities where emission testing/safety inspections and other automotive services are required. To assist with establishment of our franchise operations, we signed an agreement with an Atlanta based franchise consulting company to assist with our plan to franchise our business model into a number of new U.S. markets. We believe that the franchising vehicle will continue our growth strategy and increase our retail store presence. After securing approval for all the necessary disclosure documents, we expect to be selling franchises by the fourth quarter of 2012.


Results of Operations

Three Months Ended September 30, 2012 and 2011

Our revenue, cost of emission certificates, store operating expenses, general
and administrative expenses, (gain) loss from disposal of assets and operating
loss for the three months ended September 30, 2012 as compared to the three
months ended September 30, 2011 were as follows:

                                                         Three Months Ended
                                                            September 30             Percentage
                                                        2012            2011           Change
Revenue                                              $ 2,047,458     $ 2,164,562            (5.4 %)
Cost of emission certificates                            452,375         469,756            (3.7 %)
Store operating expenses                               1,310,257       1,368,170            (4.2 %)
General and administrative expenses                      365,386         334,822             9.1 %
(Gain) loss from sale of non-strategic assets                  -          (2,660 )              N/A
Operating loss                                       $   (80,560 )   $    (5,526 )

Revenue. Revenue decreased $117,104 or (5.4%) to $2,047,458 in the three month period ended September 30, 2012 compared to $2,164,562 in the three month period ended September 30, 2011. The decrease in revenue over the comparable period was due to a decrease in same store sales of $117,038 or (5.4%). The decrease in same store sales is mainly attributable to fewer tests being performed during the three month period ended September 30, 2012 compared to the prior comparable period and additional promotional discount programs which resulted in increased sales discounts issued of $75,476 over the prior year period.

Cost of emission certificates. Cost of emission certificates decreased $17,381 or (3.7%) in the three month period ended September 30, 2012 and was $452,375 or 22.1% of revenues, compared to $469,756 or 21.7% of revenues in the three month period ended September 30, 2011. The decrease in cost of emission certificates over the comparable period was primarily due to a decrease in same store sales.

Store operating expenses. Store operating expenses decreased $57,913 or (4.2%) in the three month period ended September 30, 2012 and was $1,310,257 or 64% of revenues, compared to $1,368,170 or 63.2% of revenues in the three month period ended September 30, 2011. The decrease was mainly attributable to lower store operating costs of $57,913 resulting from a decrease of $45,096 in same store wage expenses.

General and administrative expenses. Our general and administrative expenses increased $30,564, or 9.1% to $365,386 in the three month period ended September 30, 2012 from $334,822 in the three month period ended September 30, 2011. The increase in general and administrative expenses during the three month period ended September 30, 2012 was mainly due to higher legal, accounting and professional fees.

(Gain) loss from disposal of non-strategic assets. We recorded no sales of non-strategic assets in the three month period ended September 30, 2012. We recognized a gain on the disposal of assets of $2,660 in the three month period ended September 30, 2011.

Operating loss. Our operating loss increased by $75,034 in the three month period ended September 30, 2012 and was ($80,560) compared to an operating loss of ($5,526) in the three month period ended September 30, 2011. The increase in our operating loss was mainly due to the decrease in revenue, offset by the decrease in the cost of emission certificates and store operating expenses.


Interest income, interest expense, net loss and basic and diluted net loss per share. Our interest income, interest expense, net loss and basic and diluted net loss per share for the three month period ended September 30, 2012 as compared to the three month period ended September 30, 2011 is as follows:

                                                                Three Months Ended
                                                                   September 30,
                                                               2012             2011
Operating loss                                             $    (80,560 )   $     (5,526 )
Interest income                                                     756              760
Interest expense                                                 (9,170 )         (4,366 )
Net loss                                                   $    (88,974 )   $     (9,132 )
Basic and diluted net loss per share                       $      (0.00 )   $      (0.00 )
Weighted average shares outstanding, basic and diluted       34,688,166       33,764,249

The Company incurred net interest expense of $8,414 and $3,606 during the three month periods ended September 30, 2012 and 2011, respectively.

Net loss and basic and diluted loss per share. Net loss was $88,974 and $9,132 in the three month period ended September 30, 2012 and 2011, respectively. Basic and diluted net loss per share was ($0.00) and ($0.00), respectively in the three month periods ended September 30, 2012 and 2011, respectively.

Nine Months Ended September 30, 2012 and 2011

Our revenue, cost of emission certificates, store operating expenses, general
and administrative expenses, (gain) loss from disposal of non-strategic assets
and operating loss for the nine months ended September 30, 2012 as compared to
the nine months ended September 30, 2011 were as follows:

                                                          Nine Months Ended
                                                            September 30              Percentage
                                                        2012            2011            Change
Revenue                                              $ 5,955,326     $ 6,428,518             (7.4 %)
Cost of emission certificates                          1,321,871       1,420,251             (6.9 %)
Store operating expenses                               3,904,588       4,193,946             (6.9 %)
General and administrative expenses                      997,433       1,091,861             (8.6 %)
(Gain) loss from sale of non-strategic assets             (2,458 )       (43,282 )          (94.3 %)
Operating loss                                       $  (266,108 )   $  (234,258 )           13.6 %

Revenue. Revenue decreased $473,192 or (7.4%) to $5,955,326 in the nine month period ended September 30, 2012, compared to $6,428,518 in the nine month period ended September 30, 2011. The decrease in revenue over the comparable period was primarily due to a decrease in same store sales of $390,415 or (6.1%) and the closure of two stores in Texas during the nine months ended September 30, 2011. More specifically, one Texas store closed during March, 2011 and one Texas store closed during June, 2011. The decrease in same store sales is mainly attributable to fewer tests being performed during the nine month period ended September 30, 2012 compared to the prior comparable period and additional promotional discount programs which resulted in increased sales discounts issued of $107,577 over the prior year period.

Cost of emission certificates. Cost of emission certificates decreased $98,380 or (6.9%) in the nine month period ended September 30, 2012 and was $1,321,871 or 22.2% of revenues, compared to $1,420,251 or 22.1% of revenues in the nine month period ended September 30, 2011. The decrease in cost of emission certificates over the comparable period was primarily due to a decrease in same store sales and the closure of two stores in Texas during the nine months ended September 30, 2011.

Store operating expenses. Store operating expenses decreased $289,358 or (6.9%) in the nine month period ended September 30, 2012 and were $3,904,588 or 65.6% of revenues, compared to $4,193,946 or 65.2% of revenues in the nine month period ended September 30, 2011. The decrease was mainly attributable to a decrease of $157,185 in same store wage expenses and a decrease in store operating expenses of $93,282 resulting from the closure of two stores in Texas during the nine months ended September 30, 2011.

General and administrative expenses. Our general and administrative expenses decreased $94,428, or (8.6%) to $997,433 in the nine month period ended September 30, 2012 from $1,091,861 in the nine month period ended September 30, 2011. The decrease in general and administrative expenses during the nine month period ended September 30, 2012 was mainly due to lower salary expenses resulting from staff reductions partially offset by higher legal and accounting fees.


(Gain)/loss from sale of non-strategic assets. We recognized a gain of $2,458 from the sale of non-strategic assets in the nine month period ended September 30, 2012. We recognized a $43,282 gain from the sale of non-strategic assets in the nine month period ended September 30, 2011.

Operating loss. Our operating loss increased by $31,850 in the nine month period ended September 30, 2012 and was ($266,108) compared to an operating loss of ($234,258) in the nine month period ended September 30, 2011. The increase in our operating loss was mainly due to the decrease in revenue, offset by the decrease in the cost of emission certificates, store operating expenses and general and administrative expenses.

Interest income, interest expense, net loss and basic and diluted net loss per share. Our interest income, interest expense, net loss and basic and diluted net loss per share for the nine month period ended September 30, 2012 as compared to the nine month period ended September 30, 2011 is as follows:

                                                                 Nine Months Ended
                                                                   September 30,
                                                               2012             2011
Operating loss                                             $   (266,108 )   $   (234,258 )
Interest income                                                   2,265            2,280
Interest expense                                                (17,880 )        (13,573 )
Net loss                                                   $   (281,723 )   $   (245,551 )
Basic and diluted net loss per share                       $      (0.01 )   $      (0.01 )
Weighted average shares outstanding, basic and diluted       34,688,166       29,813,331

The Company incurred net interest expense of $15,615 and $11,293 during the nine month periods ended September 30, 2012 and 2011, respectively.

Net loss and basic and diluted net loss per share. Net loss was $281,723 and $245,551 in the nine month periods ended September 30, 2012 and 2011, respectively. Basic and diluted net loss per share was ($0.01) and ($0.01), respectively in the nine month periods ended September 30, 2012, and 2011, respectively.

Liquidity and Capital Resources

Introduction

Our net cash position increased by $4,593 during the nine months ended September 30, 2012 primarily resulting from cash provided by the change (and corresponding increase) in our line of credit, less cash used in operations while our total liabilities increased by $203,396, primarily as a result of the increased line of credit. Our current liabilities also increased, mainly due to a $192,965 net increase in our line of credit, which had a balance of $90,000 at December 31, 2011. We hope to achieve an increase in our net operating cash flows on a long-term basis, but we may not achieve positive operating cash flows on a consistent basis during 2012.

Cash Requirements

For the nine months ended September 30, 2012, our net cash used in operating activities was $147,754 compared to net cash used in operations of $191,401 in the nine months ended September 30, 2011. Negative operating cash flows during the nine months ended September 30, 2012 were primarily created by a net loss of $281,723, an increase in other current assets of $61,557, offset by depreciation and amortization of $136,666 and an increase in accounts payable and accrued liabilities of $60,358.

Negative operating cash flows during the nine months ended September 30, 2011 were primarily created by a net loss of $245,551, a decrease in accounts payable and accrued liabilities of $45,734, a decrease in other liabilities of $54,552 and a gain on the disposal of assets of $43,282. The decrease in net cash used in operating activities was offset by depreciation and amortization of $155,180, share-based compensation expense of $54,842 and a decrease in certificate and merchandise inventory of $8,779.

Sources and Uses of Cash

Net cash provided by investing activities was $12,762 for the nine months ended September 30, 2012 compared to net cash provided by investing activities of $32,812 for the nine months ended September 30, 2011. The net cash provided by investing activities during the nine months ended September 30, 2012 was related to proceeds from a note receivable of $15,860 and proceeds from asset sales of $3,100, offset by capital expenditures of $6,198. The net cash provided by investing activities during the nine months ended September 30, 2011 was related to proceeds from note receivable of $12,127 and proceeds from asset sales of $31,623, offset by capital expenditures of $10,938.


Net cash provided by financing activities was $139,585 and $76,253 for the nine months ended September 30, 2012 and 2011, respectively. During the nine months ended September 30, 2012, we received a net $192,965 from our line of credit and made principal payments of $18,529 and $34,851 on equipment financing obligations and capital leases, respectively. During the nine months ended September 30, 2011, we received net proceeds of $64,000 from the exercise of warrants into common stock, a net $60,280 from our line of credit and made principal payments of $15,043 and $32,984 on equipment financing obligations and capital leases, respectively.

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors, the Company has identified accounting policies related to valuation of our equity instruments, valuation of goodwill created as the result of business acquisitions, as key to an understanding of our financial statements. These are important accounting policies that require management's most difficult, subjective judgments.

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