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SPMI > SEC Filings for SPMI > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for SPEEDEMISSIONS INC


29-Mar-2013

Annual Report


Item 7. 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 contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. The words "may," "would," "should," "will," "assume," "believe," "plan," "expect," "anticipate," "could," "estimate," "predict," "goals," "continue," "project," and similar expressions or the negative of these terms or other comparable terminology are meant to identify such forward-looking statements. 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; raw material costs and availability; 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 SEC, including those set forth under "Item 1A. Risk Factors," in this Annual Report on Form 10-K as well as subsequently filed Quarterly Reports on Form 10-Q.

Although the forward-looking statements in this Annual 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.

Current Financial Position and Liquidity

Our revenues during the year ended December 31, 2012 and to date in 2013 have been insufficient to attain profitable operations and to provide adequate levels of cash flow from operations. We have experienced recurring net losses from operations, which have caused an accumulated deficit of $19,730,242 at December 31, 2012. We had a working capital deficit of approximately $1,301,000 at December 31, 2012 compared to a working capital deficit of approximately $377,000 at December 31, 2011. Our near-term liquidity and ability to remain in business is dependent on our ability to generate sufficient revenues from our store operations to provide sufficient cash flow from operations to pay our current level of operating expenses, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances can be given that the Company will be able to achieve sufficient levels of revenues in the near-term to provide adequate levels of cash flow from operations. Should an increase in revenues not materialize, we will seek to further reduce operating costs to bring them in line with reduced revenue levels. Should we be unable to achieve near-term profitability and generate sufficient cash flow from operations, and if we are unable to sufficiently reduce operating costs, we would need to raise additional capital or increase our borrowings beyond our existing line of credit facility, or we would go out of business. We currently have very limited access to capital, including the public and private placement of equity securities and additional debt financing. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. (See Note 1 to the Consolidated Financial Statements)


During the quarter ended June 30, 2012, we replaced our former $100,000 line of credit facility with a new loan agreement with a maximum borrowing limit of $2,000,000, subject to certain conditions stipulated in the new loan agreement. Under the new loan agreement we have taken two separate loans, as evidenced by two separate revolving note agreements. On June 8, 2012, we obtained a six-month loan for $350,000 to use for working capital purposes. Loan origination costs paid in conjunction with this $350,000 loan were $49,000 and were amortized over the six-month term of the loan. Subject to terms and conditions contained in the loan agreement, the $350,000 loan's original maturity date of December 8, 2012 was automatically extended for six-months creating a new maturity date of June 8, 2013. On October 9, 2012, we obtained a second six-month loan for $550,000 to use for the purchase of five emissions testing stores from AEE (see also Note 14 to financial statements). Loan origination costs paid in conjunction with this $550,000 loan were $119,500 and will be amortized over the six-month term of the loan. During the year ended December 31, 2012, a total of $19,644 of the second note's loan origination costs were expensed leaving the remaining costs, or $99,856, on the balance sheet as of December 31, 2012. Subject to terms and conditions contained in the loan agreement, including the consent of the lender, the $550,000 loan's original maturity date of April 9, 2013 can be automatically extended for six-months on its maturity date. At March 22, 2013, the outstanding balance on the loan facility was approximately $717,000 and our cash balances were approximately $50,000. In the event the lender does not extend the loan agreement, we would need to obtain additional credit facilities or raise additional capital to continue as a going concern and to execute our business plan. There is no assurance that such financing or capital would be available or, if available, that we would be able to complete financing or a capital raise on satisfactory terms.

Overview

As of December 31, 2012 we operated 41 vehicle emissions testing and safety inspection stations and four mobile units in four separate markets, Atlanta, Georgia; St. Louis, Missouri; Houston, Texas and Salt Lake City, Utah.

We perform vehicle emissions testing and safety inspections in certain cities in which vehicle emissions testing is mandated by the EPA. We use computerized emissions testing and safety inspections equipment that test vehicles for compliance with vehicle emissions and safety standards as determined by each state. 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.

We charge a fee for each test, whether the vehicle passes or not, and a portion of that fee is remitted to the state governing agency.

Results of Operations

Year ended December 31, 2012 compared to the year ended December 31, 2011

Our revenue, cost of emission certificates (our cost of goods sold), store operating expenses, general and administrative expenses, gain from disposal of non-strategic assets and operating loss for the year ended December 31, 2012 as compared to the comparable year ended December 31, 2011 were as follows:

                                                       Year Ended December 31,         Percentage
                                                        2012             2011            Change
Revenue                                              $ 7,752,601     $  8,321,991             (6.8 )%
Cost of emission certificates                          1,770,185        1,843,612             (4.0 )%
Store operating expenses                               5,242,468        5,562,144             (5.7 )%
General and administrative expenses                    1,288,177        1,413,050             (8.8 )%
(Gain) loss from disposal of non-strategic assets        (13,680 )        (41,157 )          (66.8 )%
Goodwill impairment expense                                    -        1,108,914              N/A
Operating loss                                       $  (534,549 )   $ (1,564,572 )          (65.8 )%

Revenue. For the year ended December 31, 2012, revenue decreased $569,390 or 6.8% to $7,752,601 compared to $8,321,991 in the prior year. The decrease in revenue was primarily due to a decrease in revenue from same store sales of 6.4% or $526,046 and to $82,790 less revenue in 2012 due to closure of two stores in 2011. The decrease in same store sales is mainly attributable to increased competition and discounting at all stores which resulted in discounts issued of $465,596 during 2012 which exceeded by $289,433 the $176,163 discounts issued in 2011. The decrease in 2012 revenue was partially offset by additional revenue of $39,446 generated from five new Georgia stores acquired in December 2012.

Cost of emission certificates. Cost of emission certificates decreased $73,427 or 4.0% to $1,770,185 in the year ended December 31, 2012 and was 22.8% of revenue, compared to $1,843,612 and 22.2% of revenue during 2011. The decrease in the cost of emission certificates over the comparable period was primarily due to the decrease in same store sales during 2012.


Store operating expenses. Our store operating expenses decreased $319,676 or 5.7% to $5,242,468 for the year ended December 31, 2012 and was 67.6% of revenue, compared to $5,562,144 or 66.8% of revenue during 2011. The decrease in store operating expenses was primarily due to a decrease of $294,344 in same store operating expenses, a decrease of $48,755 from the closure of two stores in 2011 partially offset by new store operating expenses of $23,422 for five Georgia stores purchased in December 2012. The primary cause of the $294,344 decrease in same store operating expenses was due to $195,032 in staff reductions and wage reductions, a decrease of $38,117 in repair and maintenance expense and an increase of $30,756 in revenue from sub-lease of closed stores.

General and administrative expenses. For the year ended December 31, 2012, our general and administrative expenses decreased $124,873 or 8.8% to $1,288,177 from $1,413,050 in 2011. The decrease in general and administrative expenses was primarily due to a $219,790 decrease in payroll and payroll related expenses and a decrease of $63,821 in shareholder and investor relations expenses offset by $98,181 in increased professional fees and an increase of $30,021 in fees related to new financing.

Gain from disposal of non-strategic assets. For the year ended December 31, 2012, we recognized a gain of $13,680 from the disposal of non-strategic assets, compared to a gain of $41,157 from the disposal of non-strategic assets in the year ended December 31, 2011. These non-strategic assets consisted primarily of excess testing equipment from closed stores.

Goodwill impairment expense. We determined that goodwill recorded from the acquisition of the following business was impaired as of December 31, 2011. We determined that no goodwill impairment existed at December 31, 2012.

2011 Goodwill Impairment:

               Company         Acquisition            Goodwill
               Acquired           Date           Impairment Expense
               Just, Inc.   September 8, 2005   $          1,108,914

The estimated fair value of goodwill was determined using discounted cash flow models. Due to an overall decline in the financial performance and anticipated future performance of the Just, Inc. stores located in Utah, it was estimated that Just, Inc.'s future cash flows would not be sufficient to cover the carrying value of its goodwill. The amount of goodwill impaired in 2011 was $1,108,914 and was recorded in the accompanying consolidated statements of operations for the year ended December 31, 2011.

Operating loss. Our operating loss decreased by $1,030,023 or 65.8% in the year ended December 31, 2012 and was $534,549 compared to an operating loss of $1,564,572 in the year ended December 31, 2011. The primary cause of this decrease was the absence, in 2012, of the $1,108,914 goodwill impairment charge recorded in 2011.

Interest income, interest expense and net loss and basic and diluted loss per share. Our interest income, interest expense, net loss and basic and diluted loss per share for the year ended December 31, 2012 as compared to the year ended December 31, 2011 were as follows:

                                                         2012             2011
    Operating loss                                   $   (534,549 )   $ (1,564,572 )
    Interest income                                         3,020            3,288
    Interest expense                                     (124,508 )        (17,307 )
    Net loss                                         $   (656,037 )   $ (1,578,591 )
    Basic and diluted net loss per share             $      (0.02 )   $      (0.05 )
    Weighted average shares outstanding, basic and
         diluted                                       34,688,166       30,991,130

The increase of $107,201 in interest expense during 2012, compared to 2011, was primarily the result of the amortization of loan origination costs associated with the new line of credit acquired during June 2012.

Net loss and basic and diluted net loss per share. Our net loss decreased from $1,578,591 in 2011 to $656,037 in 2012. Our basic and diluted net loss per share in the years ended December 31, 2011 and 2012 was $0.05 and $0.02, respectively. The decrease in the net loss and net loss per share was mainly attributable to no goodwill impairment expense in 2012 compared to a $1,108,914 goodwill impairment expense in the year ended December 31, 2011. Also contributing to the decrease in the net loss per share was an increase in the weighted average number of shares outstanding, basic and diluted.


Liquidity and Capital Resources

Introduction

Net loss for the year ended December 31, 2012 was $656,037 or $(0.02) per share, compared to a net loss of $1,578,591 or $(0.05) per share for the year ended December 31, 2011. Revenues for the year ended December 31, 2012 decreased $569,390, or 6.8%, to $7,752,601 from $8,321,991 in the year ended December 31, 2011. As of December 31, 2012, we had cash on hand of $54,121, a working capital deficit of $1,301,115, an accumulated deficit of $19,730,242 and total shareholders' deficit of $3,777,295.

While our line of credit facility of $2,000,000 is currently 36% of the maximum limit with an outstanding balance at March 22, 2013 of approximately $717,000, our line of credit matures on April 9, 2013 and we have no assurance it will be extended beyond that date. As a result, we do not anticipate taking additional advances from our line of credit between December 31, 2012 and April 9, 2013. Due to our decision not to take additional line of credit advances in 2013 prior to the April 9, 2013 maturity of our line of credit, we do not believe that our existing cash and cash flows from operations will be sufficient to support our operating and investing needs for at least the next twelve months. Our near term liquidity and ability to continue as a going concern is dependent on our ability to generate sufficient revenues from our store operations to provide sufficient cash flow from operations to pay our current level of operating expenses, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances may be given that the Company will be able to achieve sufficient levels of revenues in the near term to provide adequate levels of cash flow from operations. If the Company is unable to achieve near term profitability and generate sufficient cash flow from operations, we would need to raise additional capital or obtain additional borrowings beyond our existing line of credit facility. We currently have very limited access to capital, including the public and private placement of equity securities and additional debt financing. There is no assurance that such capital or financing would be available or, if available, that we would be able to complete a capital raise or financing on satisfactory terms.

Effective November 30, 2012, the Company purchased, for $425,000 in cash, certain assets of AEE. The assets purchased consisted of the operating assets of five emissions testing stations, which the Company intends to continue to operate under the Auto Emissions Express name. The Company incurred $11,620 in legal costs related to the acquisition of the five AEE stores. These legal costs are included in the general and administrative expenses of the Company as reported in its consolidated statements of operations for the year ended December 31, 2012. During the year ended December 31, 2012, the five AEE stores recorded $39,446 in revenues or 0.5% of the Company's $7,752,601 in consolidated revenues and $9,225 in store level operating income or 1.3% of the Company's store level operating profit. The Company made the acquisition to increase its market share in the Atlanta, Georgia, area and reduce average overhead costs per station by acquiring locations, which could be controlled by a local management team, using existing resources. These circumstances were the primary contributing factors for the recognition of goodwill as a result of this acquisition. Goodwill was determined using the residual method based on an appraisal of the assets acquired and commitments assumed in the transaction. The purchase price was paid in cash using funds available under our existing credit agreement with TCA Global Master Credit, LP ("TCA").

During the year ended December 31, 2012, our line of credit net borrowings increased $653,600 to the outstanding balance of $743,600 at December 31, 2012 from $90,000 at December 31, 2011. At March 22, 2013, the outstanding balance on the loan facility was approximately $717,000 and our cash balances were approximately $50,000.

Our cash, current assets, total assets, current liabilities, total liabilities, Series A convertible preferred stock and total shareholders' equity as of December 31, 2012 as compared to December 31, 2011 were as follows:

                                                      As of December 31,       As of December 31,
                                                             2012                     2011               Change
Cash                                                 $             54,121     $            129,095     $   (74,974 )
Total current assets                                              318,706                  269,362          49,344
Total assets                                                    2,643,068                2,233,464         409,604
Total current liabilities                                       1,619,821                  645,955         973,866
Total liabilities                                               1,841,017                  775,376       1,065,641
Series A convertible preferred stock                            4,579,346                4,579,346               -
Total shareholders' (deficit) equity                           (3,777,295 )             (3,121,258 )      (656,037 )

For the year ended December 31, 2012, our net cash used in operating activities was $83,779, as compared to net cash used in operating activities of $253,348 for the year ended December 31, 2011. Negative operating cash flows during 2012 were primarily created by a net loss of $656,037, an increase of $36,878 in other current assets and a gain on the disposal of assets of $13,680. Offsetting the negative operating cash flows was an increase of $353,837 in accounts payable and accrued liabilities plus depreciation and amortization of $276,663. Depreciation and amortization includes $94,052 representing amortization of loan origination costs associated with the TCA line of credit.

Negative operating cash flows during 2011 were primarily created by a net loss of $1,578,591, a decrease in other liabilities of $62,682 and a gain on the disposal of assets of $41,157. Offsetting the negative operating cash flows was $1,108,914 in goodwill impairment expense, depreciation and amortization of $201,115, share based compensation expense including director stock awards of $54,842, and an increase in accounts payable and accrued liabilities of $41,393.


On June 8, 2012, the Company paid off and cancelled its revolving line of credit agreement with Regions Bank, pursuant to which the Company had borrowed up to $100,000 in order to pay trade payables and for working capital purposes. Funds to pay off the Regions Bank revolving line of credit came from a new loan facility.

On June 8, 2012, the Company entered into a revolving line of credit loan agreement (the "Loan Agreement") with TCA Global Credit Master Fund, LP ("Lender"), pursuant to which the Company may borrow up to $2,000,000, subject to certain conditions stipulated in the Loan Agreement, in order to make asset acquisitions, pay trade payables and for other working capital purposes. Under the new loan agreement we have taken two separate loans, as evidenced by two separate revolving note agreements. On June 8, 2012, we obtained a six-month loan for $350,000 to use for working capital purposes. Loan origination costs paid in conjunction with this $350,000 loan were $49,000 and were amortized over the six-month term of the loan. Subject to terms and conditions contained in the loan agreement, the $350,000 loan's original maturity date of December 8, 2012 was automatically extended for six-months creating a new maturity date of June 8, 2013. On October 9, 2012, we obtained a second six-month loan for $550,000 to use for the purchase of five emissions testing stores from AEE (see also Note 14 to financial statements). Loan origination costs paid in conjunction with this $550,000 loan were $119,500 and will be amortized over the six-month term of the loan. During the year ended December 31, 2012, a total of $19,644 of the second note's loan origination costs were expensed leaving the remaining costs, or $99,856, as a pre-paid expense as of December 31, 2012. Subject to terms and conditions contained in the loan agreement, including the consent of the lender, the $550,000 loan's original maturity date of April 9, 2013 can be automatically extended for six-months on its maturity date. The annual interest rate on the note is 10%. The Loan Agreement is collateralized by the Company's inventory, accounts receivable, equipment, general intangibles and fixtures. If the Company prepays the outstanding balance in full, prior to maturity, a 5% prepayment penalty will be assessed. The balance due under the Loan Agreement was $743,600 at December 31, 2012.

Inflation has not had an abnormal or unanticipated effect on our operations. Our cost of emission certificates does not fluctuate from year to year as the fee we pay to the state or local government agency remains constant over the state's contract period with the administrator, which is usually five to seven years.

As of December 31, 2012, we had a shareholders' deficit of $3,777,295 compared to shareholders' deficit of $3,121,258 at December 31, 2011. The shareholders' deficit mainly resulted from our history of net operating losses.

Sources and Uses of Cash

Net cash used in investing activities was $373,961 for the year ended December 31, 2012. Net cash provided by investing activities was $32,260 for the year ended December 31, 2011.

Our capital investments made during 2012 primarily involved $425,000 used in the acquisition of five AEE stores and $8,186 used to purchase equipment for existing stores reduced by proceeds from the disposal of non-strategic assets in the amount of $38,100 and proceeds from a note receivable of $21,125.

Our capital investments made during 2011 primarily involved capital expenditures of $16,113 related to leasehold improvements and the purchase of equipment for our stores, proceeds from the disposal of non-strategic assets in the amount of $31,623 and proceeds from a note receivable of $16,750.

Net cash provided by financing activities was $382,766 for the year ended December 31, 2012, compared to $88,583 for the year ended December 31, 2011. Net cash provided by financing activities during 2012 was used for payments on capitalized leases of $52,146, payments on equipment financing obligations in the amount of $24,780 and payments to obtain financing of $25,408. These payments were offset by $485,100 in net proceeds received from our line of credit. Net cash provided by financing activities during 2011 was used for payments on debt in the amount of $20,105 and payments on capitalized leases of $45,312 offset by $90,000 in net proceeds received from a line of credit and $64,000 from the exercise of warrants into common stock.

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 its Board of Directors, the Company has identified the following critical accounting policies that require management's most difficult, subjective judgments:

Impairment of Long-Lived Assets and Goodwill - The Company reviews long-lived assets such as property, plant and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets.


Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We utilize a discounted cash flow analysis to determine a reporting unit's fair value. The methodology used in estimating discounted cash flows is inherently complex and involves significant management assumptions, including expected revenue growth and increases in expenses, to determine an appropriate discount rate and cash flows. Using discount rates for each reporting unit that were determined based on available market data and estimating cash flows for each reporting unit, none of our goodwill was impaired during 2012 or as of December 31, 2012. Furthermore, a 20% increase in the discount rates used to determine fair value would not result in impairment. Estimated cash flows extend into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that have and may significantly affect the estimates, and ultimately their carrying amount in our financials, include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, government regulation and changes in discount rates or market sector conditions. Significant changes in these assumptions could affect the Company's need to record an impairment charge.

Deferred Tax Asset Valuation Allowance - Deferred tax assets are recognized for . . .

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