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SPMI > SEC Filings for SPMI > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for SPEEDEMISSIONS INC

Form 10-K for SPEEDEMISSIONS INC


28-Mar-2014

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 years ended December 31, 2013 and 2012 and to date in 2014 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 $20,544,723 at December 31, 2013. We had a working capital deficit of approximately $2,060,000 at December 31, 2013 compared to a working capital deficit of approximately $1,301,000 at December 31, 2012. 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).

On June 8, 2012, the Company entered into the Credit Agreement with TCA, pursuant to which TCA agreed to loan the Company up to a maximum of $2,000,000 for working capital purposes. In June 2012, the Company obtained a loan from TCA in the amount of $350,000 to use for working capital purposes and, in October 2012, the Company entered into the Amended Credit Agreement with TCA pursuant to which the Company received an additional loan in the amount of $550,000 to use for the purchase of five emissions testing stores owned by AEE. On October 23, 2013, the Company entered into the Second Amended Credit Agreement with TCA pursuant to which TCA agreed to increase the revolving loan from $900,000 to $1,300,000 and, in connection therewith, the Company received an additional loan in the amount of $400,000 to finance the acquisition of the remaining seven emission testing centers owned by AEE and to provide working capital (see also Notes 9 and 14). While our line of credit facility of $1,300,000 is currently 63% of the maximum limit with an outstanding balance at March 21, 2014 of approximately $823,850, our line of credit matures on December 1, 2014 and we have no assurance it will be extended beyond that date. Therefore, our near term liquidity is dependent on our working capital and primarily on the revenues generated from our store operations. If we are 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 obtain additional borrowings beyond this existing line of credit. 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 to allow us to continue as a going concern. During the twelve months ended December 31, 2013, our line of credit net borrowings increased $195,645 to the outstanding balance of $939,245 at December 31, 2013 from $743,600 at December 31, 2012. At March 21, 2014, the outstanding balance on the loan facility was approximately $823,850, and our cash balances were approximately $41,725.

In the event TCA does not extend the line of credit, 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, 2013 we operated 43 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, 2013 compared to the year ended December 31, 2012

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, 2013 as compared to the comparable year ended December 31, 2012 were as follows:

                                                       Year Ended December 31,
                                                                                       Percentage
                                                         2013            2012            Change
Revenue                                              $  7,095,937     $ 7,752,601             (8.5 )%
Cost of emission certificates                           1,493,183       1,770,185            (15.6 )%
Store operating expenses                                5,084,345       5,242,468             (3.0 )%
General and administrative expenses                     1,082,865       1,288,177            (15.9 )%
(Gain) loss from disposal of non-strategic assets         (83,846 )       (13,680 )          512.9 %
Goodwill impairment expense                               107,739               -              n/a
Operating loss                                       $   (588,349 )   $  (534,549 )           10.1 %

Revenue. For the year ended December 31, 2013, revenue decreased $656,664 or 8.5% to $7,095,937 compared to $7,752,601 in the prior year. The decrease in revenue was due to a decrease in revenue from same store sales of 1.8% or ($108,237) and to the net effect of permanent closings of six Texas stores during 2012 and 2013 ($711,510), temporary closing of three stores during 2013 ($462,816) and increased revenue due to the purchase of 12 Georgia stores during 2012 and 2013 with a positive effect of $625,899. The decrease in same store sales is mainly attributable to increased competition.

Cost of emission certificates. Cost of emission certificates decreased $277,002 or 15.6% to $1,493,183 in the year ended December 31, 2013 and was 21.0% of revenue, compared to $1,770,185 and 22.8% of revenue during 2012. The decrease in the cost of emission certificates over the comparable period was due to the decrease in store revenues during 2013 partially offset by the net effect of closing six Texas stores where cost of emission certificates is approximately 35% of revenues while cost of emission certificates for the 12 stores purchased in Georgia is approximately 20% of revenues.

Store operating expenses. Our store operating expenses decreased $158,123 or 3.0% to $5,084,345 for the year ended December 31, 2013 and was 71.7% of revenue, compared to $5,242,468 or 67.6% of revenue during 2012. The decrease in store operating expenses was primarily due to a decrease of $636,400 in store operating expenses for nine stores permanently or temporarily closed, increased new store operating expenses of $415,957 for 12 Georgia stores purchased during 2012 and 2013 plus an increase of $62,320 in same store operating expenses. The primary causes of the $62,320 increase in same store operating expenses was due to $39,131 in wage increases, an increase of $19,670 in bank charges and an increase of $11,575 in depreciation expense.

General and administrative expenses. For the year ended December 31, 2013, our general and administrative expenses decreased $205,312 or 15.9% to $1,082,865 from $1,288,177 in 2012. The decrease in general and administrative expenses was primarily due to a $115,016 decrease in legal and accounting fees, a decrease of $40,377 in shareholder and investor relations expenses and a decrease in professional fees associated with Carbonga.

Gain from disposal of non-strategic assets. For the year ended December 31, 2013, we recognized a gain of $83,846 from the disposal of non-strategic assets, compared to a gain of $13,680 from the disposal of non-strategic assets in the year ended December 31, 2012. 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, 2013.

2013 Goodwill Impairment:

                                        Acquisition            Goodwill
      Five stores acquired from            Date           Impairment Expense
      Auto Emissions Express, LLC.   November 30, 2012   $            107,739

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 these five Georgia stores acquired from AEE, it is estimated that future cash flows from these five stores would not be sufficient to cover the carrying value of their goodwill. The amount of goodwill impaired in 2013 was $107,739 and is recorded in the accompanying consolidated statements of operations for the year ended December 31, 2013.


Operating loss. Our operating loss increased by $53,800 or 10.1% in the year ended December 31, 2013 and was $588,349 compared to an operating loss of $534,549 in the year ended December 31, 2012. The primary cause of this increase was the $107,739 goodwill impairment charge recorded in 2013.

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, 2013 as compared to the year ended December 31, 2012 were as follows:

                                                         2013             2012
    Operating loss                                   $   (588,349 )   $   (534,549 )
    Interest income                                         5,020            3,020
    Interest expense                                     (231,153 )       (124,508 )
    Net loss                                         $   (814,482 )   $   (656,037 )
    Basic and diluted net loss per share             $      (0.02 )   $      (0.02 )
    Weighted average shares outstanding, basic and
    diluted                                            35,623,871       34,688,166

The increase of $106,645 in interest expense during 2013, compared to 2012, was primarily the result of the amortization of loan origination costs associated with the line of credit and additional interest costs associated with the increase of the line of credit balance from $743,600 at December 31, 2012 to $939,245 at December 31, 2013.

Net loss and basic and diluted net loss per share. Our net loss increased from $656,037 in 2012 to $814,482 in 2013. Our basic and diluted net loss per share in the years ended December 31, 2012 and 2013 was $0.02 and $0.02, respectively. The primary causes of this increase were the $107,739 goodwill impairment charge recorded in 2013 and the $106,645 increase in interest expense.

Liquidity and Capital Resources

Introduction

Net loss for the year ended December 31, 2013 was $814,482 or $(0.02) per share, compared to a net loss of $656,037 or $(0.02) per share for the year ended December 31, 2012. Revenues for the year ended December 31, 2013 decreased $656,664, or 8.5%, to $7,095,937 from $7,752,601 in the year ended December 31, 2012. As of December 31, 2013, we had cash on hand of $65,854, a working capital deficit of $2,059,921, an accumulated deficit of $20,544,723 and total shareholders' deficit of $4,447,701.

While our line of credit facility of $1,300,000 is currently 63% of the maximum limit with an outstanding balance at March 21, 2014 of approximately $823,850, our line of credit matures on December 1, 2014 and we have no assurance it will be extended beyond that date. At March 21, 2014, our cash balances were approximately $41,725. 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 to 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, in the amount of $379,714, 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.


Effective October 25, 2013, the Company purchased, for $150,000 in cash and a $200,000 note payable, certain assets of AEE. The assets purchased consisted of the operating assets of seven emissions testing stations, which the Company intends to continue to operate under the Auto Emissions Express name. The Company incurred $6,020 in legal costs related to the acquisition of the seven 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, 2013. During the year ended December 31, 2013, the seven AEE stores recorded $87,667 in revenues or 1.2% of the Company's $7,095,937 in consolidated revenues. The Company made the acquisition to increase its market share in the Atlanta, Georgia, area and to 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, in the amount of $296,604 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.

During the year ended December 31, 2013, our line of credit net borrowings increased $195,645 to the outstanding balance of $939,245 at December 31, 2013 from $743,600 at December 31, 2012. At March 21, 2014, the outstanding balance on the loan facility was approximately $823,850 and our cash balances were approximately $41,725.

Our cash, current assets, total assets, current liabilities, total liabilities, Series A convertible preferred stock and total shareholders' equity as of December 31, 2013 as compared to December 31, 2012 were as follows:

                                                      As of December 31,       As of December 31,
                                                             2013                     2012               Change
Cash                                                 $             65,854     $             54,121     $   11,733
Total current assets                                              367,287                  318,706         48,581
Total assets                                                    2,748,270                2,643,068        105,202
Total current liabilities                                       2,427,208                1,619,821        807,387
Total liabilities                                               2,616,625                1,841,017        775,608
Series A convertible preferred stock                            4,579,346                4,579,346              -
Total shareholders' (deficit) equity                           (4,447,701 )             (3,777,295 )     (670,406 )

For the year ended December 31, 2013, our net cash used in operating activities was $85,033, as compared to net cash used in operating activities of $83,779 for the year ended December 31, 2012. Negative operating cash flows during 2013 were primarily created by a net loss of $814,482, a gain on the disposal of assets of $83,846, an increase of $19,478 in other current assets and a decrease in other liabilities of $11,401. Offsetting the negative operating cash flows was an increase of $377,711 in accounts payable and accrued liabilities plus depreciation and amortization of $281,248 and goodwill impairment expense of $107,739. Depreciation and amortization includes $99,856 representing amortization of loan origination costs associated with the TCA line of credit.

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.

On June 8, 2012, the Company entered into the Credit Agreement with TCA, pursuant to which TCA agreed to loan the Company up to a maximum of $2,000,000 for working capital purposes. In June 2012, the Company obtained a loan from TCA in the amount of $350,000 to use for working capital purposes and, in October 2012, the Company entered into the Amended Credit Agreement with TCA pursuant to which the Company received an additional loan in the amount of $550,000 to use for the purchase of five emissions testing stores owned by AEE. On October 23, 2013, the Company entered into the Second Amended Credit Agreement with TCA pursuant to which TCA agreed to increase the revolving loan from $900,000 to $1,300,000 and, in connection therewith, the Company received an additional loan in the amount of $400,000 to finance the acquisition of the remaining seven emission testing centers owned by AEE and to provide working capital (see also Notes 9 and 14). While our line of credit facility of $1,300,000 is currently 63% of the maximum limit with an outstanding balance at March 21, 2014 of approximately $823,850, our line of credit matures on December 1, 2014 and we have no assurance it will be extended beyond that date. Therefore, our near term liquidity is dependent on our working capital and primarily on the revenues generated from our store operations. If we are 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 obtain additional borrowings beyond this existing line of credit. 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 to allow us to continue as a going concern. During the twelve months ended December 31, 2013, our line of credit net borrowings increased $195,645 to the outstanding balance of $939,245 at December 31, 2013 from $743,600 at December 31, 2012. At March 21, 2014, the outstanding balance on the loan facility was approximately $823,850, and our cash balances were approximately $41,725.


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, 2013, we had a shareholders' deficit of $4,447,701 compared to shareholders' deficit of $3,777,295 at December 31, 2012. The shareholders' deficit mainly resulted from our history of net operating losses.

Sources and Uses of Cash

Net cash used in investing activities was $52,194 for the year ended December 31, 2013. Net cash used in investing activities was $373,961 for the year ended December 31, 2012.

Our capital investments made during 2013 primarily involved $150,000 used in the acquisition of seven AEE stores and $35,284 used to purchase equipment for existing stores reduced by proceeds from the disposal of non-strategic assets in the amount of $81,090 and proceeds from a note receivable of $52,000.

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.

Net cash provided by financing activities was $148,960 for the year ended December 31, 2013, compared to $382,766 for the year ended December 31, 2012. Net cash provided by financing activities during 2013 was used for payments on capitalized leases of $28,043, payments to obtain financing of $19,950 and payments on equipment financing obligations in the amount of $8,893. These payments were offset by $195,646 in net proceeds received from our line of credit. 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.

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 . . .

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