UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 000-49688
Speedemissions, Inc.
(Exact name of registrant as specified in its charter)
| Florida | 33-0961488 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1015 Tyrone Road Suite 220 Tyrone, GA |
30290 | |
| (Address of principal executive offices) | (Zip Code) | |
Issuer’s telephone number (770) 306-7667
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 3, 2010, there were 12,613,528 shares of common stock, par value $0.001, issued and outstanding.
Speedemissions, Inc.
| Cautionary Statement Relevant to Forward-Looking Information | 3 | |
| PART I FINANCIAL INFORMATION |
||
| 4 | ||
| ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | |
| ITEM 3 Quantitative and Qualitative Disclosures About Market Risk |
17 | |
| 17 | ||
| PART II OTHER INFORMATION | ||
| 17 | ||
| 17 | ||
| ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds |
17 | |
| 17 | ||
| 17 | ||
| 17 | ||
| 18 | ||
2
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q of Speedemissions, Inc. (“Speedemissions” or the “Company”) contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s current expectations, estimates and projections about the emissions testing and safety inspection industry. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” and similar expressions are intended to identify such forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond the Company’s control and are difficult to predict. The Company’s future results and shareholder values may differ materially from those expressed or forecast in these forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Speedemissions undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Speedemissions, Inc. and Subsidiaries
Consolidated Balance Sheets
| June 30, 2010 |
December 31, 2009 |
|||||||
| (unaudited) | ||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash |
$ | 463,368 | $ | 449,203 | ||||
| Other current assets |
165,684 | 136,790 | ||||||
| Total current assets |
629,052 | 585,993 | ||||||
| Property and equipment, at cost less accumulated depreciation and amortization |
814,765 | 953,183 | ||||||
| Goodwill |
4,251,657 | 4,251,657 | ||||||
| Other assets |
105,803 | 104,003 | ||||||
| Total assets |
$ | 5,801,277 | $ | 5,894,836 | ||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 221,918 | $ | 177,647 | ||||
| Accrued liabilities |
253,564 | 196,544 | ||||||
| Current portion of capitalized lease obligations |
42,123 | 47,288 | ||||||
| Current portion of equipment financing obligations |
20,266 | 18,865 | ||||||
| Current portion - deferred rent |
30,513 | 30,513 | ||||||
| Total current liabilities |
568,384 | 470,857 | ||||||
| Capitalized lease obligations, net of current portion |
64,301 | 93,604 | ||||||
| Equipment financing obligations, net of current portion |
35,069 | 46,389 | ||||||
| Deferred rent |
185,187 | 205,701 | ||||||
| Other long term liabilities |
7,350 | 7,350 | ||||||
| Total liabilities |
860,291 | 823,901 | ||||||
| Commitments and contingencies |
||||||||
| Series A convertible, redeemable preferred stock, $.001 par value, 5,000,000 shares authorized, 5,133 shares issued and outstanding; liquidation preference: $5,133,000 |
4,579,346 | 4,579,346 | ||||||
| Shareholders’ equity: |
||||||||
| Series B convertible preferred stock, $.001 par value, 3,000,000 shares authorized, 1,783,982 shares issued and outstanding with a liquidation preference of $4,581,266 at June 30, 2010 and 2,279,982 shares issued and outstanding with a liquidation preference of $5,854,991at December 31, 2009 |
1,784 | 2,280 | ||||||
| Common stock, $.001 par value, 250,000,000 shares authorized, 10,935,208 and 6,685,448 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively |
10,935 | 6,685 | ||||||
| Additional paid-in capital |
15,816,625 | 15,795,364 | ||||||
| Accumulated deficit |
(15,467,704 | ) | (15,312,740 | ) | ||||
| Total shareholders’ equity |
361,640 | 491,589 | ||||||
| Total liabilities and shareholders’ equity |
$ | 5,801,277 | $ | 5,894,836 | ||||
See accompanying notes to consolidated financial statements.
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Speedemissions, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenue |
$ | 2,495,734 | $ | 2,586,308 | $ | 4,948,847 | $ | 5,058,250 | ||||||||
| Costs of operations: |
||||||||||||||||
| Cost of emission certificates |
567,255 | 564,666 | 1,108,741 | 1,113,243 | ||||||||||||
| Store operating expenses |
1,535,403 | 1,574,762 | 3,092,125 | 3,147,591 | ||||||||||||
| General and administrative expenses |
486,361 | 361,053 | 881,624 | 662,419 | ||||||||||||
| (Gain) loss on disposal of non-strategic assets |
4,724 | (24,830 | ) | 9,713 | (24,830 | ) | ||||||||||
| Operating income (loss) |
(98,009 | ) | 110,657 | (143,356 | ) | 159,827 | ||||||||||
| Interest income (expense) |
||||||||||||||||
| Interest income |
13 | 26 | 628 | 51 | ||||||||||||
| Interest expense |
(5,393 | ) | (7,767 | ) | (12,236 | ) | (14,810 | ) | ||||||||
| Interest expense, net |
(5,380 | ) | (7,741 | ) | (11,608 | ) | (14,759 | ) | ||||||||
| Net income (loss) |
$ | (103,389 | ) | $ | 102,916 | $ | (154,964 | ) | $ | 145,068 | ||||||
| Basic net income (loss) per share |
$ | (0.01 | ) | $ | 0.02 | $ | (0.02 | ) | $ | 0.03 | ||||||
| Diluted net income (loss) per share |
$ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.02 | ||||||
| Weighted average common shares outstanding, basic |
8,509,834 | 5,162,108 | 7,736,631 | 5,162,108 | ||||||||||||
| Weighted average common shares outstanding, diluted |
8,509,834 | 9,439,606 | 7,736,631 | 9,439,606 | ||||||||||||
See accompanying notes to consolidated financial statements.
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Speedemissions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Six Months Ended June 30, |
||||||||
| 2010 | 2009 | |||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | (154,964 | ) | $ | 145,068 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
142,666 | 159,841 | ||||||
| (Gain) loss on disposal of assets |
9,713 | (24,830 | ) | |||||
| Share-based compensation |
25,014 | 23,674 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Other current assets |
(28,894 | ) | (892 | ) | ||||
| Other assets |
(1,800 | ) | (750 | ) | ||||
| Accounts payable and accrued liabilities |
101,292 | (161,314 | ) | |||||
| Other liabilities |
(20,514 | ) | (1,548 | ) | ||||
| Net cash provided by operating activities |
72,513 | 139,249 | ||||||
| Cash flows from investing activities: |
||||||||
| Proceeds from sales of property and equipment |
20,000 | 24,830 | ||||||
| Purchases of property and equipment |
(33,961 | ) | (43,992 | ) | ||||
| Net cash used in investing activities |
(13,961 | ) | (19,162 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Payments on equipment financing obligations |
(9,919 | ) | (7,892 | ) | ||||
| Payments on capitalized leases |
(34,468 | ) | (20,355 | ) | ||||
| Net cash used in financing activities |
(44,387 | ) | (28,247 | ) | ||||
| Net increase in cash |
14,165 | 91,840 | ||||||
| Cash at beginning of period |
449,203 | 512,492 | ||||||
| Cash at end of period |
$ | 463,368 | $ | 604,332 | ||||
| Supplemental Information: |
||||||||
| Cash paid during the period for interest |
$ | 12,236 | $ | 10,385 | ||||
See accompanying notes to consolidated financial statements.
6
Speedemissions, Inc.
Notes to Consolidated Financial Statements
June 30, 2010
(Unaudited)
Note 1: Nature of Operations
Description of Business
Speedemissions, Inc. (“Speedemissions” or the “Company”) 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 June 30, 2010, the Company operated 40 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.
At its vehicle emissions testing and safety inspection stations, the Company uses computerized emissions testing equipment and safety inspection equipment that tests vehicles for compliance with emissions and safety standards.
On June 22, 2010, the Company announced the launch of its first iPhone application, Carbonga. Carbonga is an iPhone application that 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.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.
The Company has evaluated subsequent events through the date of filing its Form 10-Q with the Securities and Exchange Commission. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s Consolidated Financial Statements.
Consolidation
The accompanying consolidated financial statements include the accounts of Speedemissions and non-operating subsidiaries, which are 100% owned by the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 2: Significant Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates included in these financial statements relate to useful lives of property and equipment, the valuation allowance provided against deferred tax assets and the valuation of long-lived assets and goodwill. Actual results could differ from those estimates. For a description of Speedemissions’ critical accounting policies see the Company’s annual report on Form 10-K for the year ended December 31, 2009.
Fair Value Measurements
The Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| • | Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company has no Level 1 assets or liabilities. |
| • | Level 2 – Observable inputs, other than quoted prices included in Level 1, such a quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data. The Company has no Level 2 assets or liabilities. |
7
| • | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The Company had no Level 3 assets or liabilities at June 30, 2010 or December 31, 2009. However, goodwill is evaluated at least annually for impairment based on Level 3 inputs. For a further discussion of how the Company measures the value of the reporting units and goodwill, see Note 5 Goodwill in the Company’s annual report on Form 10-K for the year ended December 31, 2009. |
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these accounts. Fair value of the equipment financing agreements and capital lease obligations approximate carrying value based upon current borrowing rates.
Note 3: Property and Equipment
Property and equipment at June 30, 2010 and December 31, 2009 consisted of the following:
| June 30, 2010 |
December
31, 2009 | |||||
| Buildings |
$ | 485,667 | $ | 485,667 | ||
| Emission testing and safety inspection equipment |
1,539,535 | 1,568,622 | ||||
| Furniture, fixtures and office equipment |
152,659 | 145,882 | ||||
| Vehicles |
25,772 | 23,272 | ||||
| Leasehold improvements |
288,786 | 292,325 | ||||
| 2,492,419 | 2,515,768 | |||||
| Less: accumulated depreciation and amortization |
1,677,654 | 1,562,585 | ||||
| $ | 814,765 | $ | 953,183 | |||
Note 4: Accrued Liabilities
Accrued liabilities at June 30, 2010 and December 31, 2009 consisted of the following:
| June 30, 2010 |
December 31, 2009 | |||||
| Payroll |
$ | 104,119 | $ | 44,529 | ||
| Professional fees |
63,309 | 99,690 | ||||
| Other |
35,777 | 42,906 | ||||
| Property Taxes |
50,359 | 9,419 | ||||
| $ | 253,564 | $ | 196,544 | |||
Note 5: Equipment Financing Agreements
In December 2007, the Company entered into sixty-month equipment financing agreements with two financing companies in the amounts of $55,124 and $40,458, respectively. The financing agreements are secured by the related equipment and are personally guaranteed by the President of the Company. The balance outstanding under these equipment financing agreements as of June 30, 2010 was $55,335.
Note 6: Net Income (loss) Per Share
Basic earnings per share (“EPS”) represents net income (loss) divided by the weighted average number of common shares outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options, warrants, and contingently issuable shares such as the Company’s Series A and Series B preferred stock (commonly and hereinafter referred to as “Common Stock Equivalents”), were exercised or converted into common stock.
8
The following table sets forth the computation for basic and diluted net income (loss) per share for the three and six month periods ended June 30, 2010 and 2009, respectively:
| Three Months
Ended June 30 |
Six Months
Ended June 30 | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||
| Net income (loss) (A) |
$ | (103,389 | ) | $ | 102,916 | $ | (154,964 | ) | $ | 145,068 | ||||
| Weighted average common shares - basic (B) |
8,509,834 | 5,162,108 | 7,736,631 | 5,162,108 | ||||||||||
| Effect of dilutive securities (3): |
||||||||||||||
| Diluted effect of stock options (1, 2) |
— | — | — | — | ||||||||||
| Diluted effect of stock warrants (1, 2) |
— | — | — | — | ||||||||||
| Diluted effect of unrestricted Preferred Series A Shares |
— | 4,277,498 | — | 4,277,498 | ||||||||||
| Weighted average common shares - diluted (C) |
8,509,834 | 9,439,606 | 7,736,631 | 9,439,606 | ||||||||||
| Net income (loss) per share - basic (A/B) |
$ | (0.01 | ) | $ | 0.02 | $ | (0.02 | ) | $ | 0.03 | ||||
| Net income (loss) per share - diluted (A/C) |
$ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | $ | 0.02 | ||||
| (1) | Because their effects are anti-dilutive, Common Stock Equivalents of 21,099,239 issuable under stock option plans and stock warrants whose grant price is greater than the average market price of Common Shares outstanding at the end of the relevant period have been excluded from the computation of weighted average common shares (diluted) for the three and six months ended June 30, 2009. These Common Stock Equivalents could be dilutive in future periods. |
| (2) | As a result of the Company’s net loss in the three and six months ended June 30, 2010, aggregate Common Stock Equivalents of 16,167,558 issuable under stock option plans and stock warrants that were potentially dilutive securities are anti-dilutive and have been excluded from the computation of weighted average common shares (diluted) for the three and six months ended June 30, 2010. These Common Stock Equivalents could be dilutive in future periods. |
| (3) | As a result of the Company’s net loss in the three and six months ended June 30, 2010, aggregate Common Stock Equivalents of 4,277,498 issuable under Series A convertible, redeemable preferred stock that were potentially dilutive securities are anti-dilutive and have been excluded from the computation of weighted average common shares (diluted) for the three and six months ended June 30, 2010. These Common Stock Equivalents could be dilutive in future periods. The Company reported net income in the three and six months ended June 30, 2009 and as a result, the 4,277,498 Common Stock Equivalents were dilutive in the three and six months ended June 30, 2009. |
| (4) | Series B convertible preferred stock held by Barron Partners, LP (“Barron”) do not have voting rights and are subject to a maximum ownership percentage by Barron at any time of 4.9% of the Company’s outstanding common stock. As a result, Common Stock Equivalents of the Series B convertible preferred stock of 13,486,900 and 18,760,000 are anti-dilutive and have been excluded from the weighted average common shares diluted calculation for the three and six months ended June 30, 2010 and 2009, respectively. |
Note 7: Preferred and Common Stock
Preferred Stock
There were 5,133 shares of Series A convertible redeemable preferred stock (“Preferred A Stock”) issued and outstanding as of June 30, 2010 and December 31, 2009. For financial statement purposes, the Preferred A Stock has been presented outside of stockholders’ equity on the Company’s balance sheets as a result of certain conditions that are outside the control of the Company that could trigger redemption of the securities.
There were 1,783,982 and 2,279,982 shares of Series B convertible preferred stock (“Preferred B Stock”) issued and outstanding as of June 30, 2010 and December 31, 2009, respectively, all of which were held by Barron. Barron converted 496,000 shares of Preferred B Stock into 3,749,760 common shares during the six months ended June 30, 2010. Barron did not convert any Preferred B Stock during the six months ended June 30, 2009.
9
Common Stock
The Company issued a total of 3,749,760 common shares to Barron during the six months ended June 30, 2010. The issuances to Barron resulted from Barron’s conversion of a total of 496,000 shares of Preferred B Stock during the six months ended June 30, 2010.
On June 14, 2010, the Compensation Committee of the Company approved common stock awards of 100,000 common shares to each of the Company’s directors. The common stock awards vested immediately. The Company issued a total of 500,000 shares of the common stock to the Company’s directors during the six months ended June 30, 2010.
Note 8: Share-Based Compensation
The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. The estimate of awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.
Share-based compensation expense was $14,223 and $11,837 during the three months ended June 30, 2010 and 2009, respectively and $25,015 and $23,674 during the six months ended June 30, 2010 and 2009, respectively. Share-based compensation is included in general administrative expenses in the consolidated statements of operations.
Stock Incentive Plans
The Company has granted options to employees and directors to purchase the Company’s common stock under various stock incentive plans. Under the plans, employees and non-employee directors are eligible to receive awards of various forms of equity-based incentive compensation, including stock options, restricted stock, restricted stock units and performance awards, among others. The plans are administered by the Compensation Committee of the Board of Directors, which determines the terms of the awards granted. Stock options are generally granted with an exercise price equal to the market value of the Company’s common stock on the date of grant, have a term of ten years or less, and generally vest over three years from the date of grant.
The following table sets forth the options granted under the Company’s stock option plans during the six month period ended June 30, 2010:
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Grant-date Fair Value | ||||||
| Options outstanding at December 31, 2009 |
5,778,808 | $ | 0.35 | |||||
| Granted |
— | — | — | |||||
| Expired |
(16,250 | ) | 0.10 | |||||
| Options outstanding at June 30, 2010 |
5,762,558 | $ | 0.35 | |||||
| Options exercisable at June 30, 2010 |
5,746,725 | $ | 0.40 | |||||
The aggregate intrinsic value of options outstanding and exercisable at June 30, 2010 was $0. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options.
The Company estimates the fair value for stock options at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions. Expected volatility is based on the comparable company data. The Company bases the risk-free interest rate on U.S. Treasury note rates. The expected term is based on the vesting period and an expected exercise term. The Company does not anticipate paying cash dividends in the foreseeable future and therefore uses an expected dividend yield of 0%. The Company did not grant stock options in the six months ended June 30, 2010.
As of June 30, 2010, there was $261 of unrecognized stock-based compensation expense related to non-vested stock options. This amount is expected to be recognized over a weighted average period of four months. There were 1,109,334 and 1,131,750 options that vested during the six months ended June 30, 2010 and 2009, respectively.
10
There were 5,762,558 and 5,778,808 options issued and outstanding under the Company’s SKTF, Inc. 2001 Stock Option Plan, the 2005 Omnibus Stock Grant and Option Plan, Speedemissions’ Inc. 2006 Stock Grant and Option Plan and 2008 Stock Grant and Option Plan as of June 30, 2010 and December 31, 2009, respectively. There were no options granted under these plans during the six month period ended June 30, 2010. There were no options exercised during the six month periods ended June 30, 2010 and 2009.
Stock Warrants
There were no common stock warrants granted or exercised during the six month period ended June 30, 2010. The following table represents our warrant activity for the six month period ended June 30, 2010:
| Number of Warrants |
|||
| Outstanding warrants at December 31, 2009 |
15,292,431 | ||
| Granted |
— | ||
| Exercised |
— | ||
| Forfeited |
(4,887,431 | ) | |
| Outstanding warrants at June 30, 2010 |
10,405,000 | ||
Note 10: Income Taxes
No provision for income taxes has been reflected for the three and six month periods ended June 30, 2010 and 2009 as the Company has sufficient net operating loss carry forwards to offset taxable income.
Note 11: Contingencies
The Company may from time to time be involved in various proceedings and litigation arising in the ordinary course of business. While any proceeding or litigation has an element of uncertainty, the Company believes that the outcome of any lawsuit or claim that may be pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial position or results of operations.
11
| 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 contains 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, 2009.
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 June 30, 2010, the Company operated 40 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 is an iPhone application that 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.
Results of Operations
Three Months Ended June 30, 2010 and 2009
Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, (gain) loss from disposal of non-strategic assets and operating income (loss) for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 were as follows:
| Three Months Ended June 30 |
Percentage | ||||||||||
| 2010 | 2009 | Change | |||||||||
| Revenue |
$ | 2,495,734 | $ | 2,586,308 | (3.5 | %) | |||||
| Cost of emission certificates |
567,255 | 564,666 | (0.5 | %) | |||||||
| Store operating expenses |
1,535,403 | 1,574,762 | (2.5 | %) | |||||||
| General and administrative expenses |
486,361 | 361,053 | 34.7 | % | |||||||
| (Gain) loss from disposal of non-strategic assets |
4,724 | (24,830 | ) | N/A | |||||||
| Operating income (loss) |
$ | (98,009 | ) | $ | 110,657 | (188.6 | %) | ||||
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Revenue. Revenue decreased $90,574 or 3.5% to $2,495,734 in the three month period ended June 30, 2010 compared to $2,586,308 in the three month period ended June 30, 2009. The decrease in revenue over the comparable period was primarily due to a decrease in same store sales of $123,848 or 4.8%, offset by an increase of $33,080 from new stores. The decrease in same store sales is mainly attributable to increased competition and discounting at our Georgia and Utah locations, offset by increases in same store sales at our Texas and Missouri locations.
Cost of emission certificates. Cost of emission certificates increased $2,589 or 0.5% in the three month period ended June 30, 2010 and was $567,255 or 22.7% of revenues, compared to $564,666 or 21.8% of revenues in the three month period ended June 30, 2009. The cost of each emission certificate varies from state to state. We experienced an increase in sales at our Texas locations where the cost of each emissions certificate is greater than the cost of each certificate in Georgia and Utah. The combination of an increase in sales in states with higher emission certificate costs together with the decrease in sales in Georgia and Utah, where the emission certificate unit cost is lower, resulted in an overall increase in our cost of sales even though our gross sales decreased.
Store operating expenses. Store operating expenses decreased $39,359 or 2.5% in the three month period ended June 30, 2010 and was $1,535,403 or 61.5% of revenues, compared to $1,574,762 or 60.9% of revenues in the three month period ended June 30, 2009. The decrease was mainly attributable to a decrease of $78,239 in same store operating expenses, offset by additional expenses from new stores of $38,880.
General and administrative expenses. Our general and administrative expenses increased $125,308 or 34.7% to $486,361 in the three month period ended June 30, 2010 from $361,053 in the three month period ended June 30, 2009. The increase in general and administrative expenses during the three month period June 30, 2010 was primarily due to $71,376 in Carbonga related expenses and an increase in professional fees of $84,735, offset by a reduction in other general and administrative expenses. Carbonga is our iPhone application developed in 2010 and the expenses include legal, advertising and other professional fees.
Loss from disposal of non-strategic assets. We recognized a loss of $4,724 on the disposal of non-strategic assets in the three month period ended June 30, 2010. We did not recognize a gain or loss from the disposal of non-strategic assets in the three month period ended June 30, 2009.
Operating income (loss). Our operating income (loss) decreased by $208,666 in the three month period ended June 30, 2010 and was ($98,009) compared to an operating income of $110,657 in the three month period ended June 30, 2009 due to the increases in cost of emissions certificates and general and administrative expenses and decreases in revenue and store operating expenses.
Interest income, interest expense, net income (loss) and basic and diluted income (loss) per share. Our interest income, interest expense, net income (loss) and basic and diluted income (loss) per share for the three month period ended June 30, 2010 as compared to the three month period ended June 30, 2009 is as follows:
| Three Months Ended June 30, |
||||||||
| 2010 | 2009 | |||||||
| Operating income (loss) |
$ | (98,009 | ) | $ | 110,657 | |||
| Interest income |
13 | 26 | ||||||
| Interest expense |
(5,393 | ) | (7,767 | ) | ||||
| Net income (loss) |
$ | (103,389 | ) | $ | 102,916 | |||
| Basic income (loss) per share |
$ | (0.01 | ) | $ | 0.02 | |||
| Diluted income (loss) per share |
$ | (0.01 | ) | $ | 0.01 | |||
| Weighted average shares outstanding, basic |
8,509,834 | 5,162,108 | ||||||
| Weighted average shares outstanding, diluted |
8,509,834 | 9,439,606 | ||||||
The Company incurred net interest expense of $5,380 and $7,741 during the three month periods ended June 30, 2010 and 2009, respectively.
Net income (loss) and basic and diluted income (loss) per share. Net income (loss) was ($98,009) and $110,657 in the three month period ended June 30, 2010 and 2009, respectively. Basic and diluted net loss per share was ($0.01) and ($0.01), respectively in the three month period ended June 30, 2010. Basic and diluted net income per share was $0.02 and $0.01, respectively in the three month period ended June 30, 2009.
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Six Months Ended June 30, 2010 and 2009
Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, (gain) loss from disposal of non-strategic assets and operating income (loss) for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 were as follows:
| Six Months
Ended June 30 |
Percentage | ||||||||||
| 2010 | 2009 | Change | |||||||||
| Revenue |
$ | 4,948,847 | $ | 5,058,250 | (2.2 | %) | |||||
| Cost of emission certificates |
1,108,741 | 1,113,243 | (0.4 | %) | |||||||
| Store operating expenses |
3,092,125 | 3,147,591 | (1.8 | %) | |||||||
| General and administrative expenses |
881,624 | 662,419 | 33.1 | % | |||||||
| (Gain) loss from disposal of non-strategic assets |
9,713 | (24,830 | ) | N/A | |||||||
| Operating income (loss) |
$ | (143,356 | ) | $ | 159,827 | (189.7 | %) | ||||
Revenue. Revenue decreased $109,403 or 2.2% to $4,948,847 in the six month period ended June 30, 2010 compared to $5,058,250 in the six month period ended June 30, 2009. The decrease in revenue over the comparable period was primarily due to a decrease in same store sales of $163,721 or 3.2%, offset by an increase of $54,124 from new stores. The decrease in same store sales is mainly attributable to increased competition and discounting at our Georgia and Utah locations, offset by increases in same store sales at our Texas and Missouri locations.
Cost of emission certificates. Cost of emission certificates decreased $4,502 or 0.4% in the six month period ended June 30, 2010 and was $1,108,741 or 22.4% of revenues, compared to $1,113,243 or 22.0% of revenues in the six month period ended June 30, 2009. The cost of each emission certificate varies from state to state. We experienced an increase in sales at our Texas locations where the cost of each emissions certificate is greater than the cost of each certificate in Georgia and Utah. The combination of an increase in sales in states with higher emission certificate costs together with the decrease in sales in Georgia and Utah, where the emission certificate unit cost is lower, resulted in a smaller decrease in our cost of sales when compared to gross revenue decreased.
Store operating expenses. Store operating expenses decreased $55,466 or 1.8% in the six month period ended June 30, 2010 and was $3,092,125 or 62.5% of revenues, compared to $3,147,591 or 62.2% of revenues in the six month period ended June 30, 2009. The decrease was mainly attributable to a decrease of $140,983 in same store operating expenses, offset by additional expenses from new stores of $85,517.
General and administrative expenses. Our general and administrative expenses increased $219,205 or 33.1% to $881,624 in the six month period ended June 30, 2010 from $662,419 in the six month period ended June 30, 2009. The increase in general and administrative expenses during the six month period June 30, 2010 was primarily due to $100,148 in Carbonga related expenses and an increase in professional fees of $130,461, offset by a reduction in other general and administrative expenses. Carbonga is our iPhone application developed in 2010 and the expenses include legal, advertising and other professional fees.
Loss from disposal of non-strategic assets. We recognized a loss of $9,713 on the disposal of non-strategic assets in the six month period ended June 30, 2010. We recognized a $24,830 gain from the disposal of non-strategic assets in the six month period ended June 30, 2009.
Operating income (loss). Our operating income (loss) decreased by $303,183 in the six month period ended June 30, 2010 and was ($143,356) compared to an operating income of $159,827 in the six month period ended June 30, 2009 due to the increases in general and administrative expenses and decreases in revenue, cost of emission certificates and store operating expenses.
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Interest income, interest expense, net income (loss) and basic and diluted income (loss) per share. Our interest income, interest expense, net income (loss) and basic and diluted income (loss) per share for the six month period ended June 30, 2010 as compared to the six month period ended June 30, 2009 is as follows:
| Six Months
Ended June 30, |
||||||||
| 2010 | 2009 | |||||||
| Operating income (loss) |
$ | (143,356 | ) | $ | 159,827 | |||
| Interest income |
628 | 51 | ||||||
| Interest expense |
(12,236 | ) | (14,810 | ) | ||||
| Net income (loss) |
$ | (154,964 | ) | $ | 145,068 | |||
| Basic income (loss) per share |
$ | (0.02 | ) | $ | 0.03 | |||
| Diluted income (loss) per share |
$ | (0.02 | ) | $ | 0.02 | |||
| Weighted average shares outstanding, basic |
7,736,631 | 5,162,108 | ||||||
| Weighted average shares outstanding, diluted |
7,736,631 | 9,439,606 | ||||||
The Company incurred net interest expense of $11,608 and $14,759 during the six month periods ended June 30, 2010 and 2009, respectively.
Net income (loss) and basic and diluted income (loss) per share. Net income (loss) was ($154,964) and $145,068 in the six month period ended June 30, 2010 and 2009, respectively. Basic and diluted net loss per share was ($0.02) and ($0.02), respectively in the six month period ended June 30, 2010. Basic and diluted net income per share was $0.03 and $0.02, respectively in the six month period ended June 30, 2009.
Liquidity and Capital Resources
Introduction
Our net cash position increased by $14,165 during the six months ended June 30, 2010 primarily from cash provided by operations and our current liabilities increased by $97,527. Our current liabilities increased mainly due to a timing difference from property tax accruals and the payment of our January 1, 2010 payroll on December 31, 2009 instead of January 1, 2010 due to the holiday weekend. We anticipate an increase in our net operating cash flow on a long-term basis, but we may not achieve positive operating cash flows on a consistent basis during 2010.
Cash Requirements
For the six months ended June 30, 2010, our net cash provided by operating activities was $72,513 compared to net cash provided by operations of $139,249 in the six months ended June 30, 2009. Positive operating cash flows during the six months ended June 30, 2010 were primarily created by depreciation and amortization of $142,666, an increase in accounts payable and accrued liabilities of $101,292, share-based compensation expenses of $25,014 and a loss on disposal of assets of $9,713. The increase in net cash provided by operating activities was offset by a net loss of $154,964, an increase in other current assets of $28,894, an increase in other assets of $1,800 and a decrease in other liabilities of $20,514.
Positive operating cash flows during the six months ended June 30, 2009 were primarily created by net income of $145,068, depreciation and amortization of $159,841, share-based compensation expenses of $23,674, offset by a decrease of $161,314 in accounts payable and accrued liabilities, an increase in other assets of $892, an increase in other assets of $750 and a decrease in other liabilities of $1,548.
Sources and Uses of Cash
Net cash used in investing activities was $13,961 for the six months ended June 30, 2010 compared to net cash used in investing activities of $19,162 for the six months ended June 30, 2009. The net cash used in investing activities during the six months ended June 30, 2010 was related to capital expenditures of $33,961, offset by $20,000 in proceeds from the sale of equipment. The net cash used in investing activities during the six months ended June 30, 2009 was related to capital expenditures of $43,992, offset by $24,830 in proceeds from the sale of equipment.
Net cash used in financing activities was $44,387 and $28,247 for the six months ended June 30, 2010 and 2009, respectively. During the six months ended June 30, 2010 we made principal payments of $9,919 and $34,468 on equipment financing obligations and capital leases, respectively. During the six months ended June 30, 2009 we made principal payments of $7,892 and $20,355 on equipment financing obligations and capital leases, respectively.
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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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| ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item, pursuant to 305(e) of Regulation S-K.
| ITEM 4T | Controls and Procedures |
The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2010 (the “Evaluation Date”), have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. There were no changes in the Company’s internal controls over financial reporting during the six months ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, the internal controls as of the Evaluation Date.
(A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company’s disclosure control objectives. The Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, in fact, effective at this reasonable assurance level as of the end of the period covered. In addition, the Company reviewed its internal controls, and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation or from the end of the reporting period to the date of this Form 10-Q.
(B) Changes in Internal Control Over Financial Reporting
In connection with the evaluation of the Company’s internal controls during the six months ended June 30, 2010, the Company’s Chief Executive Officer and Chief Financial Officer has determined that there are no changes to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
| ITEM 1 | Legal Proceedings |
As of June 30, 2010, neither the Company nor its subsidiaries is a party to nor is any of our property subject to any material or other pending legal proceedings that would materially adversely affect our operations.
| ITEM 1A | Risk Factors |
As a smaller reporting company, we are not required to provide the information required by this Item.
| ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds |
There have been no events that are required to be reported under this Item.
| ITEM 3 | Defaults Upon Senior Securities |
There have been no events that are required to be reported under this Item.
| ITEM 4 | Reserved |
| ITEM 5 | Other Information |
There have been no events that are required to be reported under this Item.
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| ITEM 6 | Exhibits |
| (a) | Exhibits |
| 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SPEEDEMISSIONS, INC. | ||||||
| Date: August 10, 2010 | By: | /s/ Richard A. Parlontieri | ||||
| Richard A. Parlontieri President | ||||||
| Date: August 10, 2010 | By: | /s/ Michael S. Shanahan | ||||
| Michael S. Shanahan Chief Financial Officer | ||||||
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