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SPEEDEMISSIONS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 14, 2014

Results of Operations

Three Months Ended March 31, 2014 and 2013

Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses and operating loss for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 were as follows: Three Months Ended March 31 Percentage 2014 2013 Change Revenue $ 1,797,811$ 1,889,013 (4.8 %) Cost of emission certificates 364,680 422,941 (13.8 %) Store operating expenses 1,298,319 1,358,208 (4.4 %) General and administrative expenses 320,385 291,495 9.9 % Operating loss $ (185,573 )$ (183,631 ) 1.1 %



Revenue. Revenue decreased $91,202 or (4.8%) to $1,797,811 in the three month period ended March 31, 2014 compared to $1,889,013 in the three month period ended March 31, 2013. The $91,202 decrease in revenue was primarily due to a $230,437 revenue decrease due to the permanent closing of three emission testing stores and the temporary closing of five stores, mitigated by a $149,131 increase in revenue resulting from 2014 revenue from seven stores acquired in October 2013. The decrease in revenue over the comparable period due to a decrease in same store revenue was $9,896 or (0.6%).

Cost of emission certificates. Cost of emission certificates decreased $58,261 or (13.8%) in the three month period ended March 31, 2014 and was $364,680 or 20.3% of revenues, compared to $422,941 or 22.4% of revenues in the three month period ended March 31, 2013. The decrease in cost of emission certificates over the comparable period was due primarily to the closing of three Texas stores where cost of emission certificates was approximately 34% of revenue while the seven stores opened in Georgia had cost of emission certificates of approximately 22% of revenue.

Store operating expenses. Store operating expenses decreased $59,889 or (4.4%) in the three month period ended March 31, 2014 and was $1,298,319 or 72.2% of revenues, compared to $1,358,208 or 71.9% of revenues in the three month period ended March 31, 2013. The $59,889 decrease was mainly attributable to net decreases of approximately $23,000 and $12,000 in same store payroll and rent expenses, respectively.

General and administrative expenses. Our general and administrative expenses increased $28,890 or 9.9% to $320,385 in the three month period ended March 31, 2014 from $291,495 in the three month period ended March 31, 2013. The increase in general and administrative expenses during the three month period March 31, 2014 was primarily due to an increase in employee compensation compared to the prior year comparable period.

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Operating loss. Our operating loss increased by $1,942 in the three month period ended March 31, 2014 and was ($185,573) compared to an operating loss of ($183,631) in the three month period ended March 31, 2013. The increase in our operating loss was primarily due to the increase in general and administrative expenses.

Interest income, interest expense, net loss and basic and diluted net loss per share. Our interest income, interest expense, net loss and basic and diluted net loss per share for the three month period ended March 31, 2014 as compared to the three month period ended March 31, 2013 is as follows:

Three Months Ended March 31, 2014 2013 Operating loss $ (185,573 )$ (183,631 ) Interest income 1,600 755 Interest expense (57,647 ) (87,896 ) Net loss $ (241,620 )$ (270,772 ) Basic and diluted net loss per common share $ (0.00 )$ (0.01 ) Weighted average shares outstanding, basic and diluted 49,706,270 34,688,166



The Company incurred net interest expense of $56,047 and $87,141 during the three month periods ended March 31, 2014 and 2013, respectively. The decrease of $31,094 in interest expense during the quarter ended March 31, 2014, compared to 2013, was primarily the result of a decrease of $29,627 in the amortization of loan origination costs associated with line of credit.

Net loss and basic and diluted loss per common share. Net loss was ($241,620) and ($270,772) in the three month periods ended March 31, 2014 and 2013, respectively. Basic and diluted net loss per share was ($0.00) and ($0.01) in the three month periods ended March 31, 2014 and 2013, respectively.

Liquidity and Capital Resources

Introduction

Our net cash position decreased by $11,610 during the three months ended March 31, 2014 from cash provided by operations while our total liabilities decreased by a net $40,495. Our current liabilities decreased mainly due to a $141,775 decrease in our line of credit partially offset by a $98,350 combined increase in our accounts payable and accrued expenses. We hope to achieve an increase in our net operating cash flows on a long-term basis, but we may not achieve positive operating cash flows on a consistent basis during 2014.

As described above, on June 8, 2012, the Company entered into the Credit Agreement with TCA Global, 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 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 from 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 purchase seven emissions testing stores from AEE and to provide working capital. Total loan origination costs paid in conjunction with the above loans totaled $239,450, with $19,644 and $119,848 expensed in years ended December 31, 2012 and 2013, respectively and $29,987 expensed during the quarter ended March 31, 2014. Unamortized loan origination costs of $69,971 remain on our balance sheet as of March 31, 2014. Our line of credit matures on December 1, 2014 and we have no assurance it will be extended beyond that date.

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. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. If the Company is unable to continue as a going concern, our shareholders will likely lose all of their investment in the Company.

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Cash Requirements

For the three months ended March 31, 2014, our net cash provided by operating activities was $3,898 compared to net cash provided by operating activities of $84,548 in the three months ended March 31, 2013. Positive operating cash flows during the three months ended March 31, 2014 were primarily created by a $98,350 increase in accounts payable and accrued liabilities plus depreciation and amortization of $77,465 reduced by by a net loss of $241,620.

Positive operating cash flows during the three months ended March 31, 2013 were primarily created by a $228,332 increase in accounts payable and accrued liabilities plus depreciation and amortization of $108,678, partially offset by a net loss of $270,772.

Sources and Uses of Cash

Net cash provided by investing activities was $16,877 for the three months ended March 31, 2014 compared to net cash used in investing activities was $5,095 for the three months ended March 31, 2013. The net cash provided by investing activities during the three months ended March 31, 2014 was the result of $18,000 in proceeds from a note receivable reduced by $1,123 used for purchases of property and equipment. The net cash used in investing activities during the three months ended March 31, 2013 was the result of $7,340 used for purchases of property and equipment partially offset by $2,245 in proceeds from a note receivable.

Net cash used in financing activities was $32,385 and $53,337 for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014, we made net payments of $141,775 on our line of credit and principal payments of $3,602 and $6,961 on equipment financing obligations and capital leases, respectively. Additionally, we issued 22,429,059 shares of our common stock to retire debt of $119,953. During the three months ended March 31, 2013, we made net payments of $45,515 on our line of credit and made principal payments of $709 and $7,113 on equipment financing obligations and capital leases, respectively.

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. In consultation with our Board of Directors, the Company has identified accounting policies related to valuation of our equity instruments, valuation of long-lived assets and goodwill, created as the result of business acquisitions, and valuation of the allowance provided against deferred tax assets 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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Source: Edgar Glimpses


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