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

August 14, 2014

Results of Operations

Three Months Ended June 30, 2014 and 2013

Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, gain from disposal of non-strategic assets and operating loss for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 were as follows:

Three Months Ended June 30 Percentage 2014 2013 Change Revenue $ 1,600,643$ 1,770,709 (9.6 %) Cost of emission certificates 310,832 357,662 (13.1 %) Store operating expenses 1,234,321 1,229,521 0.4 % General and administrative expenses 286,571 299,965 (4.5 %) Gain from sale of non-strategic assets (200,728 ) (72,267 ) 177.8 % Goodwill impairment expense 365,378 - n/a Operating loss $ (395,731 )$ (44,172 ) 795.9 %



Revenue. Revenue decreased $170,066, or (9.6%), to $1,600,643 in the three-month period ended June 30, 2014 compared to $1,770,709 in the three month period ended June 30, 2013. The $170,066 decrease in revenue was primarily due to a $298,163 revenue decrease due to the permanent closing of five emission testing stores and the sale of 13 Texas stores during 2013 and 2014, mitigated by a $136,041 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 $7,944 or (0.6%).

Cost of emission certificates. Cost of emission certificates decreased $46,830, or (13.1%), in the three month period ended June 30, 2014 and was $310,832, or 19.4% of revenues, compared to $357,662, or 20.2% of revenues, in the three month period ended June 30, 2013. The decrease in cost of emission certificates over the comparable period was due primarily to the sale of six 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 increased $4,800, or 0.4%, in the three-month period ended June 30, 2014 and was $1,234,321, or 77.1% of revenues, compared to $1,229,521, or 69.4% of revenues, in the three month period ended June 30, 2013. The $4,800 increase in store operating expenses was attributable to a net decrease of approximately $124,000 resulting from closed Texas stores offset by an increase of approximately $109,000 from newly opened Georgia stores plus additional net increases of about $20,000 from remaining stores.

General and administrative expenses. Our general and administrative expenses decreased $13,394 or 4.5% to $286,571 in the three month period ended June 30, 2014 from $299,965 in the three month period ended June 30, 2013. The decrease in general and administrative expenses during the three month period June 30, 2014 was primarily due to decreases of approximately $13,000 and $9,000 in seminar costs and legal and accounting fees, respectively, partially offset by approximately an $8,000 increase in other professional fees.

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Gain from disposal of non-strategic assets. During the three months ended June 30, 2014, we sold the assets comprising six of our Texas stores for a combined amount of $220,000. We received $152,500 cash and a note receivable for $67,500. The principal amount of the note is payable in equal monthly payments over a 12-month period with no interest. The net book value of the assets sold was $19,272 resulting in a recorded gain of $200,728 on the asset sale. On April 11, 2013, the Company sold the assets comprising three of its Texas stores for $110,000. The Company received $50,000 cash at closing and a note receivable for $60,000. The net book value of the assets sold was $37,733 resulting in a recorded gain of $72,267 on the asset sale.

Goodwill impairment expense. We determined that goodwill recorded from the acquisition of the following business was impaired as of June 30, 2014.

2013 Goodwill Impairment: Acquisition Goodwill Date Impairment Expense Just, Inc.. September 8, 2005 $ 365,378



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 seven Utah stores acquired from Just, Inc., it is estimated that future cash flows from these seven stores would not be sufficient to cover the carrying value of their goodwill. The amount of goodwill impaired in 2014 was $365,378 and is recorded in the accompanying consolidated statements of operations for the three months ended June 30, 2014.

Operating loss. Our operating loss decreased by $351,559 in the three-month period ended June 30, 2014 and was ($395,731) compared to an operating loss of ($44,172) in the three month period ended June 30, 2013. The increase in our operating loss was primarily due to the $365,378 goodwill impairment expense partially offset by the $200,728 gain from disposal of non-strategic assets. Without the goodwill impairment expense in 2014 and asset sales in 2014 and 2013, our loss in the three months ended June 30, 2014increased by $114,642 due primarily to the previously discussed decrease in revenues.

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 June 30, 2014 as compared to the three month period ended June 30, 2013 is as follows:

Three Months Ended June 30, 2014 2013 Operating loss $ (395,731 )$ (44,172 ) Interest income 1,005 1,255 Interest expense (58,516 ) (68,573 ) Net loss $ (453,242 )$ (111,490 ) Basic and diluted net loss per share $ (0.01 )$ (0.00 )



Weighted average shares outstanding, basic and diluted 77,303,463 34,688,166

The Company incurred net interest expense of $57,511 and $67,318 during the three month periods ended June 30, 2014 and 2013, respectively. The decrease of $10,057 in interest expense during the quarter ended June 30, 2014, compared to 2013, was primarily the result of a decrease in the amortization of loan origination costs associated with the line of credit.

Net loss and basic and diluted loss per share. Net loss was ($453,242) and ($111,490) in the three month period ended June 30, 2014 and 2013, respectively. Basic and diluted net loss per share was ($0.00) in both the three month periods ended June 30, 2014 and 2013.

Six Months Ended June 30, 2014 and 2013

Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, gain from disposal of non-strategic assets and operating loss for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 were as follows:

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Six Months Ended June 30 Percentage 2014 2013 Change Revenue $ 3,398,453$ 3,659,721 (7.1 %) Cost of emission certificates 675,512 780,603 (13.5 %) Store operating expenses 2,532,639 2,587,729 (2.1 %) General and administrative expenses 606,956 591,460 2.6 % Gain from sale of non-strategic assets (200,728 ) (72,267 ) 177.8 % Goodwill Impairment expense 365,378 - n/a Operating loss $ (581,304 )$ (227,804 ) 155.2 %



Revenue. Revenue decreased $261,268, or (7.1%), to $3,398,453 in the six-month period ended June 30, 2014 compared to $3,659,721in the six-month period ended June 30, 2013. The $261,268 decrease in revenue was primarily due to a $567,231 revenue decrease due to the permanent closing of five emission testing stores and sale of 13 Texas stores during 2013 and 2014, mitigated by a $285,173 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 $20,790 or (0.9%).

Cost of emission certificates. Cost of emission certificates decreased $105,090, or (13.5%), in the six-month period ended June 30, 2014 and was $675,512, or 19.9% of revenues, compared to $780,603, or 21.3% of revenues, in the six-month period ended June 30, 2013. The decrease in cost of emission certificates over the comparable period was due primarily to the sale of six 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 $55,090, or (2.1%), in the six-month period ended June 30, 2014 and was $2,532,639, or 74.5% of revenues, compared to $2,587,729, or 70.7% of revenues, in the six-month period ended June 30, 2013. The $55,090 decrease in store operating expenses was attributable a net decrease of approximately $274,000 resulting from closed Texas stores offset by an increase of approximately $208,000 from newly opened Georgia stores plus additional net increases of about $11,000 from remaining stores.

General and administrative expenses. Our general and administrative expenses increased $15,495, or 2.6%, to $606,956 in the six-month period ended June 30, 2014 from $591,460 in the six-month period ended June 30, 2013. The increase in general and administrative expenses during the six-month period June 30, 2014 was primarily due to increases of approximately $15,000, $12,000 and $10,000 in stock compensation expense, finance charges and bank charges, respectively, partially offset by an approximately $22,000 decrease in legal and accounting fees.

Gain from sale of non-strategic assets. During the six months ended June 30, 2014, we sold the assets comprising six of our Texas stores for a combined amount of $220,000. We received $152,500 cash and a note receivable for $67,500. The principal amount of the note is payable in equal monthly payments over a 12-month period with no interest. The net book value of the assets sold was $19,272 resulting in a recorded gain of $200,728 on the asset sale. On April 11, 2013, the Company sold the assets comprising three of its Texas stores for $110,000. The Company received $50,000 cash at closing and a note receivable for $60,000. The net book value of the assets sold was $37,733 resulting in a recorded gain of $72,267 on the asset sale.

Goodwill impairment expense. We determined that goodwill recorded from the acquisition of the following business was impaired as of June 30, 2014.

2013 Goodwill Impairment: Acquisition Goodwill Date Impairment Expense Just, Inc.. September 8, 2005 $ 365,378



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 seven Utah stores acquired from Just, Inc., it is estimated that future cash flows from these seven stores would not be sufficient to cover the carrying value of their goodwill. The amount of goodwill impaired in 2014 was $365,378 and is recorded in the accompanying consolidated statements of operations for the six months ended June 30, 2014.

Operating loss. Our operating loss increased by $353,500 in the six-month period ended June 30, 2014 and was ($581,304) compared to an operating loss of ($227,804) in the six-month period ended June 30, 2013. The increase in our operating loss was primarily due to the $365,378 goodwill impairment expense partially offset by the $200,728 gain from disposal of non-strategic assets. Without the goodwill impairment expense in 2014 and asset sales in 2014 and 2013, our loss increased by $116,583 due primarily to the previously discussed decrease in revenues.

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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 six-month period ended June 30, 2014 as compared to the six-month period ended June 30, 2013 are as follows:

Six Months Ended June 30, 2014 2013 Operating loss $ (581,304 )$ (227,804 ) Interest income 2,605 2,010 Interest expense (116,163 ) (156,469 ) Net loss $ (694,862 )$ (382,263 ) Basic and diluted net loss per share $ (0.01 )$ (0.01 )



Weighted average shares outstanding, basic and diluted 63,581,102 34,688,166

The Company incurred net interest expense of $113,558 and $154,459 during the six-month periods ended June 30, 2014 and 2013, respectively. The decrease of $40,306 in interest expense during the six months ended June 30, 2014, compared to 2013, was primarily the result of a decrease in the amortization of loan origination costs associated with the line of credit.

Net loss and basic and diluted net loss per share. Net loss was ($694,862) and ($382,263) in the six-month periods ended June 30, 2014 and 2013, respectively. Basic and diluted net loss per share was ($0.01) in both the six-month periods ended June 30, 2014, and 2013.

Liquidity and Capital Resources

Introduction

Our net cash position decreased by $20,027 during the six months ended June 30, 2014 primarily resulting from cash used in operations, while our total liabilities decreased by $114,070, primarily as a result a $263,096 decrease in our line of credit. 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.

Cash Requirements

For the six months ended June 30, 2014, our net cash used in operating activities was $234,865 compared to net cash provided by operations of $9,802 in the six months ended June 30, 2013. Negative operating cash flows during the six months ended June 30, 2014 were primarily created by a net loss of $329,484 and a $200,728 gain on sale of non-strategic assets reduced by goodwill impairment expense of $365,378, depreciation and amortization of $151,657, a decrease in other assets of $63,210 and an increase of $41,851 in accounts payable and accrued liabilities.

Positive operating cash flows during the six months ended June 30, 2013 were primarily created by an increase of $258,575 in accounts payable and accrued liabilities plus depreciation and amortization of $190,781 reduced by a net loss of $382,263 and a $72,267 gain on sale of non-strategic assets.

Sources and Uses of Cash

Net cash provided by investing activities was $182,377 for the six months ended June 30, 2014 compared to net cash provided by investing activities of $46,156 for the six months ended June 30, 2013. The net cash provided by investing activities during the six months ended June 30, 2014 was related to proceeds from non-strategic asset sales of $157,500 and proceeds from a note receivable of $26,000. The net cash provided by investing activities during the six months ended June 30, 2013 was related to proceeds from a note receivable of $16,000 and proceeds from non-strategic asset sales of $50,000, offset by capital expenditures of $19,844.

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Net cash provided by financing activities for the six months ended June 30, 2014 was $32,461 compared to net cash used in financing activities of $39,471 for the six months ended June 30, 2013. During the six months ended June 30, 2014, we issued 52,108,059 shares of our common stock in exchange for $203,279 of vendor debt and received $125,000 from increases in notes payable. We made a net reduction of $263,096 in our line of credit and made principal payments of $13,970 and $14,541 on notes payable and capital leases, respectively. During the six months ended June 30, 2013, we made a net reduction of $23,600 in our line of credit and made principal payments of $1,466 and $14,405 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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