10-Q 1 j8812010q.htm FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012 j8812010q.htm


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, 2012
 
¨
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  x    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 1, 2012, there were 34,688,166 shares of common stock, par value $0.001, issued and outstanding.



 
1

 
 
Speedemissions, Inc.
 
TABLE OF CONTENTS
 
Cautionary Statement Relevant to Forward-Looking Information
       3
   
PART I FINANCIAL INFORMATION
 
     
ITEM 1.
Financial Statements
       4
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
       13
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
       17
ITEM 4.
Controls and Procedures
       17
   
PART II OTHER INFORMATION
 
     
ITEM 1.
Legal Proceedings
 18
ITEM 1A.
Risk Factors
       18
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
       18
ITEM 3.
Defaults Upon Senior Securities
       18
ITEM 4.
Mine safety disclosures
       18
ITEM 5.
Other Information
       18
ITEM 6.
Exhibits
       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.
 
 
 
 
 
 
 
3

 
 
PART I - FINANCIAL INFORMATION
 
Item  1.
Financial Statements
 
Speedemissions, Inc. and Subsidiaries
Consolidated Balance Sheets
 
   
June 30,
2012
   
December 31,
2011
 
   
(unaudited)
       
Assets
           
Current assets:
           
Cash
  $ 189,589     $ 129,095  
Notes receivable – current portion
    12,000       21,125  
Certificate and merchandise inventory
    63,646       59,822  
Other current assets
    114,488       59,320  
Total current assets
    379,723       269,362  
                 
Notes receivable, net of current portion
    75,424       79,914  
Property and equipment, at cost less accumulated depreciation and amortization
    450,823       539,673  
Goodwill
    1,240,152       1,240,152  
Other assets
    104,363       104,363  
Total assets
  $ 2,250,485     $ 2,233,464  
Liabilities and Shareholders’ Deficit
               
Current liabilities:
               
Line of credit
  $ 350,000     $ 90,000  
Note payable
    55,000       55,000  
Accounts payable
    209,952       220,625  
Accrued liabilities
    195,801       200,096  
Current portion of capitalized lease obligations
    17,010       40,659  
Current portion of equipment financing obligations
    12,653       24,780  
Current portion - deferred rent
    14,795       14,795  
Total current liabilities
    855,211       645,955  
Capitalized lease obligations, net of current portion
    -       681  
Deferred rent
    122,585       121,390  
Other long term liabilities
    7,350       7,350  
Total liabilities
    985,146       775,376  
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’ deficit:
               
Common stock, $.001 par value, 250,000,000 shares authorized, 34,688,166 shares
issued and outstanding at June 30, 2012 and December 31, 2011
    34,618       34,618  
Additional paid-in capital
    15,918,329       15,918,329  
Accumulated deficit
    (19,266,954 )     (19,074,205 )
Total shareholders’ deficit
    (3,314,007 )     (3,121,258 )
Total liabilities and shareholders’ deficit
  $ 2,250,485     $ 2,233,464  
 
See accompanying notes to consolidated financial statements.
 
 
4

 
 
 Speedemissions, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
 
   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
  $ 1,986,864     $ 2,152,831     $ 3,907,869     $ 4,263,957  
Costs of operations:
                               
Cost of emission certificates
    443,750       480,427       869,496       950,495  
Store operating expenses
    1,281,780       1,383,888       2,594,332       2,825,775  
General and administrative expenses
    333,005       416,718       632,047       757,039  
(Gain) loss on sale of non-strategic assets
    -       (39,622 )     (2,458 )     (40,622 )
Operating loss
    (71,671 )     (88,580 )     (185,548 )     (228,730 )
Interest income (expense)
                               
Interest income
    755       760       1,510       1,519  
Interest expense
    (5,051 )     (4,648 )     (8,711 )     (9,208 )
Interest expense, net
    (4,296 )     (3,888 )     (7,201 )     (7,689 )
Net loss
  $ (75,967 )   $ (92,468 )   $ (192,749 )   $ (236,419 )
Basic and diluted net loss per share
  $ 0.00     $ (0.00 )   $ (0.01 )   $ (0.01 )
Weighted average common shares outstanding, basic and
diluted
    34,688,166       31,692,498       34,688,166       31,660,755  
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
5

 
 
Speedemissions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (192,749 )   $ (236,419 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    91,278       107,830  
(Gain) loss on sale of assets
    (2,458 )     (40,622 )
Share-based compensation
    -       54,842  
Changes in operating assets and liabilities:
               
Certificate and merchandise inventory
    (3,823 )     (1,877 )
Other current assets
    (55,169 )     (32,835 )
Other assets
    -       200  
Accounts payable and accrued liabilities
    (14,968 )     (17,101 )
Other liabilities
    1,195       (35,570 )
Net cash used in operating activities
    (176,694 )     (201,552 )
Cash flows from investing activities:
               
Proceeds from note receivable
    13,615       6,000  
Proceeds from sales of property and equipment
    3,100       28,000  
Purchases of property and equipment
    (3,070 )     (7,006 )
Net cash provided by investing activities
    13,645       26,994  
Cash flows from financing activities:
               
Net proceeds from warrant exercise
    -       64,000  
Proceeds from line of credit
    355,000       435,262  
Payments on line of credit
    (95,000 )     (375,000 )
Payments on equipment financing obligations
    (12,127 )     (9,505 )
Payments on capitalized leases
    (24,330 )     (21,670 )
Net cash provided by financing activities
    223,543       93,087  
Net (decrease) increase in cash
    60,494       (81,471 )
Cash at beginning of period
    129,095       261,600  
Cash at end of period
  $ 189,589     $ 180,129  
Supplemental Information:
               
Cash paid during the period for interest
  $ 8,469     $ 8,953  
Supplemental Disclosure of Non-Cash Activity:
               
Note receivable from sale of assets
  $ -     $ 15,000  
 
See accompanying notes to consolidated financial statements.
 
 
6

 
 
Speedemissions, Inc.
Notes to Consolidated Financial Statements
 
June 30, 2012
(Unaudited)
 
Note 1. Going Concern
 
The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and liquidation of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that may be necessary in the event the Company cannot continue as a going concern.
 
We have experienced recurring net losses which have caused an accumulated deficit of $19,266,954 at June 30, 2012. We had a working capital deficit of $475,488 at June 30, 2012 compared to a working capital deficit of $376,593 at December 31, 2011.
 
Our revenues for the quarter and six month period ended June 30, 2012 and the fiscal year ended December 31, 2011 were below our expectations and internal forecasts primarily as a result of fewer vehicle emissions tests and safety inspections being performed at our stores.
 
Our revenues for the quarter and six month period ended June 30, 2012 and for the fiscal year ended December 31, 2011 have been insufficient to attain profitable operations and to provide adequate levels of cash flow from operations. 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.   As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.
 
During the quarter ended June 30, 2012 we replaced the existing $100,000 line of credit facility with a new agreement with a maximum borrowing limit of $2,000,000, subject to certain conditions stipulated in the new loan agreement.  At June 30, 2012, we had drawn $350,000 under our new line of credit facility or 18% of the maximum limit. Under the new line of credit facility, the principal amount outstanding is payable on December 8, 2012 with an automatic extension to June 8, 2013, subject to terms and conditions contained in the loan agreement. On the maturity date, 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 would be available or, if available, that we would be able to complete financing on satisfactory terms.  At August 1, 2012, the outstanding balance on the loan facility was $350,000 and our cash balances were approximately $88,000.
 
During the prior two years, we made reductions in employee headcount, the number of stores, same store operating expenses, corporate overhead and other operating expenses. At June 30, 2012, our primary source of liquidity for cash flows was cash received from our store operations and our new line of credit facility.
 
During the first quarter of 2012, the majority of the Company’s employees received a 2% reduction in their salary or hourly wage rate. During the quarter ended March 31, 2012, as well as the year ended December 31, 2011, due to insufficient cash flow from operations and borrowing limitations under our line of credit facility, we have been extending landlords and vendors beyond normal payment terms. During the quarter ended June 30, 2012, using funds drawn from the new line of credit facility, we were able to restore normal payment terms with landlords and vendors.
 
 
Note 2: Nature of Operations
 
Description of Business
 
Speedemissions, Inc. is one of the largest test-only emissions testing and safety inspection companies in the United States. We perform vehicle emissions testing and safety inspections in certain cities in which vehicle emissions testing is mandated by the United States Environmental Protection Agency (“EPA”). As of June 30, 2012, we operated 38 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). We also operate four mobile testing units in the Atlanta, Georgia area which service automotive dealerships and local government agencies. We manage our operations based on these four regions and we have one reportable segment. References in this document to “Speedemissions,” “Company,” “we,” “us” and “our” mean Speedemissions, Inc. and our consolidated subsidiaries.
 
 
7

 
 
We use computerized emissions testing and safety inspections equipment that test vehicles for compliance with vehicle emissions and safety standards. Our revenues are mainly generated from the test or inspection fee charged to the registered owner of the vehicle. As a service to our customers, we sell automotive parts and supplies such as windshield wipers, taillight bulbs and gas caps. In addition, we perform a limited amount of services including oil changes and headlight restorations at select locations. We do not provide major automotive repair services.
 
On June 22, 2010, the Company announced the launch of its first iPhone application, Carbonga. Carbonga 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. We launched version two of Carbonga on February 16, 2011. Version two improved the speed and performance of the application and has additional features including the ability to receive vehicle safety recalls and Technical Service Bulletins for an annual subscription fee.
 
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, 2011.
 
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 its non-operating subsidiaries, which are 100% owned by the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Note 3: 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, 2011.
 
 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 as 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.
 
 
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 has no Level 3 assets or liabilities.
 
 
8

 
 
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, capital lease obligations, notes receivable and note payable approximate carrying value based upon current borrowing rates.
 
Note 4: Inventory
 
Inventory at June 30, 2012 consisted of certificate and merchandise inventory and was $42,614 and $21,032, respectively. Inventory at December 31, 2011 consisted of certificate and merchandise inventory and was $45,798 and $14,024, respectively.
 
Note 5: Note Receivable
 
On September 14, 2010, the Company settled a lawsuit originally filed in 2006 against a former manager. The Company alleged the manager, while employed by the Company, breached his fiduciary duty by purchasing property in Texas where one of the Company’s testing facilities he managed was located.
 
Under the provisions of the settlement agreement, the Company will receive the sum of $125,000 payable in monthly installments of $1,000 per month for seventy-two months. The balance of $53,000 will be due and payable to the Company on June 1, 2016. The note receivable is collateralized by a second lien on property owned by the former manager. The note receivable and gain from the settlement was computed and recorded at its present value of $106,881 using an interest rate equal to prime rate plus 0.5%, which was 3.75%, which approximates rates offered in the market for notes receivable with similar terms and conditions. The Company recognized a gain from the legal settlement in the amount of $106,881 during 2010.
 
The present value of the note receivable was $87,424 and $101,039 at June 30, 2012 and December 31, 2011, respectively.
 
Note 6: Property and Equipment
 
Property and equipment at June 30, 2012 and December 31, 2011 consisted of the following:
 
   
June 30, 2012
   
December 31, 2011
 
Buildings
  $ 485,667     $ 485,667  
Emission testing and safety inspection
equipment
    1,468,642       1,474,142  
Furniture, fixtures and office equipment
    160,727       158,782  
Vehicles
    25,772       25,772  
Leasehold improvements
    329,081       327,956  
      2,469,889       2,472,319  
Less: accumulated depreciation and
amortization
    2,019,066       1,932,646  
    $ 450,823     $ 539,673  
 
Note 7: Accrued Liabilities
 
Accrued liabilities at June 30, 2012 and December 31, 2011 consisted of the following:
 
   
June 30,
2012
   
December 31,
2011
 
Professional fees
  $ 37,794     $ 82,948  
Payroll
    56,998       69,419  
Property taxes
    62,897       10,074  
Other
    38,112       37,655  
    $ 195,801     $ 200,096  

 
9

 
 
Note 8: Equipment Financing Agreements
 
The balance outstanding under equipment financing agreements as of June 30, 2012 and December 31, 2011 was $12,653 and $24,780, respectively.
 
 Note 9: Notes Payable
 
Bridge Note Agreement
 
On November 11, 2010, the Company entered into a $55,000 bridge note agreement (“Note”) with an affiliate, GCA Strategic Investment Fund, Limited (“GCA”). The Note bears 0% interest and is due in full on November 11, 2012. The Note is not convertible into the Company’s stock and is subject to mandatory prepayment upon a change of control, as defined in the Note. The Note had a balance due of $55,000 on June 30, 2012 and December 31, 2011.
 
Line of Credit
 
On June 8, 2012, the Company paid off and cancelled its revolving line of credit agreement with Regions Bank, pursuant to which the Company had borrowed up to $100,000 in order to pay trade payables and for working capital purposes. Funds to pay off the Regions Bank revolving line of credit came from a new loan facility.
 
On June 8, 2012, the Company entered into a revolving line of credit loan agreement (the “Loan Agreement”) with TCA Global Credit Master Fund, LP (“Lender”), pursuant to which the Company may borrow up to $2,000,000, subject to certain conditions stipulated in the Loan Agreement, in order to pay trade payables and for working capital purposes. The principal amount outstanding under the Loan Agreement is payable on December 8, 2012, with an automatic extension to June 8, 2013, subject to terms and conditions contained in the loan agreement. The annual interest rate on the note is 10%. The Loan Agreement is collateralized by the Company’s inventory, accounts receivable, equipment, general intangibles and fixtures. If the Company prepays the outstanding balance in full, prior to maturity, a 5% prepayment penalty will be assessed. The balance due under the prior and current loan agreements was $350,000 and $90,000 at June 30, 2012 and December 31, 2011, respectively.  Loan and legal fees totaling $49,000 were incurred and paid to Lender at closing.  These fees were capitalized by the Company and will be amortized over a six-month period during the current year.
 
Note 10: Net Loss Per Share
 
Basic earnings per share (“EPS”) or net loss per share, represents net 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.
 
The following table sets forth the computation for basic and diluted net loss per share for the three and six month periods ended June 30, 2012 and 2011, respectively:
 
   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2012
   
2011
   
2012
   
2011
 
Net loss (A)
  $ (75,967 )   $ (92,468 )   $ (192,749 )   $ (236,419 )
                                 
Weighted average common shares - basic (B)
    34,688,166       31,692,498       34,688,166       31,660,834  
Effect of dilutive securities
                               
Diluted effect of stock options (1)
                       
Diluted effect of stock warrants (1)
                       
Diluted effect of unrestricted Preferred Series A Shares (2)
                       
                                 
Weighted average common shares - diluted (C)
    34,688,166       31,692,498       34,688,166       31,660,755  
Net loss per share - basic (A/B)
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
Net loss per share - diluted (A/C)
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )

 
10

 
 
(1)
As a result of the Company’s net loss for the three and six month periods ended June 30, 2012 and 2011, aggregate Common Stock Equivalents of 59,000 and 64,000 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 month periods ended June 30, 2012 and 2011, respectively. 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 month periods ended June 30, 2012 and 2011, 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 month periods ended June 30, 2012 and 2011, respectively. These Common Stock Equivalents could be dilutive in future periods.
 
Note 11: 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, 2012 and December 31, 2011. 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.
 
Common Stock
 
The Company issued no common shares during the six month period ended June 30, 2012. The Company had 34,688,166 common shares outstanding as of June 30, 2012.
 
Note 12: 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 an 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 are 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 $0 and $54,842 during the three months ended June 30, 2012 and 2011, respectively and $0 and $54,842 during the six months ended June 30, 2012 and 2011, respectively. Share-based compensation is included in general and 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 outstanding under the Company’s stock option plans during the six month period ended June 30, 2012:
 
   
Number of
Shares
   
Weighted  Average
Exercise
Price
   
Weighted Average
Grant-date
Fair Value
 
Options outstanding at December 31, 2011
    59,000     $ 0.57        
Granted
                 
Expired
                   
Options outstanding at June 30, 2012
    59,000     $ 0.57          
Options exercisable at June 30, 2012
    59,000     $ 0.57          

 
11

 
 
The aggregate intrinsic value of options outstanding and exercisable at June 30, 2012 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, 2012.
 
As of June 30, 2012, there were no unrecognized share-based compensation expenses related to non-vested stock options. There were 0 and 2,667 options that vested during the six months ended June 30, 2012 and 2011, respectively.
 
There were 59,000 options issued and outstanding under the Company’s 2001 Stock Option Plan, the Amended and Restated 2005 Omnibus Stock Grant and Option Plan, Speedemissions Inc. 2006 Stock Grant and Option Plan and the 2008 Stock Grant and Option Plan (collectively, the “Option Plans”) as of June 30, 2012 and December 31, 2011. There were no options granted under these plans during the six month period ended June 30, 2012. There were no options exercised during the six month periods ended June 30, 2012 and 2011.
 
Stock Warrants
 
There were no common stock warrants outstanding as of December 31, 2011 and there were no warrants granted or exercised during the six month period ended June 30, 2012.
 
Note 13: Income Taxes
 
No provision for income taxes has been reflected for the three and six month periods ended June 30, 2012 and 2011 as the Company has sufficient net operating loss carry forwards to offset taxable income.
 
 Note 14: Contingencies
 
In the ordinary course of business, the Company may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the Company’s financial condition and/or results of operations.
 
During 2010, the Company filed a Demand for Arbitration claim for $2,900,000 plus legal fees against the former owners of Mr. Sticker, Inc. (“Mr. Sticker”), David E. Smith, Barbara Smith and Grant Smith (the “Smiths”). The Company purchased Mr. Sticker from the Smiths on June 30, 2005 for $3,100,000. The Company asserts that the Smith’s interfered with the continuation of the acquired business and the renewal of certain leases held by the Smiths or by controlled entities of the Smiths related to the acquisition of Mr. Sticker by the Company. The Company further asserts breach of contract, fraud and fraudulent inducement and tortuous interference by the Smiths. The arbitration claim has yet to be heard by the arbitrators.
 
 
12

 
 
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, 2011.
 
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, 2012, the Company operated 38 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 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. We launched version two of Carbonga on February 16, 2011. Version two improved the speed and performance of the application and has additional features including the ability to receive vehicle safety recalls and Technical Service Bulletins for an annual subscription fee. Revenues from Carbonga have not been material to operating results.

 
13

 
 
Results of Operations
 
Three Months Ended June 30, 2012 and 2011
 
Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, (gain) loss from disposal of assets and operating loss for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 were as follows:
 
   
Three Months Ended
June 30
   
Percentage
 
   
2012
   
2011
   
Change
 
Revenue
  $ 1,986,864     $ 2,152,831       (7.7 %)
Cost of emission certificates
    443,750       480,427       (7.6 %)
Store operating expenses
    1,281,780       1,383,888       (7.4 %)
General and administrative expenses
    333,005       416,718       (20.1 %)
(Gain) loss from sale of non-strategic assets
    -       (39,622 )     N/A
Operating loss
  $ (71,671 )   $ (88,580 )     (19.1 %)
 
 
Revenue. Revenue decreased $165,967 or (7.7%) to $1,986,864 in the three month period ended June 30, 2012 compared to $2,152,831 in the three month period ended June 30, 2011. The decrease in revenue over the comparable period was primarily due to a decrease from same store sales of $133,300 or (6.3%) and the closure of one store in Texas during the three months ended June 30, 2011. The decrease in same store sales is mainly attributable to fewer tests being performed during the three month period ended June 30, 2012 compared to the prior comparable period.
 
Cost of emission certificates. Cost of emission certificates decreased $36,677 or (7.6%) in the three month period ended June 30, 2012 and was $443,750 or 22.3% of revenues, compared to $480,427or 22.3% of revenues in the three month period ended June 30, 2011. The decrease in cost of emission certificates over the comparable period was primarily due to a decrease in same store sales and the closure of one store in Texas during the three months ended June 30, 2011.
 
Store operating expenses. Store operating expenses decreased $102,108 or (7.4%) in the three month period ended June 30, 2012 and was $1,281,780 or 64.5% of revenues, compared to $1,383,888 or 64.3% of revenues in the three month period ended June 30, 2011. The decrease was mainly attributable to lower store operating costs of $102,108 resulting from  a decrease in same store operating expenses of $66,019 and the closure of one store in Texas during the three months ended June 30, 2011.
 
General and administrative expenses. Our general and administrative expenses decreased $83,712, or (20.1%) to $333,005 in the three month period ended June 30, 2012 from $416,718 in the three month period ended June 30, 2011. The decrease in general and administrative expenses during the three month period June 30, 2012 was mainly due to lower salary expenses resulting from staff reductions partially offset by higher legal and accounting fees.
 
(Gain) loss from disposal of non-strategic assets. We recorded no sales of non-strategic assets in the three month period ended June 30, 2012. We recognized a gain on the disposal of assets of $39,622 in the three month period ended June 30, 2011.
 
Operating loss. Our operating loss decreased by $16,909 in the three month period ended June 30, 2012 and was ($71,671) compared to an operating loss of ($88,580) in the three month period ended June 30, 2011. The decrease in our operating loss was mainly due to the decrease in revenue, offset by the decrease in the cost of emission certificates, store operating expenses and general and administrative expenses.
 
 
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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 three month period ended June 30, 2012 as compared to the three month period ended June 30, 2011 is as follows:
 
   
Three Months Ended
June 30,
 
   
2012
   
2011
 
Operating loss
  $ (71,671 )   $ (88,580 )
Interest income
    755       760  
Interest expense
    (5,051 )     (4,648 )
Net loss
  $ (75,967 )   $ (92,468 )
Basic and diluted net loss per share
  $ 0.00     $ (0.00 )
Weighted average shares outstanding, basic and diluted
    34,688,166       31,692,498  

 
The Company incurred net interest expense of $4,296 and $3,888 during the three month periods ended June 30, 2012 and 2011, respectively.
 
Net loss and basic and diluted loss per share. Net loss was $75,967 and $92,468  in the three month period ended June 30, 2012 and 2011, respectively. Basic and diluted net loss per share was ($0.00) and ($0.00), respectively in the three month periods ended June 30, 2012 and 2011, respectively.
 
Six Months Ended June 30, 2012 and 2011
 
Our revenue, cost of emission certificates, store operating expenses, general and administrative expenses, (gain) loss from disposal of non-strategic assets and operating loss for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 were as follows:
 
   
Six Months Ended
June 30
   
Percentage
Change
 
   
2012
   
2011
 
Revenue
  $ 3,907,869     $ 4,263,957       (8.4 %)
Cost of emission certificates
    869,496       950,495       (8.5 %)
Store operating expenses
    2,594,332       2,825,775       (8.2 %)
General and administrative expenses
    632,047       757,039       (16.5 %)
(Gain) loss from sale of non-strategic assets
    (2,458 )     (40,622 )     (93.9 %)
Operating loss
  $ (185,548 )   $ (228,730 )     (18.9 %)
 
Revenue. Revenue decreased $356,088 or (8.4%) to $3,907,869 in the six month period ended June 30, 2012, compared to $4,263,957 in the six month period ended June 30, 2011. The decrease in revenue over the comparable period was primarily due to a decrease in same store sales of $273,496 or (6.5%) and the closure of two stores in Texas during the six months ended June 30, 2011. The decrease in same store sales is mainly attributable to fewer tests being performed during the six month period ended June 30, 2012 compared to the prior comparable period.
 
Cost of emission certificates. Cost of emission certificates decreased $80,999 or (8.5%) in the six month period ended June 30, 2012 and was $869,496 or 22.2% of revenues, compared to $950,495 or 22.3% of revenues in the six month period ended June 30, 2011. The decrease in cost of emission certificates over the comparable period was primarily due to a decrease in same store sales and the closure of two stores in Texas during the six months ended June 30, 2011.
 
Store operating expenses. Store operating expenses decreased $231,443 or (8.2%) in the six month period ended June 30, 2012 and were $2,594,332 or 66.4% of revenues, compared to $2,825,775 or 66.3% of revenues in the six month period ended June 30, 2011. The decrease was mainly attributable to a decrease in same store operating expenses of $145,757 and lower store operating costs of $85,687 resulting from the closure of two stores in Texas during the six months ended June 30, 2011 .
 
General and administrative expenses. Our general and administrative expenses decreased $124,992, or (16.5%) to $632,047 in the six month period ended June 30, 2012 from $757,039  in the six month period ended June 30, 2011. The decrease in general and administrative expenses during the six month period June 30, 2012 was mainly due to lower salary expenses resulting from staff reductions partially offset by higher legal and accounting fees.
 
 
15

 
 
(Gain)/loss from sale of non-strategic assets. We recognized a gain of $2,458 from the sale of non-strategic assets in the six month period ended June 30, 2012. We recognized a $40,622 gain from the sale of non-strategic assets in the six month period ended June 30, 2011.
 
Operating loss. Our operating loss decreased by $43,182 in the six month period ended June 30, 2012 and was ($185,548) compared to an operating loss of ($228,730) in the six month period ended June 30, 2011. The decrease in our operating loss was mainly due to the decrease in revenue, offset by the decrease in the cost of emission certificates, store operating expenses and 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 six month period ended June 30, 2012 as compared to the six month period ended June 30, 2011 is as follows:
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Operating loss
  $ (185,548 )   $ (228,730 )
Interest income
    1,510       1,519  
Interest expense
    (8,711 )     (9,208 )
Net loss
  $ (192,749 )   $ (236,419 )
Basic and diluted net loss per share
  $ (0.01 )   $ (0.01 )
Weighted average shares outstanding, basic and diluted
    34,688,166       31,660,755  
 
The Company incurred net interest expense of $7,201 and $7,689 during the six month periods ended June 30, 2012 and 2011, respectively.
 
Net loss and basic and diluted net loss per share. Net loss was ($192,749) and ($236,419) in the six month periods ended June 30, 2012 and 2011, respectively. Basic and diluted net loss per share was ($0.01) and ($0.01), respectively in the six month periods ended June 30, 2012, and 2011, respectively.
 
Liquidity and Capital Resources
 
Introduction
 
Our net cash position increased by $60,494 during the six months ended June 30, 2012 primarily resulting from cash provided by the change (and corresponding increase) in our line of credit, less cash used in operations while our total liabilities increased by $209,770, primarily as a result in the increased line of credit. Our current liabilities also increased, mainly due to a $260,000 net increase in our line of credit, which had a balance of $90,000 at December 31, 2011. 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 2012.
 
Cash Requirements
 
For the six months ended June 30, 2012, our net cash used in operating activities was $176,694 compared to net cash used in operations of $201,552 in the six months ended June 30, 2011. Negative operating cash flows during the six months ended June 30, 2012 were primarily created by a net loss of $192,749,  an increase in other current assets of $55,169, a decrease in accounts payable and accrued liabilities of $14,968 offset by depreciation and amortization of $91,278.
 
Negative operating cash flows during the six months ended June 30, 2011 were primarily created by a net loss of $236,419, a decrease in accounts payable and accrued liabilities of $17,101, an increase in certificate and merchandise inventory of $1,877, a decrease in other liabilities of $35,570 and a gain on the disposal of assets of $40,622. The decrease in net cash used in operating activities was offset by depreciation and amortization of $107,830, share-based compensation expense of $54,842 and a decrease in other current assets of $200.
 
Sources and Uses of Cash
 
Net cash provided by investing activities was $13,645 for the six months ended June 30, 2012 compared to net cash provided by investing activities of $26,994 for the six months ended June 30, 2011. The net cash provided by investing activities during the six months ended June 30, 2012 was related to proceeds from a note receivable of $13,615 and proceeds from asset sales of $3,100, offset by capital expenditures of $3,070. The net cash provided by investing activities during the six months ended June 30, 2011 was related to proceeds from a note receivable of $6,000 and proceeds from asset sales of $28,000, offset by capital expenditures of $7,006.
 
 
16

 
 
Net cash provided by financing activities was $223,543 and 93,087 for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, we received a net $260,000 from our line of credit and made principal payments of $12,127 and $24,330 on equipment financing obligations and capital leases, respectively. During the six months ended June 30, 2011, we received net proceeds of $64,000 from the exercise of warrants into common stock, a net $60,262 from our line of credit and made principal payments of $9,505 and $21,670 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 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.
 
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 4 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, 2012 (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, 2012 that have materially affected, or are reasonably likely to materially affect, the internal controls and procedures 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, 2012, the Company’s Chief Executive Officer and Chief Financial Officer have determined that there are no changes to the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company’s internal controls over financial reporting.
 
 
17

 
 
PART II - OTHER INFORMATION
 
ITEM  1
Legal Proceedings
 
In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.
 
During 2010, the Company filed a Demand for Arbitration claim for $2,900,000 plus legal fees against the former owners of Mr. Sticker, Inc. (“Mr. Sticker”), David E. Smith, Barbara Smith and Grant Smith (the “Smiths”). The Company purchased Mr. Sticker from the Smiths on June 30, 2005 for $3,100,000. The Company asserts that the Smith’s interfered with the continuation of the acquired business and the renewal of certain leases held by the Smiths or by controlled entities of the Smiths related to the acquisition of Mr. Sticker by the Company. The Company further asserts breach of contract, fraud and fraudulent inducement and tortuous interference by the Smiths. The arbitration claim has yet to be heard by the arbitrators.
 
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
Mine safety disclosures
 
            The disclosures under this Item are not applicable to the Company.
 
ITEM 5
Other Information
 
There have been no events that are required to be reported under this Item.
 
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.
   
101
Interactive Data File.

 
18

 
 
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, 2012
By:
/s/ Richard A. Parlontieri
   
Richard A. Parlontieri
President, Chief Executive Officer
     
Date: August 10, 2012
By:
/s/ Larry C. Cobb
   
Larry C. Cobb
Chief Financial Officer

 
 
 
 
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