UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-QSB
[X]
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended June 30, 2005
[
] TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For
the
transition period from _______________ to _______________.
Commission
file number: 000-49688
Speedemissions,
Inc.
(Exact
name of small business issuer as specified in its charter)
Florida
(State
or other jurisdiction of
incorporation
or organization)
|
33-0961488
(I.R.S.
Employer
Identification
No.)
|
|
|
1139
Senoia Road
Suite
B
Tyrone,
GA
(Address
of principal executive offices)
|
30290
(Zip
Code)
|
Issuer’s
telephone number (770) 306-7667
Check
whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 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
Applicable
only to issuers involved in bankruptcy proceedings during the preceding five
years
Check
whether the registrant filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Exchange Act after the distribution of securities under a plan confirmed by
a
court.
Yes No
Applicable
only to corporate issuers
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date. As of August 9, 2005, there were 26,610,808
shares of common stock, par value $0.001, issued and outstanding.
Transitional
Small Business Disclosure Format
(check
one):
Yes
No X
Speedemissions,
Inc.
TABLE
OF CONTENTS
PART
I
|
|
|
|
ITEM
1
|
Financial
Statements
|
3
|
ITEM
2
|
Managements
Discussion and Analysis
|
21
|
ITEM
3
|
Controls
and Procedures
|
29
|
|
|
|
PART
II
|
|
|
|
ITEM
1
|
Legal
Proceedings
|
30
|
ITEM
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
ITEM
3
|
Defaults
Upon Senior Securities
|
30
|
ITEM
4
|
Submission
of Matters to a Vote of Security Holders
|
31
|
ITEM
5
|
Other
Information
|
31
|
ITEM
6
|
Exhibits
|
33
|
PART
I
This
Quarterly Report includes forward-looking statements within the meaning of
the
Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based
on management’s beliefs and assumptions, and on information currently available
to management. 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 or Plan
of Operation.” Forward-looking statements also include statements in which words
such as “expect,”“anticipate,”“intend,”“plan,”“believe,”“estimate,”“consider” or
similar expressions are used.
Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions. The Company’s future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Readers are cautioned not to put undue reliance on any
forward-looking statements.
ITEM
1 Financial
Statements
Speedemissions,
Inc.
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet
|
|
|
|
June
30, 2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
|
$
|
87,777
|
|
Other
current assets
|
|
|
160,718
|
|
Deferred
tax asset
|
|
|
23,960
|
|
|
|
|
|
|
Total
current assets
|
|
|
272,455
|
|
|
|
|
|
|
Property
and equipment, at cost less accumulated
|
|
|
|
|
depreciation
and amortization
|
|
|
1,272,737
|
|
|
|
|
|
|
Goodwill
|
|
|
5,818,543
|
|
|
|
|
|
|
Other
assets
|
|
|
65,109
|
|
|
|
|
|
|
Total
assets
|
|
$
|
7,428,844
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
687,688
|
|
Debt
payable to related parties
|
|
|
1,091,872
|
|
Accrued
interest on debt payable to related parties
|
|
|
218,506
|
|
Current
portion of capitalized lease obligation
|
|
|
35,854
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,033,920
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Debt
payable to related parties less current portion
|
|
|
1,152,462
|
|
Capitalized
lease obligation less current portion
|
|
|
10,458
|
|
Deferred
tax Liability
|
|
|
49,512
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
1,212,432
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,246,352
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
Series
A convertible and cumulative preferred stock, $.001
|
|
|
|
|
par
value, 5,000,000 shares authorized, 2,500 shares issued and
outstanding
|
|
|
3
|
|
Series
B convertible and cumulative preferred stock, $.001
|
|
|
|
|
par
value, 3,000,000 shares authorized, 2,500,000 shares issued and
outstanding
|
|
|
2,500
|
|
Common
stock, $.001 par value, 100,000,000 shares
authorized,
|
|
|
|
|
25,737,522
shares issued and outstanding
|
|
|
25,738
|
|
Additional
paid-in capital
|
|
|
19,241,484
|
|
Deferred
compensation
|
|
|
(53,544
|
)
|
Series
B convertible and cumulative preferred stock, subscription
receivable
|
|
|
(2,746,400
|
)
|
Accumulated
deficit
|
|
|
(12,287,289
|
)
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
4,182,492
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
7,428,844
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
|
Speedemissions, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30
|
|
June
30
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,255,586
|
|
$
|
748,608
|
|
$
|
2,533,876
|
|
$
|
1,367,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of emissions certificates
|
|
|
391,677
|
|
|
230,343
|
|
|
820,720
|
|
|
415,751
|
|
General
and administrative expenses
|
|
|
1,263,803
|
|
|
1,335,090
|
|
|
2,410,687
|
|
|
2,987,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(399,894
|
)
|
|
(816,825
|
)
|
|
(697,531
|
)
|
|
(2,036,393
|
)
|
Interest
expense
|
|
|
65,293
|
|
|
16,908
|
|
|
129,386
|
|
|
35,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(465,187
|
)
|
$
|
(833,733
|
)
|
$
|
(826,917
|
)
|
$
|
(2,072,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(465,187
|
)
|
$
|
(833,733
|
)
|
$
|
(826,917
|
)
|
$
|
(2,072,232
|
)
|
Less:
preferred stock dividends (undeclared)
|
|
|
44,110
|
|
|
44,110
|
|
|
88,220
|
|
|
77,672
|
|
Less:
beneficial conversion feature on Series B
|
|
|
4,577,632
|
|
|
|
|
|
4,577,632
|
|
|
|
|
convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(5,086,929
|
)
|
$
|
(877,843
|
)
|
$
|
(5,492,769
|
)
|
$
|
(2,149,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.20
|
)
|
$
|
(0.04
|
)
|
|
(0.22
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic and diluted
|
|
|
25,095,166
|
|
|
20,786,921
|
|
|
24,970,461
|
|
|
19,919,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
|
|
|
Speedemissions,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
For
the Six Months Ended June 30, 2005 and 2004
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(826,917
|
)
|
$
|
(2,072,232
|
)
|
Adjustments
to reconcile net loss
|
|
|
|
|
|
|
|
to
net cash used by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
169,231
|
|
|
113,690
|
|
Loss
on sale of assets
|
|
|
14,046
|
|
|
|
|
Stock
expense incurred in payment of promissory notes
|
|
|
-
|
|
|
489,812
|
|
Stock
expense incurred in business acquisition
|
|
|
-
|
|
|
559,514
|
|
Stock
option expenses
|
|
|
(19,949
|
)
|
|
31,070
|
|
Stock
issued for services
|
|
|
293,156
|
|
|
226,762
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(5,058
|
)
|
|
42,686
|
|
Other
assets
|
|
|
13,695
|
|
|
(36,759
|
)
|
Accrued
interest on long-term debt payable to related parties
|
|
|
105,968
|
|
|
28,927
|
|
Accounts
payable and accrued liabilities
|
|
|
(161,978
|
)
|
|
269,633
|
|
|
|
|
|
|
|
|
|
Net
cash used by operating activities
|
|
|
(417,806
|
)
|
|
(346,897
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of businesses
|
|
|
(3,100,000
|
)
|
|
(2,376,015
|
)
|
Proceeds
from asset sales
|
|
|
34,000
|
|
|
|
|
Net
purchases of property and equipment
|
|
|
-
|
|
|
(147,303
|
)
|
Cash
acquired in acquisition
|
|
|
2,743
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(3,063,257
|
)
|
|
(2,523,318
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible preferred stock
|
|
|
|
|
|
|
|
to
related party, net of expenses
|
|
|
3,160,000
|
|
|
2,234,000
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
-
|
|
|
712,500
|
|
Proceeds
from promissory note payable to related party
|
|
|
350,000
|
|
|
50,000
|
|
Payments
on promissory notes
|
|
|
(20,000
|
)
|
|
(41,666
|
)
|
Proceeds
from convertible debenture
|
|
|
90,000
|
|
|
|
|
Payments
on capitalized leases
|
|
|
(27,591
|
)
|
|
(21,729
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
3,552,409
|
|
|
2,933,105
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
71,346
|
|
|
62,890
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period, December 31
|
|
|
16,431
|
|
|
9,231
|
|
|
|
|
|
|
|
|
|
Cash
at end of period, June 30
|
|
$
|
87,777
|
|
$
|
72,121
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
7,989
|
|
$
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
Investing and Financing activities:
|
|
|
|
|
|
|
|
Equity
securities issued in connection with the acquisition of
|
|
$
|
43,000
|
|
$
|
-
|
|
Mr.
Sticker, Inc.
|
|
|
|
|
|
|
|
Equity
securities issued in connection with the acquisition of
|
|
$
|
-
|
|
$
|
573,790
|
|
Twenty
Dollar Emission, Inc.
|
|
|
|
|
|
|
|
Equity
securities issued in payment of notes payable
|
|
$
|
57,418
|
|
$
|
539,000
|
|
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
|
|
|
|
Speedemissions,
Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2005
(Unaudited)
Note
1: Basis of Presentation
Emissions
Testing, Inc. (Emissions Testing) was incorporated on May 5, 2000 under the
laws
of the state of Georgia for the primary business purpose of opening, acquiring,
developing and operating vehicle emissions testing stations. Effective as of
March 19, 2002, Emissions Testing and Speedemissions, LLC merged and changed
its
name to Speedemissions, Inc. Effective as of June 16, 2003, Speedemissions,
Inc.
(Speedemissions or the Company) entered into an acquisition agreement with
SKTF
Enterprises, Inc. (SKTF). Pursuant to the acquisition agreement, SKTF acquired
all of the outstanding common stock of Speedemissions in exchange for 9,000,000
shares of SKTF common stock, which were issued to the stockholders of
Speedemissions. Accordingly, Speedemissions became a wholly owned subsidiary
of
SKTF.
SKTF
was
a development stage company that had not begun operations and had no revenues
and a minimal amount of assets and liabilities. For accounting purposes,
Speedemissions is viewed as the acquiring entity and has accounted for the
transaction as a reverse acquisition. Accounting and reporting guidance
indicates that the merger of a private operating company into a nonoperating
public shell corporation with nominal net assets is in substance a capital
transaction rather than a business combination. That is, the transaction is
equivalent to the private company issuing common stock
for the
net monetary assets of the shell corporation, accompanied by a
recapitalization.
The
accumulated deficit of Speedemissions has been carried forward subsequent to
the
acquisition. Results of operations subsequent to the date of acquisition reflect
the consolidated results of operations of Speedemissions and SKTF. Operations
for periods prior to the acquisition reflect those of Speedemissions. Assets
and
liabilities of Speedemissions and SKTF have been consolidated at their
historical cost carrying amounts at the date of acquisition.
Effective
on September 5, 2003, SKTF Enterprises, Inc. changed its name to Speedemissions,
Inc. For ease of reference, these notes and the accompanying consolidated
financial statements continue to refer to “SKTF” and “Speedemissions” in the
context of their legal names prior to the September 5, 2003 name
change.
On
June
30, 2005, the Company purchased all of the outstanding common stock of Mr.
Sticker, Inc., (Mr. Sticker) a Houston, Texas, company that operates six (6)
emissions testing stations in the Houston, Texas, area. The purchase price
was
$3,100,000 in cash plus approximately 183,000 shares of the Company’s common
stock. Mr. Sticker’s financial statements have been consolidated, as a wholly
owned subsidiary, with the Company’s financial statements as of June 30,
2005.
Note
2: Nature of Operations and Summary of Significant Accounting
Policies
Nature
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Speedemissions, SKTF and Mr. Sticker as discussed in Note 1. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The
accompanying condensed consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America and in accordance with the SEC’s instructions applicable to Form 10-QSB
interim financial information. In the opinion of management, such condensed
consolidated financial statements include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows as of June 30, 2005 and for all periods
presented. The results of operations presented in the accompanying condensed
consolidated financial statements are not necessarily indicative of the results
expected for the full fiscal year or for any future period.
The
accompanying condensed consolidated financial statements do not include all
of
the information and disclosures required by accounting principles generally
accepted in the United States of America for annual financial statements. Such
interim condensed consolidated financial statements should be read in
conjunction our Company’s audited financial statements contained in our Form
10-KSB for the year ended December 31, 2004.
Nature
of Operations
Speedemissions
is engaged in opening, acquiring, developing and operating vehicle emissions
testing stations. 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, 2005 the Company operated, twenty-eight (28) emissions testing stations
and four (4) mobile units in Georgia and Texas. The Company does business under
the trade names Speedemissions
and Mr. Sticker.
At its
emissions testing stations, the Company uses computerized emissions testing
equipment that tests vehicles for compliance with emissions standards; in the
emissions testing industry, such stations are known as decentralized facilities.
The Company utilizes “basic” testing systems that test a motor vehicle’s
emissions while in neutral and “enhanced” testing systems that test a vehicle’s
emissions under simulated driving conditions.
Use
of Estimates in Financial Statements
The
preparation of financial statements in conformity with generally accepted
accounting principles 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 balance sheet. Accordingly,
actual results could differ from those estimates.
Revenue
Recognition
Revenue
is recognized as the testing services are performed. Under current state of
Georgia law, the charge for an emissions test is limited to $25.00 per vehicle,
which is recorded by the Company as gross revenue. The cost of emissions
certificates paid to the state of Georgia is approximately $6.95 per certificate
and is shown separately in the accompanying condensed consolidated statements
of
operations. Under current state of Texas law, the charge for an emissions test
is generally limited to $39.50 per vehicle, which is recorded by the Company
as
gross revenue. The cost of emissions certificates paid to the state of Texas
varies between approximately $5.50 and $14.00 per certificate depending on
the
type of test and is shown separately in the accompanying condensed consolidated
statements of operations. In some cases, in response to competitive situations,
the Company has charged less than the statutory maximum revenue charges
allowed.
The
Company normally requires that the customer’s payment be made with cash, check
or credit card; accordingly, the Company does not have significant levels of
accounts receivable.
Under
current Georgia and Texas laws, if a vehicle fails an emissions test, it may
be
retested at no additional charge during a specified period after the initial
test, as long as the subsequent test is performed at the same facility. At
the
time of initial testing, the Company provides an allowance for potential retest
costs, based on prior retest experience and information furnished by the states
of Georgia and Texas, which is comprised mainly of the labor cost associated
with performing a retest. When a retest is performed, the incremental cost
of
performing a retest is applied against the retest allowance. At June 30, 2005
and 2004, the allowance for retest costs was not material.
Fair
Value of Financial Instruments
The
carrying amounts of cash, approximate fair value because of the short-term
nature of these accounts.
Management does not believe it is practicable to estimate the fair value of
its
liability of its financial instruments because of the Company's financial
position.
Accounting
for Business Combinations
Statement
of Financial Accounting Standards No 141, Business
Combinations
(SFAS
141), prescribes the accounting for all business combinations by, among other
things, requiring the use of the purchase method of accounting. SFAS 141 was
effective for the Company for business combinations consummated after June
30,
2001.
Impairment
of Long-Lived Assets
Property
and Equipment
The
Company reviews its property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. When indicators of impairment are present, the Company evaluates
the carrying amount of such assets in relation to the operating performance
and
future estimated undiscounted net cash flows expected to be generated by the
assets or underlying businesses. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The assessment of
the
recoverability of the carrying amount of the assets will be impacted if
estimated future operating cash flows are not achieved. In the opinion of
management, property and equipment was not impaired as of June
30,
2005 or
2004.
Goodwill
The
Company has adopted
Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets
(SFAS
142), which prescribes the accounting for all purchased goodwill. In accordance
with SFAS 142, goodwill is not amortized but tested for impairment annually
and
also whenever an impairment indicator arises.
Goodwill
is tested for impairment using a two-step process that begins with an estimation
of the fair value of the specific reporting unit of the Company, as defined,
to
which the goodwill is attributable and a comparison of such fair value to the
carrying amount of the reporting unit, including goodwill. If the carrying
amount exceeds fair value, the second step is performed to measure the amount
of
the impairment loss, which equals the amount by which the carrying amount of
the
reporting unit goodwill exceeds the implied fair value of that goodwill (the
implied fair value of goodwill represents the excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities as if
the
reporting unit had been acquired in a business combination and the fair value
of
the reporting unit was the price paid to acquire the reporting unit). In the
opinion of management, goodwill was not impaired as of June 30, 2005 and
2004.
Net
Loss Per Common Share
Basic
net
loss per share is computed by dividing the net loss for the period by the
weighted-average number of common shares outstanding for the period. Diluted
net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common and potential common shares outstanding during
the period, if the effect of the potential common shares is dilutive. As a
result of the Company’s net losses, all potentially dilutive securities would be
antidilutive and are excluded from the computation of diluted net loss per
share.
Regulatory
Impact
The
current and future demand for the Company’s services is substantially dependent
upon federal, state, local and foreign legislation and regulations mandating
air
pollution controls and emissions testing. If any or all of these governmental
agencies should change their positions or eliminate or revise their requirements
related to air pollution controls and emissions testing (including a shift
to
centralized facilities versus decentralized facilities), the Company could
experience a significant adverse impact on its financial position and results
of
operations.
Accounting
for Stock-Based Compensation
The
Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB
25),
and related interpretations in accounting for stock options. The Company has
adopted only the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting
for Stock-Based Compensation (SFAS
123), as amended by statement of Financial Accounting Standards No. 148,
Accounting
for Stock-Based Compensation - Transition and Disclosure, in
accounting for stock options and does not recognize compensation expense under
the fair value provisions of SFAS 123. Beginning with the first reporting period
that begins after December 31, 2005, we will no longer be allowed to use the
intrinsic value recognition method and instead will recognize the cost of
employee services received in exchange for equity securities based on the grant
date fair value of the awards.
The
Company applies APB Opinion 25 and related interpretations in accounting for
its
stock options. Stock-based employee compensation cost has been reflected in
net
loss in the accompanying consolidated statements of operations, for the 400,000
options classified as variable stock options granted that had an exercise price
less than the market value of the underlying common stock on the date of grant
(see Note 5). At the end of each calendar quarter, the Company determines a
value for the financial effect of the variable stock options. The following
table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
|
|
Six
months ended June 30
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
loss, attributable to common shareholders
|
|
$
|
(5,492,769)
|
|
$
|
(2,149,904)
|
Deduct:
Total stock based employee compensation expense determined under
the fair
value method for all awards
|
|
|
78,151
|
|
|
362,447
|
Pro
forma net loss
|
|
$
|
(5,570,920)
|
|
$
|
(2,512,351)
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
Basic
and diluted, as reported
|
|
$
|
(0.22)
|
|
$
|
(0.11)
|
Basic
and diluted, pro forma
|
|
$
|
(0.22)
|
|
$
|
(0.13)
|
The
fair
value of stock options issued during the six months ended June 30, 2005 and
2004
has been determined using the Black-Scholes option-pricing model with the
following assumptions: risk-free interest rates of 3.00%; expected lives of
3
years; expected volatility of 45.00%; and no dividend yield.
Recently
Issued Accounting Standard
FASB
statement No. 123R, “Share Based Payment” becomes effective at the beginning of
the Company’s quarter ending March 31, 2006 and will require all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values and no longer
allow pro forma disclosure as an alternative to financial statement
recognition.
Note
3: Factors Affecting Operations
The
Company has limited operations and has not yet generated a profit. These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. The future success of the Company is contingent
upon, among other things, the ability to: achieve and maintain satisfactory
levels of profitable operations; obtain and maintain adequate levels of debt
and/or equity financing; and provide sufficient cash from operations to meet
current and future obligations. The Company is actively seeking new sources
of
financing, however there is no guarantee that the Company will be successful
in
obtaining the financing required to fund its capital needs.
The
Company has prepared financial forecasts which indicate that, based on its
current business plans and strategies, it anticipates that it will achieve
profitable operations and generate positive cash flows in the next few years.
However, the ultimate ability of the Company to achieve these forecasts and
to
meet the objectives discussed in the preceding paragraph cannot be determined
at
this time. The accompanying consolidated financial statements do not include
any
adjustments that might result from the outcome of these
uncertainties.
Note
4: Long-Term Debt Payable to Related Parties
Long-term
debt payable to related parties at June
30,
2005
was as follows:
|
GCA
Fund 10% note
(a)
|
|
$300,000
|
|
|
V2R
10% note (b)
|
|
63,334
|
|
|
Convertible
Debentures (c)
|
|
90,000
|
|
|
State
Inspections of Texas 12.5% note
(d)
|
|
120,000
|
|
|
State
inspections of Texas non-interest bearing note (e)
|
|
36,000
|
|
|
State
Inspections of Texas 12.5% note
(f)
|
|
1,285,000
|
|
|
GCA
Fund 8% note
(g)
|
|
350,000
|
|
|
|
|
|
|
|
|
|
2,244,334
|
|
|
Less
current portion
|
|
1,091,872
|
|
|
|
|
$1,152,462
|
|
(a)
The
$300,000 promissory note payable had an original maturity date of August 2,
2003
but was not repaid on that date. Effective as of September 2, 2003, the Company
and GCA Fund agreed to extend the maturity date to April 24, 2004. Effective
as
of May 5, 2004, the Company and GCA Fund agreed to extend the maturity date
to
October 24, 2004. Effective as of October 15, 2004, the Company and GCA Fund
agreed to extend the maturity date to October 24, 2005. At June 30, 2005, the
Company had made no interest payments to GCA Fund and thus was not in compliance
with the applicable interest payment provisions of the promissory note payable
agreements; however, the Company obtained a waiver from GCA Fund regarding
such
noncompliance.
The
$300,000 promissory note payable is mandatorily redeemable, at the option of
GCA
Fund, under certain circumstances as outlined in the note payable agreement,
including but not limited to a change in control, as defined. The promissory
note payable agreement contains certain financial and nonfinancial covenants
to
which the Company must adhere.
(b)
On
June 13, 2003, the Company entered into a consulting agreement with V2R, Inc.,
which is controlled by Bahram Yusefzadeh, who subsequent to June 13, 2003 became
one of our directors. Under the terms of the agreement, our subsidiary agreed
to
pay to V2R, upon the successful closing of a merger or acquisition of our
subsidiary with a publicly traded corporation, the sum of $225,000. Of this
amount, $125,000 was to be paid in accordance with the terms of a promissory
note. The principal balance of the note was due on December 31, 2003, but was
extended pursuant to an amendment dated December 30, 2003 to the earlier to
occur of (i) the closing of a round of equity or debt financing in excess of
$1,500,000, (ii) 90 days after the effectiveness of a registration statement,
or
(iii) in three equal installments beginning March 1, 2004, May 1, 2004, and
July
1, 2004. The entire principal and interest became due on January 21, 2004 when
we closed a round of equity financing in excess of $1,500,000; however, as
of
June 30, 2005 we had only made two payments totaling $61,666, leaving an unpaid
balance of principal and interest of approximately $75,800 as of June 30, 2005.
On July 14, 2005, we made an additional payment of $25,000, leaving an unpaid
balance of principal and interest of approximately $51,747.17 as of that
date.
(c)
On
June 6, 2005, the Company issued a convertible debenture to a qualified investor
in the amount of 140,000. The debenture was issued at a 10% discount. The
Company received $90,000 in cash on June 6, 2005 and the balance after June
30,
2005. The debenture is due and payable in 24 months, from the date of issuance,
and carries interest at 10.0%. The holder has the right to convert the
debenture, at any time prior to maturity, into shares of the Company’s common
stock at $0.20 per common share. Additionally the holder received a warrant
to
purchase 140,000 shares of the Company’s common stock. The warrant has a five
year term and an exercise price of $0.25 per share.
(d)
On
November 15, 2004, State Inspections of Texas, Inc. (SIT) advanced
the Company $120,000 on a secured promissory note. The note is due and payable
in 180 days, from the date of issuance, and carries interest at 12.5%. The
note
is secured by certain real property of the Company. Effective March 31, 2005,
the due date on the note was extended to November 15, 2005.
(e)
On
December 1, 2004, SIT sold
the
Company certain assets for $36,000 on an unsecured promissory note. The note
was
due and payable in 36 equal monthly installments, starting January 2005 and
ending December 2008 and carries no interest. No payments on this note were
made
during the quarter ended June 30, 2005, and effective March 31, 2005 the
starting date for the monthly payments was extended to August 2005.
(f)
On
December 30, 2004, SIT sold
the
Company certain assets for $1,285,000 on a secured promissory note. Payment
terms of the note are; interest only (12.5% annually) payable monthly from
February 2005 through January 2006, monthly principal and interest payments
of
$43,000 from February 2006 through June 2008 and a final payment of
approximately $291,000 in July 2008. The note is secured by the assets sold
to
the Company by SIT under the terms of this promissory note. One interest
payments on this note was made during the quarter ended June 30, 2005, and
effective March 31, 2005 the starting date for the monthly payments was extended
to September 2005.
(g)
On
January 26, 2005, the Company executed a promissory note in favor of GCA
Strategic Investment Fund Limited in the principal amount of $350,000, and
on
that date the Company received funds in the same amount. Under the terms of
the
note, we were obligated to repay the entire principal amount, plus interest
at
the rate of 8% per year, on April 26, 2005, however payment was not made on
that
date. Effective as of March 31, 2005, the Company and GCA Fund agreed to extend
the maturity date to October 31, 2005. The obligation is secured by certain
of
our real property. We will use the funds for general working capital purposes.
In connection with and as consideration for the issuance of the promissory
note,
we issued warrants to acquire a total of 200,000 shares of our common stock
at
$0.357 per share, and entered into a registration rights agreement in connection
therewith. We issued to GCA Strategic Investment Fund Limited warrants to
acquire 100,000 shares of our common stock, exercisable for a period of five
years at $0.357 per share. We also issued to Global Capital Advisors, LLC,
the
investment advisory to GCA Strategic Investment Fund Limited, warrants to
acquire 100,000 shares of our common stock, exercisable for a period of five
years at $0.357 per share.
Note
5: Stockholders’ Equity
Stockholders’
Equity was comprised of the following:
|
|
At
June 30, 2005
|
|
|
(unaudited)
|
|
|
|
|
Series
A convertible and cumulative preferred stock, $.001 par value, 5,000,000
shares authorized, 2,500 shares issued and outstanding
|
|
$
|
3
|
|
|
|
|
Series
B convertible and cumulative preferred stock, $.001 par value, 3,000,000
shares authorized, 2,500,000 shares issued and outstanding
|
|
|
2,500
|
|
|
|
|
Common
stock, $.001 par value, 100,000,000 shares authorized, 25,737,522
shares
issued and outstanding
|
|
|
25,738
|
|
|
|
|
Additional
paid in capital
|
|
|
19,241,484
|
|
|
|
|
Deferred
compensation
|
|
|
(53,544)
|
|
|
|
|
Series
B convertible and cumulative preferred stock, subscriptions
receivable
|
|
|
(2,746,400)
|
|
|
|
|
Accumulated
deficit
|
|
|
(12,287,289)
|
|
|
|
|
Total
stockholders’ equity
|
|
$
|
4,182,492
|
Preferred
Stock
On
January 21, 2004, the Company completed a private placement of 2,500 shares
of
its par value $.001 Series A Convertible Preferred Stock (the Preferred Stock)
and 2,500,000 common stock purchase warrants (the Warrants) to GCA Strategic
Investment Fund Limited, an existing affiliate shareholder of the Company,
in
exchange for gross proceeds to the Company of $2,500,000. Net proceeds to the
Company after the payment of an advisors fee and offering expenses was
$2,234,000.
The
Preferred Stock accrues a dividend of 7% per annum, and each share of Preferred
Stock is convertible into 1,000 shares of the Company’s common stock or
2,500,000 shares of common stock in the aggregate. The Warrants are exercisable
for a period of five years at an exercise price of $1.25 per share of common
stock to be acquired upon exercise. In the event of liquidation, dissolution
or
winding up of the Company preferred stockholders are entitled to be paid prior
to any preference of any other payment or distribution.
On
June
30, 2005 the Company completed a private placement of 2,500,000 shares of its
par value $.001 Series B Convertible Preferred Stock (the Preferred B) and
43,900,000 common stock purchase warrants (the B-1 Warrants and the B-2
Warrants) to Barron Partners LP, in exchange for gross proceeds to the Company
of $6,420,000. Net proceeds to the Company after the payment of advisors fees
and offering expenses was $5,846,400. In addition to the cash portion of the
advisors fee, the Company issued 2,850,000 common stock purchase warrants (the
Advisor’s Warrants) to Prospect Financial Advisors, LLC. The 2,850,000 Advisor’s
Warrants are exercisable for a period of five years at an exercise price of
$0.06 per share of common stock to
be
acquired upon exercise. On June 30, 2005, the Company used $3,100,000 of the
net
proceeds from the Preferred B placement to purchase all of the outstanding
common stock of Mr. Sticker. The remainder of the net proceeds, or $2,746,400,
was received on July 1, 2005 and was retained, by the Company for a future
acquisition and current working capital. The $2,746,400 is recorded in the
Company’s June 30, 2005, condensed consolidated balance sheet as a convertible
preferred stock subscription receivable.
The
Preferred Stock does not pay a dividend and has no voting rights. Each share
of
Preferred Stock is convertible into 42.8 shares of the Company’s common stock or
107,000,000 shares of common stock in the aggregate. The 25,000,000 B-1 Warrants
are exercisable for a period of five years at an exercise price of $0.24 per
share of common stock to be acquired upon exercise. The 18,900,000 B-2 Warrants
are exercisable for a period of five years at an exercise price of $0.48 per
share of common stock to be acquired upon exercise. In the event of liquidation,
dissolution or winding up of the Company preferred stockholders are entitled
to
be paid prior to any preference of any other payment or
distribution.
Common
Stock
The
Company is authorized to issue 100,000,000 shares of $0.001 par value common
stock, of which 25,737,522 and 24,541,594 shares were issued and outstanding
as
of June 30, 2005 and December 31, 2004, respectively.
In
the
six months ended June 30, 2005 and 2004, the Company issued 900,534 and 600,000
shares of its common stock, respectively, for general and administrative
expenses, which consisted principally of legal and consulting services. The
Company recognized an expense of $293,156 and $226,762 in the six months ended
June 30, 2005 and 2004, respectively. (see note 7).
Stock
Option Plan
SKTF’s
board of directors and stockholders approved a stock option plan, effective
June
1, 2001, pursuant to which 1,000,000 shares of common stock have been reserved
for issuance under the plan. There were 951,750
and 686,750 stock options issued and outstanding as of June 30, 2005 and
December 31, 2004, respectively.
On
October 2, 2003 the Company issued options to purchase up to 400,000 shares
of
common stock at an exercise price of $2.00 per share. No stock-based employee
compensation cost was recorded related to these options as the options granted
had an exercise price greater than the market value of the underlying common
stock on the date of grant.
On
December 19, 2003, the 400,000 options granted on October 2, 2003, were
cancelled and immediately re-issued with an exercise price of $.25 per share
and
an expiration date of December 18, 2013. Of the 400,000 options, 100,000 vested
immediately with the remaining options vesting in three equal increments on
October 1, 2004, 2005 and 2006, respectively. The 400,000 options granted on
December 19, 2003 have been reclassified as variable stock options since they
had an exercise price less than the market value of the underlying common stock
on the date of grant. The Company recorded $(19,949) and $31,070 in compensation
(income) expense, respectively, during the six months ended June 30, 2005 and
2004.
On
March
10, 2005, the Company granted 265,000 stock options to eleven of its employees.
All of the options carried an exercise price of $.25, vested as of the date
of
the grant and expire March 10, 2015. No stock-based employee compensation cost
has been recorded in the accompanying consolidated statements of operations
related to these options as the options granted had an exercise price greater
than the fair value of the underlying common stock on the date of
grant.
On
June
30, 2005, the Company granted 175,000 stock options to two of its employees.
All
of the options carried an exercise price of $.235, vested as of the date of
the
grant and expire June 30, 2015. No stock-based employee compensation cost has
been recorded in the accompanying consolidated statements of operations related
to these options as the options granted had an exercise price greater than
the
fair value of the underlying common stock on the date of grant.
Stock
Warrants
There
were 52,630,073
and 5,180,073 common stock warrants issued and outstanding as of June 30, 2005
and December 31, 2004, respectively.
On
January 26, 2005, the Company executed a promissory note in favor of GCA
Strategic Investment Fund Limited in the principal amount of $350,000, and
on
that date the Company received funds in the same amount. In connection with
and
as consideration for the issuance of the promissory note, we issued warrants
to
acquire a total of 200,000 shares of our common stock at $0.357 per share,
and
entered into a registration rights agreement in connection therewith. We issued
to GCA Strategic Investment Fund Limited warrants to acquire 100,000 shares
of
our common stock, exercisable for a period of five years at $0.357 per share.
We
also issued to Global Capital Advisors, LLC, the investment advisory to GCA
Strategic Investment Fund Limited, warrants to acquire 100,000 shares of our
common stock, exercisable for a period of five years at $0.357 per
share.
On
February 22, 2005, we issued warrants to acquire up to 250,000 shares of our
common stock, restricted in accordance with Rule 144, to Richard A. Parlontieri,
our President and a Director. These warrants were issued as incentive
compensation for his work for us and at an exercise price of $0.25 per share.
The issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, and Mr. Parlontieri is a sophisticated
investor.
On
March
10, 2005, we issued warrants to acquire up to 250,000 shares of our common
stock, restricted in accordance with Rule 144, to two unrelated consultants.
These warrants were issued for services rendered to us and at an exercise price
of $0.25 per share. The issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, and the consultants are
sophisticated investors and familiar with our operations.
On
June
30, 2005 the Company completed a private placement of 2,500,000 shares of its
Series B Convertible Preferred Stock (the Preferred B) and 43,900,000 common
stock purchase warrants (the B-1 Warrants and the B-2 Warrants) to Barron
Partners LP, in exchange for gross proceeds to the Company of $6,420,000. In
addition to a cash advisors fee, the Company issued 2,850,000 common stock
purchase warrants (the Advisor’s Warrants) to Prospect Financial Advisors, LLC.
The 2,850,000 Advisor’s Warrants are exercisable for a period of five years at
an exercise price of $0.06 per share of common stock to be acquired upon
exercise. The 25,000,000 B-1 Warrants are exercisable for a period of five
years
at an exercise price of $0.24 per share of common stock
to
be
acquired upon exercise. The 18,900,000 B-2 Warrants are exercisable for a period
of five years at an exercise price of $0.48 per share of common stock to be
acquired upon exercise. In the event of liquidation, dissolution or winding
up
of the Company preferred stockholders are entitled to be paid prior to any
preference of any other payment or distribution.
Additional
Warrants
In
connection with the acquisition of Speedemissions by SKTF, Speedemissions issued
a warrant to V2R. The warrant entitles V2R to purchase 130,000 shares of
Speedemissions common stock at an exercise price of $.01 per share. At December
31, 2004, the warrant was exercisable.
Note
6: Income Taxes
As
of
December 31, 2004, Speedemissions had net operating loss (NOL) carryforwards
of
approximately $6,046,000 that may be used to offset future taxable income.
The
NOL carryforwards will expire at various dates through 2024.
As
a
result of the NOL carryforwards, the Company has recorded no provision or
benefit for income taxes in the accompanying condensed consolidated financial
statements. A valuation allowance has been recorded to offset the recognition
of
any deferred tax assets due to the uncertainty of future realization. However,
as a result of the consolidation of the financial statements of the June 30,
2005, acquired company, Mr. Sticker, the Company’s condensed consolidated
balance sheet presents $23,960 and $49,512 in, respectively, a deferred tax
asset and a deferred tax liability. The deferred tax liability resulted from
temporary differences between the financial reporting basis and tax basis of
fixed assets. The deferred tax asset resulted from net operating loss
carryforwards.
Note
7: Consulting Agreements
In
connection with the June 16, 2003 acquisition of Speedemissions by SKTF,
Speedemissions entered into a consulting agreement with V2R. Effective January
1, 2004, the consulting agreement was cancelled and replaced, by mutual
agreement of the Company and V2R, with a new agreement. The new agreement
continues for 30 months at a consulting fee of $8,334 per month. The new
agreement grants V2R warrants to purchase 100,000 shares of the Company's common
stock at $0.25 per share. The warrants vest in two increments of 50,000 on
January 1, 2005 and 2006, respectively. Additionally, V2R can earn success
fees
calculated using the Lehman Formula, as defined, for merger and acquisition
and
strategic alliance or partnership agreements arranged by the entity. During
the
six months ended June 30, 2005 and 2004, the Company paid a total of
approximately $7,500 and $40,100, respectively, under the consulting agreement.
Effective June 30, 2005, this agreement was terminated by mutual consent of
V2R
and the Company.
Effective
December 1, 2003, the Company entered into an agreement with a public relations
firm to issue stock in exchange for consulting services to be rendered by the
public relations firm during the period from December 1, 2003 to May 31, 2004.
On January 7, 2004, March 9, 2004 and May 7, 2004, the Company issued a total
of
450,000 shares of its common stock under the terms of its consulting agreement
with the public relations firm. During the six months ended June 30, 2004,
the
Company recognized approximately $142,000 in general and administrative expenses
related to this agreement.
Effective
January 1, 2004, the Company entered into an agreement with a financial
consulting firm to issue stock in exchange for consulting services to be
rendered by the financial consulting firm during the period from January 1,
2004
to June 30, 2004. The Company issued, on May 24, 2004, a total of 100,000 shares
of its common stock under the terms of this agreement. During the six months
ended June 30, 2004, the Company recognized $51,000 in general and
administrative expenses related to this agreement.
On
February 25, 2004, the Company issued 50,000 shares of its common stock for
services rendered during the three months ended March 31, 2004, recording an
expense of $33,500 during that period.
Effective
November 5, 2004, the Company entered into an agreement with an equity research
services firm to issue stock in exchange for consulting services to be rendered
by the equity research services firm. The Company issued, on November 5, 2004,
a
total of 312,500 shares of its common stock, under the terms of this agreement.
During the six months ended June 30, 2005, the Company recognized approximately
$38,500 in general and administrative expenses related to this
agreement.
On
January 18, 2005, we issued a total of 250,000 shares of our common stock,
restricted in accordance with Rule 144, to two consultants for services rendered
during the year ended December 31, 2004. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and the
shareholders were sophisticated purchasers.
On
February 22, 2005, we issued a total of 250,000 shares of our common stock,
restricted in accordance with Rule 144, to Calabria Advisors, LLC, an entity
controlled by Mr. Richard A. Parlontieri, our President and a Director. Calabria
Advisers, LLC provides us with consulting services. The issuances were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, and
the shareholder is a sophisticated investor and familiar with our operations.
During the three months ended March 31, 2005, the Company recognized $75,000
in
general and administrative expenses related to this agreement.
On
June
17, 2005, we issued a total of 250,000 shares of our common stock, restricted
in
accordance with Rule 144, to Calabria Advisors, LLC, an entity controlled by
Mr.
Richard A. Parlontieri, our President and a Director. Calabria Advisers, LLC
provides us with consulting services. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and the
shareholder is a sophisticated investor and familiar with our operations. During
the three months ended June 30, 2005, the Company recognized $58,750 in general
and administrative expenses related to this agreement.
Note
8: Goodwill
As
discussed in Note 1, the Company made one acquisition during the quarter ended
June 30, 2005. The acquisition all of the outstanding common stock of Mr.
Sticker, Inc. (Mr. Sticker) resulted in the recording of goodwill of $2,886,354.
The following table provides details of the acquisition:
|
|
|
Mr.
Sticker
|
|
|
|
|
|
|
|
Assets
acquired
|
|
|
|
|
Current
assets
|
$
|
51,588
|
|
|
Equipment
|
|
292,500
|
|
|
Other
assets
|
|
11,675
|
|
|
Goodwill
|
|
2,886,354
|
|
|
|
$
|
3,242,117
|
|
|
|
|
|
|
|
Purchase
price
|
|
|
|
|
Cash
|
$
|
3,100,000
|
|
|
Current
liabilities
|
|
49,605
|
|
|
Deferred
tax liability
|
|
49,512
|
|
|
Common
stock
|
|
43,000
|
|
|
|
$
|
3,242,117
|
|
The
Company made the above acquisition to increase its market share in the Houston,
Texas area and reduce average overhead costs per store by acquiring six (6)
locations, which could be controlled by a local management team, using existing
resources. These circumstances were the primary contributing factors for the
recognition of goodwill as a result of this acquisition.
Note
9: Contingencies
In
April
2005, a lawsuit was filed against us by Weingarten Realty Investors in the
U.S.
District Court of Harris County, Texas, case number 2005-25671. The Complaint
alleges breach of contract arising out of a real property lease in Texas for
two
testing sites that were to be built. The case does not allege specific damages,
although the total of all monthly payments under the two leases is approximately
$516,000. We filed an Answer to the Complaint, and we are in discussions to
settle the matter.
We
are
not a party to or otherwise involved in any other legal
proceedings.
In
the
ordinary course of business, we may from time to time be 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. However, in the opinion of our management, other than as set forth
herein, matters currently pending or threatened against us are not expected
to
have a material adverse effect on our financial position or results of
operations.
Note
10: Subsequent Events
On
July 1, 2005, the Company received and deposited to its cash account $2,746,400,
which represented the balance of the cash proceeds from the June 30, 2005 sale
of 2,500,000 shares of its Series B Convertible Preferred Stock.
On
June
30, 2005, we entered into a Preferred Stock Purchase Agreement (the “Agreement”)
with Barron Partners LP (the “Investor”) pursuant to which the Investor
purchased $6,420,000 worth
of
our
Series B Convertible Preferred Stock (the “Preferred Shares”), along with
warrants to purchase 25,000,000 shares of our common stock at $0.24 per share,
and warrants to purchase 18,900,000 shares of our common stock at $0.48 per
share.
On
August
4, 2005, we entered into an Amendment to Stock Purchase Agreement (the
“Amendment”) which modified the Agreement as follows:
|
a.
|
the
Investor purchased $6,615,000 of our Preferred
Shares;
|
|
b.
|
the
warrants were increased to 26,214,953 shares at $0.24 per share,
19,659,346 shares at $0.48 per share, and 40,000,000 shares at $0.12
per
share. We may call the $0.12 warrants if our stock price exceeds
$0.24 for
fifteen (15) consecutive trading
days;
|
|
c.
|
each
of the Preferred Shares is convertible into 75.6 shares of our common
stock, subject to adjustment if certain conditions are met, for a
total of
189,000,000 shares of common stock, has a liquidation preference
equal to
its purchase price, and has no voting
rights.
|
|
d.
|
the
exercise of the warrants, including the call provision on the $0.12
warrants, and the conversion of the Preferred Shares are subject
to a
maximum ownership by the Investor at any time of
4.9%.
|
On
August
4, 2005, in conjunction with the above-referenced amended financing transaction,
we issued restated warrants to acquire 26,214,953 shares of our common stock
at
$0.24 per share, restated warrants to acquire 19,659,346 shares of our common
stock at $0.48 per share, and warrants to acquire 40,000,000 shares of our
common stock at $0.12 per share, to a single accredited investor, in exchange
for an additional $195,000 in cash. The issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, and the shareholder
is
accredited.
ITEM
2 Managements
Discussion and Analysis
Disclaimer
Regarding Forward Looking Statements
Our
Management’s Discussion and Analysis contains not only statements that are
historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Forward-looking statements are, by their
very
nature, uncertain and risky. These risks and uncertainties include
international, national and local general economic and market conditions;
demographic changes; our ability to sustain, manage, or forecast growth; our
ability to successfully make and integrate acquisitions; raw material costs
and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other risks that might be detailed from time to time in our
filings with the Securities and Exchange Commission.
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.
Overview
As
of
June 30, 2005 we operated twenty-eight (28) vehicle emissions testing stations
and four (4) mobile units in two separate markets, greater Atlanta, Georgia
and
Houston, Texas. This number of operating units reflects a closing of three
stations, the acquisition of Mr. Sticker, with its six (6) stations and a
consolidation of mobile operations from seven (7) to four (4) units during
the
six months ended June 30, 2005. These actions were taken to improve efficiencies
and increase profitability. We do not provide automotive repair services at
our
centers because we believe that it inhibits our ability to provide timely
customer service and creates a perception that our test results might be
compromised.
We
charge
a fee for each test, whether it passes or not, and a portion of that fee is
passed on to the state governing agency. In Georgia, the maximum fee that we
can
charge is $25, and a fee of $6.95 is paid to the State of Georgia. In Texas,
the
maximum fee that we can charge is $39.50, for both an emissions test and a
safety inspection, and a fee varying between approximately $5.50 and $14.00
per
certificate, depending on the type of test is paid to the State of Texas. In
some cases, in response to competitive situations, the Company has charged
less
than the statutory maximum revenue charges allowed.
We
want
to grow. We completed four acquisitions during 2004, which added nineteen
testing centers and seven mobile units. We completed one acquisition during
the
six months ended June 30, 2005, which added six testing centers. We intend
to
close more acquisitions, and to open company-owned stations, in
2005.
As
a
result of our growth plans, our biggest challenge will be managing our growth
and integrating our acquisitions. We have tried to attract qualified personnel
to assist us with this growth, while keeping our overhead expenses manageable.
We have not operated at a profit, nor have we operated on a break-even operating
cash flow basis. However, if we are successful in implementing our growth
strategy, we believe that both of these financial goals are achievable in the
next 12 months. Until that time, we will have to continue to fund our
operations, and our acquisitions, with capital raised from selling our
stock.
Explanatory
Paragraph in Report of Our Independent Certified Public
Accountants
Our
independent accountants have included an explanatory paragraph in their most
recent report, stating that our audited financial statements for the period
ending December 31, 2004 were prepared assuming that we will continue as a
going
concern. However, they note that we have not yet generated significant revenues,
that we have a large accumulated working capital deficit, and that there are
no
assurances that we will be able to meet our financial obligations in the
future.
Our
independent accountants included the explanatory paragraph based primarily
on an
objective test of our historical financial results. Although we agree that
this
explanatory paragraph is applicable when the objective test is applied, we
believe that if we can successfully implement our business plan in the next
fiscal year, future audit reports might be issued without this explanatory
paragraph. Until such time, however, our going concern paragraph may be viewed
by some shareholders and investors as an indication of financial instability,
and it may impair our ability to raise capital.
The
following analysis compares the results of operations for the three and six
month periods ended June 30, 2005 to the comparable periods ended June 30,
2004.
Results
of Operations
Introduction
Our
operations reflect a significantly different company as of June 30, 2005 versus
June 30, 2004. As of June 30, 2004 we operated sixteen (16) emissions testing
stations in Georgia and three (3) emissions testing stations in Texas. During
December 2004 we made one (1) acquisition which resulted in the addition of
six
(6) emissions testing stations Texas and seven (7) mobile units in Georgia.
During the six months ended June 30, 2005 we closed three (3) stations, acquired
Mr. Sticker’s six (6) stations and consolidated mobile operations from seven (7)
to four (4) units. These actions were taken to improve efficiencies and increase
profitability. As a result, we operated a total of twenty-eight (28) stations
and four (4) mobile units as of June 30, 2005. Therefore, our operating expenses
and revenues during the three and six months ended June 30, 2005 were
significantly greater than the three and six months ended June 30, 2004,
primarily due to the six (6) Texas stations acquired in December
2004.
Revenues
and Loss from Operations
Our
revenue, cost of emission certificates, general and administrative expenses,
and
loss from operations for the three months ended June 30, 2005 as compared to
the
three months ended June 30, 2004 and December 31, 2004 are as
follows:
|
|
3
Months
|
|
|
3
Months
|
|
|
|
|
3
Months
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
June
30,
|
|
|
June
30,
|
|
Percentage
|
|
|
December
31,
|
|
|
2005
|
|
|
2004
|
|
Change
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,255,586
|
|
$
|
748,608
|
|
68%
|
|
$
|
$
746,515
|
Cost
of Emission Certificates
|
|
391,677
|
|
|
230,343
|
|
70%
|
|
|
225,075
|
General
& Administrative Expenses
|
|
1,263,803
|
|
|
1,335,090
|
|
(5)%
|
|
|
946,765
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
$
|
(399,894)
|
|
$
|
(816,825)
|
|
(51)%
|
|
$
|
(425,325)
|
Our
revenues increased in the three months ended June 30, 2005 primarily because
of
the six stations we acquired via acquisition during December 2004, plus the
single station acquired during June 2004. For the fourth quarter of 2004, our
average per-station revenue was $39,000, compared to over $57,000 for the second
quarter of 2005, an increase of over $18,000 per station. Contributing to the
increase in revenues from fourth quarter 2004 to second quarter 2005 was the
closing of two unprofitable stations during January 2005 and one unprofitable
station during April 2005. Our cost of emission certificates increased in the
three months ended June 30, 2005 as compared to the same period in 2004
primarily because of the six stations we acquired in December 2004 and the
one
station we acquired in June 2004.
Our
general and administrative expenses during the three months ended June 30,
2005
were $1,263,803, a decrease of $71,287, or (5)% as compared to the three months
ended June 30, 2004. The primary causes of the decreased general and
administrative expenses were the following differences in expenses recorded
between the three months ended June 30, 2004, and the three months ended June
30, 2005 which respectively increased or (decreased) expenses recorded in the
three months ended June 30, 2005 when compared to the three months ended June
30, 2004:
General
and administrative expenses associated with the six Texas stations
purchased in December 2004
|
|
$
|
307,000
|
Discount
from market price on 1,100,000 common shares issued in debt conversion
-
expensed three months ended June 30, 2004
|
|
|
(231,000)
|
Decrease
in consulting fees from 2004 to 2005
|
|
|
(129,000)
|
Decrease
in legal and accounting fees from 2004 to 2005
|
|
|
(59,000)
|
|
|
$
|
(112,000)
|
Our
revenue, cost of emission certificates, general and administrative expenses,
and
loss from operations for the six months ended June 30, 2005 as compared to
the
six months ended June 30, 2004 and December 31, 2004 are as
follows:
|
|
6
Months
|
|
|
6
Months
|
|
|
|
|
6
Months
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
June
30,
|
|
|
June
30,
|
|
Percentage
|
|
|
December
31,
|
|
|
2005
|
|
|
2004
|
|
Change
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
2,533,876
|
|
$
|
1,367,005
|
|
85%
|
|
$
|
$
1,504,523
|
Cost
of Emission Certificates
|
|
820,720
|
|
|
415,751
|
|
97%
|
|
|
458,756
|
General
& Administrative Expenses
|
|
2,410,687
|
|
|
2,987,647
|
|
(19)%
|
|
|
1,917,620
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
$
|
(697,531)
|
|
$
|
(2,036,393)
|
|
(66)%
|
|
$
|
(871,853)
|
Our
revenues increased in the six months ended June 30, 2005 primarily because
of
the six stations we acquired via acquisition during December 2004, plus the
single station acquired during June 2004. For the six months ended December
31,
2004, our average per-station revenue was $79,000, compared to over $115,000
for
the six months ended June 30, 2005, an increase of over $36,000 per station.
Contributing to the increase in revenues from the six months ended December
31,
2004 to the six months ended June 30, 2005 was the closing of two unprofitable
stations during January 2005 and one unprofitable station during April 2005.
Our
cost of emission certificates increased in the six months ended June 30, 2005
as
compared to the same period in 2004 primarily because of the six stations we
acquired in December 2004 and the one station we acquired in June
2004.
Our
general and administrative expenses during the six months ended June 30, 2005
were $2,410,687 a decrease of $576,960, or (19) % as compared to the six months
ended June 30, 2004. The primary causes of the decreased general and
administrative expenses were the following differences in expenses recorded
between the six months ended June 30, 2004, and the six months ended June 30,
2005 which respectively increased or (decreased) expenses recorded in the six
months ended June 30, 2005 when compared to the six months ended June 30,
2004:
General
& administrative expenses associated with the six Texas stations
purchased in December 2004
|
|
$
|
577,000
|
Excess
of purchase price over fair market value of assets purchased during
the
six months ended June 30, 2004
|
|
|
(560,000)
|
Discount
from market price on 2,024,996 common shares issued in debt conversion
-
expensed six months ended June 30, 2004
|
|
|
(462,000)
|
Decrease
in legal and accounting fees from 2004 to 2005
|
|
|
(144,000)
|
|
|
$
|
(589,000)
|
Interest
Expense and Net Loss
Our
interest expense and net loss for the three months ended June 30, 2005 as
compared to the three months ended June 30, 2004 is as follows:
|
|
Three
months
|
|
|
Three
months
|
|
|
|
|
ended
June 30,
|
|
|
ended
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$
|
65,293
|
|
$
|
16,908
|
|
286%
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
(465,187)
|
|
|
(833,733)
|
|
(44)%
|
Preferred
stock dividends on Series A convertible preferred stock
(undeclared)
|
|
44,110
|
|
|
44,110
|
|
0%
|
Beneficial
conversion feature on Series B convertible preferred stock
|
|
4,577,632
|
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
Net
loss after beneficial conversion feature
|
|
(5,086,929)
|
|
|
(877,843)
|
|
605%
|
Basic
and Diluted Loss per Share
|
$
|
(0.20)
|
|
$
|
(0.04)
|
|
(400)%
|
Our
interest expense during the three months ended June 30, 2005 was $ 65,293,
a
$48,385, or 286% increase compared to $16,908 for the three months ended June
30, 2004. The increase was due to interest costs associated with an increase
of
debt of approximately $1,861,000 from June 30, 2004 to June 30, 2005. Total
debt, as of June 30, 2005 was approximately $2,244,000.
During
the three months ended June 30, 2005, we had a net loss, before beneficial
conversion feature, of $465,187. During the three months ended June 30, 2004,
we
reported a net loss of $833,733. The $368,546 decrease in net loss for the
three
months ended June 30, 2005 was primarily due to approximately $112,000 in net
general and administrative cost decreases, as detailed above, less approximately
$48,000 in increased interest expense, favorably offset by an increase of
approximately $346,000 in revenue, less cost of emission certificates, for
the
three months ended June 30, 2005 compared to the three months ended June 30,
2004.
During
the three months ended June 30, 2005, we recorded a charge to accumulated
deficit of $4,577,632 as a result of a beneficial conversion feature associated
with the 2,500,000 shares of Series B convertible preferred stock and 43,900,000
warrants issued in the June 30, 2005 capital raise (see Note 5). As a result
of
this beneficial conversion feature, our basic and diluted loss per share for
the
three months ended June 30, 2005 increased from $(0.04) to $(0.20).
Interest
Expense and Net Loss
Our
interest expense and net loss for the six months ended June 30, 2005 as compared
to the six months ended June 30, 2004 is as follows:
|
|
Six
months
|
|
|
Six
months
|
|
|
|
|
ended
June 30,
|
|
|
ended
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
$
|
129,386
|
|
$
|
35,839
|
|
261%
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
(826,917)
|
|
|
(2,072,232)
|
|
(60)%
|
Preferred
stock dividends on Series A convertible preferred stock
(undeclared)
|
|
88,220
|
|
|
77,672
|
|
14%
|
Beneficial
conversion feature on Series B convertible preferred stock
|
|
4,577,632
|
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
Net
loss after beneficial conversion expense
|
|
(5,492,769)
|
|
|
(2,149,904)
|
|
160%
|
|
|
|
|
|
|
|
|
Basic
and Diluted Loss per Share
|
$
|
(0.22)
|
|
$
|
(0.11)
|
|
(120)%
|
Our
interest expense during the six months ended June 30, 2005 was $ 129,386, a
$93,547, or 261% increase compared to $35,839 for the three months ended June
30, 2004. The increase was due to interest costs associated with an increase
of
debt of approximately $1,861,000 from June 30, 2004 to June 30, 2005. Total
debt, as of June 30, 2005 was approximately $2,244,000.
During
the six months ended June 30, 2005, we had a net loss before beneficial
conversion feature, of $826,917. During the six months ended June 30, 2004,
we
reported a net loss of $2,072,232. The $1,245,315 decrease in net loss for
the
six months ended June 30, 2005 was primarily due to approximately $589,000
in
net general and administrative cost decreases, as detailed above, less
approximately $94,000 in increased interest expense, plus an increase of
approximately $762,000 in revenue, less cost of emission certificates, for
the
six months ended June 30, 2005 compared to the six months ended June 30,
2004.
During
the six months ended June 30, 2005, we recorded a charge to accumulated deficit
of $4,577,632 as a result of a beneficial conversion feature associated with
the
2,500,000 shares of Series B convertible preferred stock and 43,900,000 warrants
issued in the June 30, 2005 capital raise (see Note 5). As a result of this
beneficial conversion feature, our basic and diluted loss per share for the
six
months ended June 30, 2005 increased from $(0.11) to $(0.22).
Liquidity
and Capital Resources
Introduction
During
the six months ended June 30, 2005, we did not generate positive operating
cash
flows. With four acquisitions completed during 2004 and as we continue to
implement our growth strategy, we anticipate an increase in our operating cash
flow, but with the increased costs
of
expanding our operations, may not achieve positive operating cash flow during
2005. Therefore, during the six months ended June 30, 2005, we raised $350,000
from the issuance of a promissory note to the GCA Strategic Investment Fund
Limited, to be used for working capital purposes and $6,420,000 from the
issuance 2,500,000 of our Series B convertible preferred stock, to be used
for
acquisitions and working capital. To date, the Company has funded operations
and
acquisitions primarily through the issuance of equity securities to related
parties. We anticipate raising additional capital during the third quarter
of
2005 from the issuance of long-term debt, although the terms of a debt placement
have not been determined.
Our
cash,
total current assets, total assets, total current liabilities, and total
liabilities as of June
30,
2005 as
compared to December 31, 2004 were:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
87,777
|
|
$
|
16,431
|
|
$
|
71,346
|
Total
current assets
|
|
|
272,455
|
|
|
88,355
|
|
|
184,100
|
Total
assets
|
|
|
7,428,844
|
|
|
4,344,038
|
|
|
3,084,806
|
Total
current liabilities
|
|
|
2,033,920
|
|
|
1,504,933
|
|
|
528,987
|
Total
liabilities
|
|
|
3,246,352
|
|
|
2,837,235
|
|
|
409,117
|
Cash
Requirements
For
the
six months ended June
30,
2005
our net cash used by operating activities was ($417,406), as compared to
($346,897) for the six months ended June
30,
2004.
Negative operating cash flows during the six months ended June
30,
2005
were primarily created by a net loss from operations of $826,917 plus a decrease
of $161,978 in accounts payable and accrued liabilities, partially reduced
by
non-cash stock related expenses of $273,207, depreciation of $169,231 and an
increase in interest payable to related parties of $105,968. Because of our
rapid growth, we do not have an opinion as to how indicative these results
will
be of future results.
For
the
six months ended June 30, 2004 our net cash used in operating activities was
($346,897). Negative operating cash flows during the six months ended June
30,
2004 were primarily created by a net loss from operations of $2,072,232,
partially offset by non-cash stock related expenses of $1,307,158, an increase
of 269,633 in accounts payable and accrued liabilities and depreciation and
amortization of $113,690.
The
following table shows net loss as a percentage of revenues decreasing from
152%
in 2004 to 33% in 2005. This
indicates that the significant fixed expenses associated with being a public
company do not increase proportionally with increased revenues. As we grow
through future acquisitions we expect revenues will continue to increase at
a
faster rate than associated expenses and these efficiencies will result in
more
profitable operations.
|
|
Revenues
|
|
Net
Loss
|
|
Percentage
of Revenues
|
|
|
|
|
|
|
|
Six
months ended June 30, 2005
|
|
$
2,533,876
|
|
$
(826,917)
|
|
33%
|
Six
months ended June 30, 2004
|
|
1,367,005
|
|
(2,072,232)
|
|
152%
|
Sources
and Uses of Cash
Net
cash
used by investing activities was $3,063,257 and $2,523,318, respectively, for
the six months ended June 30, 2005 and 2004. The investing activities during
the
six months ended June 30, 2005 and June 30, 2004 involved primarily $3,100,000
and $2,376,015, respectively, used in the acquisition of
businesses.
Net
cash
provided by financing activities was $3,552,409 and $2,933,105, respectively,
for the six months ended June 30, 2005 and 2004. Net cash provided during the
six months ended June 30, 2005 resulted primarily from $3,160,000 in net
proceeds from the issuance of the Series B convertible preferred stock, $350,000
in promissory note proceeds from a related party and $90,000 in proceeds from
the sale of a convertible debenture. Net cash provided during the six months
ended June 30, 2004 resulted primarily from $2,234,000 in net proceeds from
the
issuance of Series A convertible preferred stock and an increase of $712,500
resulting from a private placement of the Company’s common stock and
warrants.
On
January 18, 2004, the combined principal amount of $225,000 and accrued interest
amount of approximately $55,000 outstanding under one of our promissory notes
were converted into 1,100,000 shares of our common stock at an exchange rate
of
$0.25 per common share.
On
June
16, 2004, the combined principal amount of $315,000 and accrued interest amount
of approximately $9,000 outstanding under a series of our promissory notes
were
converted into 924,996 shares of our common stock at an exchange rate of $0.35
per common share.
On
June
17, 2005, the principal amount of $25,000 outstanding under a promissory note
were converted into 125,001 shares of our common stock at an exchange rate
of
$0.20 per common share.
On
June
30, 2005, the combined principal amount of $25,600 and accrued interest amount
of approximately $1,000 outstanding under a series of our promissory notes
were
converted into 112,415 shares of our common stock at an exchange rate of $0.235
per common share.
We
are
not generating sufficient cash flow from operations to fund growth as we
continue to acquire and open new emission testing stations. If we can
successfully complete one or more acquisitions of profitable businesses, then
we
anticipate that we can operate at a profitable level. Until such time, however,
and in order to complete the acquisitions, we will need to raise additional
capital through the sale of our equity securities. If we are unsuccessful in
raising the required capital, we may have to curtail operations.
Critical
Accounting Policies
The
discussion and analysis of the Company’s financial condition and results of
operations are based upon its consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. In consultation with its Board
of
Directors, the Company has identified accounting policies related to valuation
of its common stock and for assessing whether any value should be assigned
to a
warrant that it believes are key to an understanding of its financial
statements. Additionally, the Company has identified accounting policies related
to the valuation of goodwill, created as the result of business acquisitions,
as
a key to an understanding of its financial statements. These are important
accounting policies that require management’s most difficult, subjective
judgments.
ITEM
3 Controls
and Procedures
Our
Chief
Executive Officer and Chief Financial Officer (or those persons performing
similar functions), after evaluating the effectiveness of our 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 the end of the period covered
by this report (the “Evaluation Date”), have concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective to ensure
the timely collection, evaluation and disclosure of information relating to
us
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 significant changes in our internal controls or in other factors
that could significantly affect the internal controls subsequent to the
Evaluation Date.
PART
II
ITEM
1 Legal
Proceedings
In
April
2005, a lawsuit was filed against us by Weingarten Realty Investors in the
U.S.
District Court of Harris County, Texas, case number 2005-25671. The Complaint
alleges breach of contract arising out of a real property lease in Texas for
two
testing sites that were to be built. The case does not allege specific damages,
although the total of all monthly payments under the two leases is approximately
$516,000. We filed an Answer to the Complaint, and we are in discussions to
settle the matter.
We
are
not a party to or otherwise involved in any other legal
proceedings.
In
the
ordinary course of business, we may from time to time be 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. However, in the opinion of our management, other than as set forth
herein, matters currently pending or threatened against us are not expected
to
have a material adverse effect on our financial position or results of
operations.
ITEM
2 Unregistered
Sales of Equity Securities and Use of Proceeds
On
April
11, 2005, we issued a total of 250,000 shares of our common stock, restricted
in
accordance with Rule 144, to Calabria Advisors, LLC, an entity controlled by
Mr.
Richard A. Parlontieri, our President and a Director. Calabria Advisers, LLC
provides us with consulting services. The issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and the
shareholder is a sophisticated investor and familiar with our
operations.
On
June
30, 2005, we issued 2,500,000 shares of our Series B Convertible Preferred
Stock, warrants to acquire 25,000,000 shares of our common stock at $0.24 per
share, and warrants to acquire 18,900,000 shares of our common stock at $0.48
per share, to a single accredited investor, in exchange for $6,420,000 in cash.
The issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, and the shareholder is accredited. On August 4, 2005,
we
amended the transaction and issued restated warrants to acquire 26,214,953
shares of our common stock at $0.24 per share, restated warrants to acquire
19,659,346 shares of our common stock at $0.48 per share, and warrants to
acquire 40,000,000 shares of our common stock at $0.12 per share, in exchange
for an additional $195,000 in cash. The amended issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, and the
shareholder is accredited.
On
June
30, 2005, in conjunction with the financing transaction on the same date, we
issued warrants to acquire 2,850,000 shares of our common stock at $0.06 per
share to a single accredited investor, as consideration for services rendered.
The issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, and the shareholder is accredited.
ITEM
3 Defaults
Upon Senior Securities
On
June
13, 2003, our subsidiary entered into a consulting agreement with V2R, Inc.,
which is controlled by Bahram Yusefzadeh, who subsequent to June 13, 2003 became
one of our directors. Under the terms of the agreement, our subsidiary agreed
to
pay to V2R, upon the successful closing of a merger or acquisition of our
subsidiary with a publicly traded corporation, the sum of $225,000. Of this
amount, $125,000 was to be paid in accordance with the terms of a promissory
note. The principal balance of the note was due on December 31, 2003, but was
extended pursuant to an amendment dated December 30, 2003 to the earlier to
occur of (i) the closing of a round of equity or debt financing in excess of
$1,500,000, (ii) 90 days after the effectiveness of a registration statement,
or
(iii) in three equal installments beginning March 1, 2004, May 1, 2004, and
July
1, 2004. The entire principal and interest became due on January 21, 2004 when
we closed a round of equity financing in excess of $1,500,000; however, as
of
the date hereof we have only made three payments totaling $86,666, leaving
an
unpaid balance of principal and interest of approximately $51,747.17 as of
July
14, 2005.
On
January 21, 2004, we completed a private placement of 2,500 shares of our Series
A Convertible Preferred Stock to GCA Fund, in exchange for gross proceeds to
us
of $2,500,000. The Preferred stock pays a dividend of seven percent (7%) per
annum, payable quarterly. Dividends
on the Series A Convertible Preferred Stock shall be paid, at our discretion,
in
either (i) additional shares of Series A Convertible Preferred Stock based
on
the Original Issue Price, or (ii) Common Stock based on the Market Price. As
of
June 30, 2005, and as of the date hereof, we have not paid any dividends on
the
Series A Convertible Preferred Stock. As of June 30, 2005, we are in arrears
on
these dividends in the amount of $254,112.00.
ITEM
4 Submission
of Matters to a Vote of Security Holders
There
have been no events that are required to be reported under this
Item.
ITEM
5 Other
Information
Resignation
and Appointment of Officer
Effective
on April 15, 2005, Mr. William Klenk resigned from his position as our Chief
Financial Officer and Secretary. Effective on April 15, 2005, our Board of
Directors hired Mr. Larry C. Cobb as our Chief Financial Officer to replace
Mr.
Klenk.
Appointment
of Director
Effective
on May 26, 2005, our Board of Directors appointed Mr. Erik Sander to fill a
vacancy on our Board of Directors.
Acquisition
of Mr. Sticker
On
June
30, 2005, we completed the acquisition of all of the outstanding securities
of
Mr. Sticker, Inc., a Texas corporation, which is now our wholly-owned
subsidiary. Mr. Sticker owns and operates six (6) emission testing centers
in
the Houston, Texas area.
Barron
Partners LP Financing
On
June
30, 2005, we entered into a Preferred Stock Purchase Agreement (the “Agreement”)
with Barron Partners LP (the “Investor”) pursuant to which the Investor
purchased $6,420,000 worth of our Series B Convertible Preferred Stock (the
“Preferred Shares”), along with warrants to purchase 25,000,000 shares of our
common stock at $0.24 per share, and warrants to purchase 18,900,000 shares
of
our common stock at $0.48 per share.
Each
of the
Preferred Shares is convertible into 42.8 shares of our common stock, subject
to
adjustment if certain conditions are met, for a total of 107,000,000 shares
of
common stock, has a liquidation preference equal to its purchase price, and
has
no voting rights. The warrants are exercisable for a period of five years,
and
the exercise price is subject to adjustment if certain conditions are met.
In
conjunction with the Agreement, we entered into a Registration Rights Agreement
wherein we agreed to file a registration statement with 30 days, and to have
it
effective within 150 days.
On
August
4, 2005, we entered into an Amendment to Stock Purchase Agreement (the
“Amendment”) which modified the Agreement as follows:
|
a.
|
the
Investor purchased $6,615,000 of our Preferred
Shares;
|
|
b.
|
the
warrants were increased to 26,214,953 shares at $0.24 per share,
19,659,346 shares at $0.48 per share, and 40,000,000 shares at $0.12
per
share. We may call the $0.12 warrants if our stock price exceeds
$0.24 for
fifteen (15) consecutive trading
days;
|
|
c.
|
each
of the Preferred Shares is convertible into 75.6 shares of our common
stock, subject to adjustment if certain conditions are met, for a
total of
189,000,000 shares of common stock, has a liquidation preference
equal to
its purchase price, and has no voting
rights.
|
|
d.
|
the
exercise of the warrants, including the call provision on the $0.12
warrants, and the conversion of the Preferred Shares are subject
to a
maximum ownership by the Investor at any time of
4.9%.
|
As
consideration related to the transaction, we issued warrants to acquire
2,850,000 shares of our common stock at $0.06 per share, exercisable for a
period of five years, to Prospect Financial Advisors, LLC. Prospect also
received a cash commission equal to eight percent (8%) of the cash
raised.
Creation
of Series B Preferred Stock
On
June
30, 2005, as amended on August 4, 2005 in conjunction with the financing
described above, we created a new series of preferred stock consisting of
3,000,000 shares and known as the Series B Convertible Preferred Stock. An
Amendment to our Articles of Incorporation has been filed with the State of
Florida setting for the rights, privileges, and preferences
thereof.
ITEM
6 Exhibits
(a) |
Exhibits |
|
|
|
|
|
|
|
2.1
(1)
|
|
Acquisition
Agreement dated June 13, 2003 with Speedemissions, Inc.
|
|
|
|
|
|
2.2
(5)
|
|
Asset
Purchase Agreement dated January 21, 2004
|
|
|
|
|
|
2.3
(6)
|
|
Asset
Purchase Agreement dated January 30, 2004
|
|
|
|
|
|
2.4
(7)
|
|
Asset
Purchase Agreement dated December 2, 2004
|
|
|
|
|
|
2.5
(8)
|
|
Asset
Purchase Agreement dated December 30, 2004
|
|
|
|
|
|
3.1
(2)
|
|
Articles
of Incorporation of SKTF Enterprises, Inc.
|
|
|
|
|
|
3.2
(3)
|
|
Articles
of Amendment to Articles of Incorporation of SKTF Enterprises,
Inc.
|
|
|
|
|
|
3.3
(2)
|
|
Bylaws
of SKTF Enterprises, Inc.
|
|
|
|
|
|
4.1
(4)
|
|
Certificate
of Designation of Series A Convertible Preferred Stock
|
|
|
|
|
|
4.2
(9)
|
|
Certificate
of Designation of Series B Convertible Preferred Stock
|
|
|
|
|
|
10.1
(9)
|
|
Common
Stock Purchase Warrant “A” issued to Barron Partners dated June 30,
2005
|
|
|
|
|
|
10.2
(9)
|
|
Common
Stock Purchase Warrant “B” issued to Barron Partners dated June 30,
2005
|
|
|
|
|
|
10.3
(9)
|
|
Common
Stock Purchase Warrant issued to Prospect Financial Advisors, LLC
dated
June 30, 2005
|
|
|
|
|
|
10.4
(9)
|
|
Stock
Purchase Agreement dated June 30, 2005 for the acquisition of Mr.
Sticker,
Inc.
|
|
|
|
|
|
10.5
(9)
|
|
Preferred
Stock Purchase Agreement with Barron Partners LP dated June 30,
2005
|
|
|
|
|
|
10.6
(9)
|
|
Registration
Rights Agreement dated June 30, 2005
|
|
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
32.1
|
|
Chief
Executive Officer Certification Pursuant to 18 USC, Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.2
|
|
Chief
Financial Officer Certification Pursuant to 18 USC, Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(1)
|
Incorporated
by reference from our Current Report on Form 8-K dated June 16, 2003
and
filed with the Commission on June 17,
2003.
|
|
(2)
|
Incorporated
by reference from our Pre-Effective Registration Statement on Form
SB-2
dated and filed with the Commission on August 30,
2001.
|
|
(3)
|
Incorporated
by reference from our Current Report on Form 8-K dated August 29,
2003 and
filed with the Commission on September 2,
2003.
|
|
(4)
|
Incorporated
by reference from our Current Report on Form 8-K dated January 26,
2004
and filed with the Commission on January 29,
2004.
|
|
(5)
|
Incorporated
by reference from our Current Report on Form 8-K dated and filed
with the
Commission on February 3, 2004.
|
|
(6)
|
Incorporated
by reference from our Current Report on Form 8-K dated February 4,
2004
and filed with the Commission on February 5,
2004.
|
|
(7)
|
Incorporated
by reference from our Current Report on Form 8-K dated December 7,
2004
and filed with the Commission on December 8,
2004.
|
|
(8)
|
Incorporated
by reference from our Current Report on Form 8-K dated January 3,
2005 and
filed with the Commission on January 7,
2005.
|
|
(9)
|
Incorporated
by reference from our Current Report on Form 8-K dated July 6, 2005
and
filed with the Commission on July 7,
2005.
|
(b) Reports
on Form 8-K
On
April
18, 2005, we filed an Item 3.02 Current Report on Form 8-K regarding the
issuance of unregistered securities.
On
April
25, 2005, we filed an Item 5.02 Current Report on Form 8-K regarding the
resignation of our Chief Financial Officer and the appointment of his
replacement.
On
June
2, 2005, we filed an Item 5.02 Current Report on Form 8-K regarding the
appointment of a director.
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. |
|
|
|
Dated: August
11, 2005 |
By: |
/s/:
Richard A. Parlontieri |
|
|
|
Richard
A. Parlontieri, President |
|
|
|
|
|
|
|
|
|
By: |
/s/:
Larry Cobb |
|
|
|
Larry
Cobb, Chief Financial Officer |