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Speedemissions Revising Its Business Model

In the face of recurring net losses that have caused an accumulated deficit exceeding $20 million, Speedemissions Inc. is branching out into the wider service market.

The Atlanta-based vehicle emissions testing and safety inspections company in May announced a new business model, called SpeedEmissions Car Care Stores, that’s focused on being a provider of basic automotive services and products. The idea is to use its emission customer base as a foundation to provide an array of basic services and products to its customers, including tune-ups, brake repair and air-conditioning work.

Management also wants to more rapidly expand its presence throughout the 22 states where decentralized vehicle emission testing is mandated by the U.S. EPA. The company currently does business in the Atlanta, Houston, St. Louis and Salt Lake City markets.

For some time now, Speedemissions has been working on new initiatives to combat increased competition in the emissions-testing and inspection business following new laws in some of its markets. This includes the summer 2012 launch of a franchising program and the debut of a pilot repair program in the fall.

The company also has stepped up the sale of products such as windshield wipers and light bulbs.

As we previously stated, Speedemissions has experienced recurring net losses that have caused an accumulated deficit exceeding $20 million as of March 31, 2013. Additionally, the company had a working capital deficit of nearly $1.52 million on March 31, 2013 — up from a working capital deficit of $1.30 million at year-end 2012.

Revenue from 2012 and the first three months of 2013 have been insufficient to attain profitable operations and to provide adequate levels of cash flow from operations.

According to a filing with the SEC, the company’s near-term liquidity and ability to continue as a going concern is dependent on its ability to generate sufficient revenue from store operations to provide sufficient cash flow from operations to pay its current level of operating expenses, to provide for inventory purchases, and to reduce past-due amounts owed to vendors and service providers.

“No assurances can 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,” states Speedemissions’ May 14 filing with the SEC. “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.”

Hence the new business model. But, before we can understand the new model, we must first focus on the old one.

Over the past 12 years, Speedemissions has honed its “test only” model for emission testing and safety inspections. During this time, the primary focus was to perform the vehicle inspection and not up-sell customers on other automotive products and services. However, management now believes that remaking the company into more of a complete auto service provider will allow it to grow its business and to potentially move into new markets and to accelerate franchise sales.

Rich Parlontieri, president and CEO, said management has been studying this modification of Speedemissions’ business model for some time.

“In an industry where the American consumer is now holding a car for 11-plus years and where nearly 86 percent of light automotive vehicles are outside the manufacturers’ warranty, we believe offering a number of different automotive services to our customers is a logical move for us to make — now and for the long term,” Parlontieri explained. “We believe this transition to emission repair, tune-up, brake repair, air-conditioning, diagnostics, and other automotive services and products will hopefully result in a higher per-customer ticket average, thereby increasing both revenue and income.”

Parlontieri added that a move to remodel four to six of the company’s current stores and build new stores will enhance the growth of the SpeedEmissions Car Care franchise unit.

As of March 31, the company operated 41 vehicle emissions testing and safety inspection stations under the trade names Speedemissions and Auto Emissions Express (Atlanta, Georgia and St. Louis), Mr. Sticker (Houston) and Just Emissions (Salt Lake City). The company also operate four mobile testing units in the Atlanta area that service automotive dealerships and local government agencies.

Speedemissions’ revenues for the first quarter of 2013 — as well as the 2012 fiscal year — were below management’s expectations and internal forecasts, primarily as a result of fewer vehicle emissions tests and safety inspections being performed at its stores.

Revenue decreased $31,992 (or 1.7 percent) to $1.89 million for the quarter ended March 31, 2013, primarily because of a 5.7-percent drop in same-store revenue that was tied to a promotional discount program. This was mitigated by revenue from five stores acquired in November 2012, less the revenue lost from two stores closed in December 2012.

Speedemissions’ first-quarter net loss widened from $116,782 to $270,772 year-over-year because of sales discounts, increases in store operations and interest expense.

Speaking about the first-quarter 2013 results, Parlontieri said: “As we reviewed our Q1 operations, there were several encouraging signs that the business has stabilized with increases in customers in our Atlanta and St. Louis stores. It appears the number of new competitors has leveled off. We have continued to effectively reduce expenses without impeding our 95-percent customer satisfaction rating.”

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