Amortization expense on finite lived intangible assets for the three months ended March 31,September 30, 2015 and 2014 was $1.7$1.6 and $1.9 million, respectively, and for the nine months ended September 30, 2015 and 2014 was $4.9 million and $2.0$5.0 million, respectively.
| | September 30, | | | December 31, | |
| | 2015 | | | 2014 | |
Finished goods | | $ | 10,308 | | | $ | 12,286 | |
Raw materials | | | 2,383 | | | | 2,780 | |
Work in process | | | 470 | | | | 360 | |
Total | | $ | 13,161 | | | $ | 15,426 | |
| | March 31, | | | December 31, | |
| | 2015 | | | 2014 | |
Finished goods | | $ | 10,460 | | | $ | 12,286 | |
Raw materials | | | 2,286 | | | | 2,780 | |
Work in process | | | 370 | | | | 360 | |
Total | | $ | 13,116 | | | $ | 15,426 | |
NOTE 5 — EQUITY
On May 15, 2014, the Reverse Stock Splitreverse stock split of the Company’s issued and outstanding common stock at a ratio of one-for-ten was approved by the Company’s stockholders.stockholders (the "Reverse Stock Split"). The Reverse Stock Split became effective June 3, 2014, pursuant to a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the State of Delaware. The Company is authorized in its Amended and Restated Certificate of Incorporation to issue up to a total of 600,000,000 shares of common stock at a par value of $.001 per share and 10,000,000 shares of preferred stock at a par value of $.001 per share. The Company’s common stock continues to trade on the Nasdaq Capital Market under the symbol SWSH under a new CUSIP number. In the Condensed Consolidated Balance Sheets, the Equity section has been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing the line item Common stock and increasing the line item Additional paid-in capital, with no change to Equity in the aggregate.
Changes in equity for the threenine months ended March 31,September 30, 2015 consisted of the following:
Balance at December 31, 2014 | | $ | 81,290 | |
Stock based compensation | | | 305 | |
Payments to cover RSU's | | | (5 | ) |
Net loss | | | (48,301 | ) |
Balance at September 30, 2015 | | $ | 33,289 | |
Balance at December 31, 2014 | | $ | 81,290 | |
Stock based compensation | | | 109 | |
Foreign currency translation adjustment | | | (26 | ) |
Net loss | | | (8,831 | ) |
Balance at March 31, 2015 | | $ | 72,542 | |
Comprehensive Loss
A summary of the changes in the components of accumulated other comprehensive loss for the threenine months ended March 31,September 30, 2015 is provided below:
| | Foreign Currency Translation Adjustment | | | Employee Benefit Plan Adjustment, Net of Tax | | | Accumulated Other Comprehensive Loss | |
Balance at December 31, 2014 | | $ | (125 | ) | | $ | (1,182 | ) | | $ | (1,307 | ) |
Current period other comprehensive loss | | | (26 | ) | | | - | | | | (26 | ) |
Balance at March 31, 2015 | | $ | (151 | ) | | $ | (1,182 | ) | | $ | (1,333 | ) |
| | Foreign Currency Translation Adjustment | | | Employee Benefit Plan Adjustment, Net of Tax | | | Accumulated Other Comprehensive Loss | |
Balance at December 31, 2014 | | $ | (125 | ) | | $ | (1,182 | ) | | $ | (1,307 | ) |
Current period other comprehensive income | | | - | | | | - | | | | - | |
Balance at September 30, 2015 | | $ | (125 | ) | | $ | (1,182 | ) | | $ | (1,307 | ) |
NOTE 6 — LONG-TERM DEBT AND OTHER OBLIGATIONS
Short-term Debt
On August 29, 2014, the Company entered into a $20.0 million revolving credit facility, through the execution of a Loan and Security Agreement, by and among the Company, as Guarantor, and certain subsidiaries of the Company and collectively, as Borrower, and Siena Lending Group LLC, as Lender (the “Credit Facility”). The Credit Facility matures on August 29, 2017.
Interest on borrowings under the Credit Facility will accrue at the Base Rate plus 2.00% and will be payable monthly. Base Rate is defined as the greater of (1) the Prime Rate, (2) the Federal Funds Rate plus 0.50%, or (3) 3.25%.
Borrowings and availability under the Credit Facility are subject to a borrowing base and limitations, and compliance with other terms specified in the agreement. Borrowings under the Credit Facility are secured by a first priority lien on certain of the Company’s and its subsidiaries’ assets. The calculated borrowing base as of September 30, 2015 was $10.2 million, of which $4.1 million was outstanding under letters of credit, $3.7 million was outstanding under borrowings and $2.5 million was unused.
The Credit Facility contains certain customary representations and warranties, and certain customary covenants on the Company’s ability to, among other things, incur additional indebtedness, create liens or other encumbrances, sell or otherwise dispose of assets, and merge or consolidate with other entities or enter into a change of control transaction. The Credit Facility contains various events of default and certain cash management and reporting requirements. The Company has met all required covenants under the Credit Facility as of September 30, 2015.
| | March 31, | | | December 31, | |
| | 2015 | | | 2014 | |
Notes payable | | $ | 1,125 | | | $ | 1,193 | |
Convertible promissory notes, 4.0%: maturing at various dates through 2016 | | | 624 | | | | 832 | |
Capitalized lease obligations and other financing | | | 1,945 | | | | 1,044 | |
Total debt and obligations | | | 3,694 | | | | 3,069 | |
Long-term debt and obligations due within one year | | | (2,623 | ) | | | (1,884 | ) |
Long-term debt and obligations | | $ | 1,071 | | | $ | 1,185 | |
Long-term Debt
| | September 30, | | | December 31, | |
| | 2015 | | | 2014 | |
Notes payable | | $ | 990 | | | $ | 1,193 | |
Convertible promissory notes, 4.0%: maturing at various dates through 2016 | | | 346 | | | | 832 | |
Capitalized lease obligations and other financing | | | 448 | | | | 1,044 | |
Total debt and obligations | | | 1,784 | | | | 3,069 | |
| | | | | | | | |
Long-term debt and obligations due within one year from continuing operations | | $ | 616 | | | $ | 1,790 | |
| | | | | | | | |
Long-term debt and obligations due within one year from discontinued operations | | $ | 370 | | | $ | 94 | |
| | | | | | | | |
Long-term debt and obligations from continuing operations | | $ | 720 | | | $ | 1,077 | |
| | | | | | | | |
Long-term debt and obligations from discontinued operations | | $ | 78 | | | $ | 108 | |
Interest on notes payable range between 3.6%is 3.7% and 4.0% andsuch notes mature at various dates throughin 2019. At the Company’s election, the Company may settle, at any time prior to and including the maturity date, any portion of the outstanding convertible promissory notes’ principal balance of $0.6$0.3 million, plus accrued interest, in a combination of cash and shares of common stock. To the extent that the Company’s common stock is part of such settlement, the settlement price is the most recent closing price of the Company’s common stock on the trading day prior to the date of settlement. Although none of these notes have been settled to date with shares, if all notes outstanding at March 31,September 30, 2015 were to be settled with shares the Company would issue 337,278329,832 shares of common stock based on the per share value at March 31, 2015.
On August 29, 2014, the Company entered into a $20.0 million revolving credit facility, through the execution of a Loan and Security Agreement, by and among the Company, as Guarantor, and certain subsidiaries of the Company and collectively, as Borrower, and Siena Lending Group LLC, as Lender (the “Credit Facility”). The Credit Facility matures on August 29, 2017.
Interest on borrowings under the Credit Facility will accrue at the Base Rate plus 2.00% and will be payable monthly. Base Rate is defined as the greater of (1) the Prime Rate, (2) the Federal Funds Rate plus 0.50%, or (3) 3.25%.
Borrowings and availability under the Credit Facility are subject to a borrowing base and limitations, and compliance with other terms specified in the agreement. Borrowings under the Credit Facility are secured by a first priority lien on certain of the Company’s and its subsidiaries’ assets. The calculated borrowing base as of March 31, 2015 was $12.3 million, of which $4.1 million was outstanding under letters of credit, $3.2 million was outstanding under borrowings and $5.0 million was unused.
The Credit Facility contains certain customary representations and warranties, and certain customary covenants on the Company’s ability to, among other things, incur additional indebtedness, create liens or other encumbrances, sell or otherwise dispose of assets, and merge or consolidate with other entities or enter into a change of control transaction. The Credit Facility contains various events of default. The Company has met all required covenants under the Credit Facility as of March 31, 2015.
The Company entered into a letter agreement, dated as of March 25, 2015, as amended (“Letter Agreement”), with its Lender in respect of the occurrence of a Springing DACA Event, as such term is defined in the Loan and Security Agreement dated as of August 29, 2014, among the Company, certain of the Company’s subsidiaries, and its Lender. The Lender temporarily waived certain cash management requirements and certain expanded reporting requirements that would otherwise go into effect upon occurrence of a Springing DACA Event until May 12,September 30, 2015.
The Company has entered into capitalized lease obligations with third party finance companies to finance the cost of certain equipment. At MarchAs of September 30, 2015, and December 31, 2015,2014, these obligations bore interest at rates ranging between 4.0% and 18.4%, and at December 31, 2014, interest ranged between 4.0% and 18.4%.are part of liabilities held for sale.
The fair value of the Company's debt is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and maturities, and approximates the carrying value of these liabilities.
The details of other long-term liabilities are:
| | September 30, 2015 | | | December 31, 2014 | |
CoolBrands defined benefit pension plan | | $ | 1,447 | | | $ | 1,487 | |
Honeycrest Holdings, Ltd. litigation reserve | | | 1,667 | | | | 1,667 | |
Other | | | 162 | | | | 187 | |
| | $ | 3,276 | | | $ | 3,341 | |
NOTE 7 — OTHER INCOME (EXPENSE), NET
| | Three Months Ended | |
| | March 31, | |
| | 2015 | | | 2014 | |
Interest income | | $ | - | | | $ | 4 | |
Interest expense | | | (95 | ) | | | (78 | ) |
Foreign currency | | | (71 | ) | | | (15 | ) |
Other | | | 280 | | | | (628 | ) |
Total other income (expense), net | | $ | 114 | | | $ | (717 | ) |
Other income (expense) for the three and nine months ended September 30, 2015 and 2014 included in continuing operations are as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Interest expense | | $ | (83 | ) | | $ | (33 | ) | | $ | (170 | ) | | $ | (106 | ) |
Other | | | (2,000 | ) | | | - | | | | (2,000 | ) | | | - | |
Total other income (expense), net | | $ | (2,083 | ) | | $ | (33 | ) | | $ | (2,170 | ) | | $ | (106 | ) |
Other expense consists of the $2.0 million fine paid to the United States of America, pursuant to the terms of a Deferred Prosecution Agreement between the Company and the United States Attorney's Office for the Western District of North Carolina ("USAO") as described in Note 12 under "Other Matters."
Other income (expense) for the three and nine months ended September 30, 2015 and 2014 included in discontinued operations are as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Interest income | | $ | - | | | $ | 1 | | | $ | - | | | $ | 8 | |
Interest expense | | | (53 | ) | | | (46 | ) | | | (163 | ) | | | (196 | ) |
Foreign currency | | | (448 | ) | | | (4 | ) | | | (619 | ) | | | (104 | ) |
Other | | | 1,276 | | | | (136 | ) | | | 2,114 | | | | (1,038 | ) |
Total other income (expense), net | | $ | 775 | | | $ | (185 | ) | | $ | 1,332 | | | $ | (1,330 | ) |
As described in Note 2, “Discontinued Operations and Assets Held for Sale”, “Other” for the three and nine months ended March 31,September 30, 2015, primarily consists of a $0.3$1.2 and $2.1 million gain related to the sale of equipment of a closed operation,sold operations, and for the three and nine months ended March 31,September 30, 2014, primarily represents a $0.6$0.1 million and $1.0 million loss related to the sale of assets held for sale.
NOTE 8 — SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental cash flow information for the nine months ended September 30, 2015 and 2014, including continuing and discontinued operations as follows:
| | Three Months Ended March 31, | |
| | 2015 | | | 2014 | |
Cash paid for income taxes | | $ | - | | | $ | 20 | |
| | | | | | | | |
Cash paid for interest | | $ | 95 | | | $ | 78 | |
| | | | | | | | |
Cash received from interest | | $ | - | | | $ | 5 | |
| | Nine Months Ended September 30, | |
| | 2015 | | | 2014 | |
Cash paid for income taxes | | $ | 5 | | | $ | 93 | |
| | | | | | | | |
Cash paid for interest | | $ | 344 | | | $ | 302 | |
| | | | | | | | |
Cash received from interest | | $ | - | | | $ | 8 | |
NOTE 9 — LOSS PER SHARE
Basic net loss attributable to common stockholders per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Shares of common stock underlying outstanding stock options of which the market price of the common stock is higher than the exercise price of the related stock awards and unvested restricted stock units of 6,6030 and 19,857 were not included in the computation of diluted loss per share for the threenine months ended March 31,September 30, 2015 since their inclusion would be anti-dilutive.
Shares of common stock underlying outstanding stock options of which the market price of the common stock is higher than the exercise price of the related stock awards and unvested restricted stock units of 32,480 were not included in the computation of diluted loss per share for the three months ended March 31, 2014, respectively, since their inclusion would be anti-dilutive.
NOTE 10 — INCOME TAXES
In projecting the Company’s income tax expense for 2015, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2015. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended March 31,September 30, 2015.
For the three months and nine months ended March 31,September 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded in the first quarterand second quarters of 2015 included the accrual of income tax expense related to an additional valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a “naked credit”). Specifically, the Company does not consider the deferred tax liabilities related to indefinite lived intangible assets when determining the need for a valuation allowance.
For the year ended December 31, 2014, there was a deferred tax liability associated with excess book over tax tradenames as it relates to the U.S. subsidiary of the Company. As tradenames are considered to be an indefinite lived intangibles, this associated deferred tax liability is not allowed to be netted with other deferred tax assets in determining the need for a valuation allowance. This resulted in an overall net deferred tax liability after applying the valuation allowance.
Due to the impairment of tradenames for book purposes in the third quarter of 2015, a deferred tax asset now exists related to tradenames for the U.S. subsidiary. Given the change from 2014 to 2015 from a deferred tax liability to a deferred tax asset, a tax benefit for 2015 was recognized.
NOTE 11— RELATED PARTY TRANSACTIONS
The Company paid fees for training course development and utilization of the delivery platform from a company, the majority of which is owned by a partnership in which a significant shareholder, former director and three former executives of the Company have a controlling interest. Fees paid during the three and nine months ended March 31,September 30, 2015 and 2014 were less than $0.1 million, respectively.million.
As discussed further below in Note 12, “Commitments and Contingencies,” the Company entered into a Manufacturing and Supply Agreement (the “Cavalier Agreement”) with a plant in connection with its acquisition of Sanolite in July 2011. The Cavalier Agreement was terminated in September 2014, pursuant to the terms of the agreement. In connection with the acquisition in 2011, two of the owners of both Sanolite and the manufacturing plant became Company employees. There were no purchases, pursuant to the Cavalier Agreement, for the three and nine months ended March 31,September 30, 2015 and $1.5$1.8 million at March 31, 2014.and $4.9 million for the three and nine months ending September 30, 2014, respectively. At March 31,September 30, 2015, there were no balances included in accounts payable due to this entity, and at December 31, 2014, the Company had less than $0.1 million and $0.3 million included in accounts payable due to this entity, respectively.entity. As described below,in Note 12, the transactions pursuant to the Cavalier Agreement were considered to be conducted at the going market prices for such products.
The Company is obligated to make lease payments pursuant to certain real property and equipment lease agreements with employees that were former owners of acquired companies. Such lease payments made during the three months ended March 31,September 30, 2015 and 2014 were $0.2 million.million and $0.2 million, respectively, and for the nine months ended September 30, 2015 and 2014 were $0.5 million and $0.7 million, respectively.
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Guarantees
In connection with a distribution agreement entered into in December 2010, the Company provided a guarantee that the distributor'sdistributor’s operating cash flows associated with the agreement would not fall below certain agreed-to minimums, subject to certain pre-defined conditions, over the ten year term of the distribution agreement. If the distributor'sdistributor’s annual operating cash flow does fall below the agreed-to annual minimums, the Company will reimburse the distributor for any such short fall up to a pre-designated amount. No value was assigned to the fair value of the guarantee at March 31,September 30, 2015 and December 31, 2014, based on a probability assessment of the projected cash flows. Management currently does not believe that it is probable that any amounts will be paid under this agreement and thus there is no amount accrued for the guarantee in the Condensed Consolidated Financial Statements. This liability would be considered a Level 3 financial instrument given the unobservable inputs used in the projected cash flow model. Upon closing of the sales transaction completed on November 2, 2015, the Company no longer has this liability.
As discussed above in Note 11, “Related Party Transactions,” the Company entered into the Cavalier Agreement. The agreement, which was scheduled to expire on December 31, 2012, was extended for an additional two year period with an automatic 18-month renewal term and a six month termination provision. The agreement provides for pricing adjustments, up or down, on the first of each month based on the vendor'svendor’s actual average product costs incurred during the prior month. Additional product payments made by the Company due to the vendors pricing adjustment as a result of this agreement have not been significant and have not represented costs materially above the going market price for such product. The Cavalier Agreement was terminated in September 2014 pursuant to the terms of the agreement.
LEGAL MATTERS
We may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations. However, the results of these matters cannot be predicted with certainty and no assurance can be given that the ultimate resolution of any legal or administrative proceedings or disputes will not have a material adverse effect on our business, financial condition and results of operations.
Securities Litigation
On May 21, 2012, a stockholder derivative action was brought against the Company's former CEO and former CFO and the Company's then directors for alleged breaches of fiduciary duty by a purported Company stockholder in the United States District Court for the Southern District of New York. In this derivative action, captioned Arsenault v. Berrard, et al., 1:12-cv-4028, the plaintiff seeks to recover for the Company damages arising out of the Company's March 28, 2012 announcement regarding the Board of Director’sDirector's conclusion that the Company's previously issued interim financial statements for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011, and the other financial information in the Company's quarterly reports on Form 10-Q for the periods then ended, should no longer be relied upon and that an internal review by the Company's Audit Committee primarily relating to possible adjustments to the Company's financial statements was ongoing.
On August 13, 2012, the Arsenault derivative action, along with othera related putative securities class actionsaction pending in the Southern District of New York, was transferred to the United States District Court for the Western District of North Carolina where other related putative securities class actions.actions were pending. All actionactions were consolidated under the caption InIn re Swisher Hygiene, Inc. Securities and Derivative Litigation, MDL No. 2384. On August 21, 2012, the Western District of North Carolina issued an order governing the practice and procedure in the actions transferred to the Western District of North Carolina as well as the actions originally filed there. On October 18, 2012, the Western District of North Carolina held an Initial Pretrial Conference at which it appointed lead counsel and lead plaintiffs for the securities class actions, and set a schedule for the filing of a consolidated class action complaint and defendants' time to answer or otherwise respond to the consolidated class action complaint. The Western District of North Carolina stayed the Arsenault derivative action, pending the outcome of the securities class actions.
On August 6, 2014, following a hearing, the Western District of North Carolina approved a settlement of the securities class actions, and issued an Order and Final Judgment that, among other things, dismissed the securities class actions pending in the United States with prejudice and provided for full and complete releases to defendants. The Arsenault derivative action is still pending.
On June 11, 2013, an individual action was filed in the United States.States District Court for the Southern District of Florida captioned Miller, et al. v. Swisher Hygiene, Inc., et al., No. 0:13-CV-61292-JAL, against the Company, its former CEO and former CFO, and a former Company director, bringing state and federal claims founded on the allegations that in deciding to sell their company to the Company, plaintiffs relied on defendants' statements about such things as the Company's accounting and internal controls, which, in light of the Company’sCompany's restatement of its financial statements, were false. On July 17, 2013, the Company notified the United States Judicial Panel on Multidistrict Litigation ("MDL Panel") of this action, and requested that it be transferred and centralized in the Western District of North Carolina with the other actions pending there. On July 23, 2013, the MDL Panel issued a Conditional Transfer Order (the "Miller CTO"), conditionally transferring the case to the Western District of North Carolina. On July 29, 2013, plaintiffs notified the MDL Panel that they would seek to vacate the Miller CTO. In light of the proceedings in the MDL Panel, defendants requested that the Southern District of Florida stay all proceedings pending the MDL Panel's ruling. On August 6, 2013, the Southern District of Florida issued a stay of all proceedings pending a ruling by the MDL Panel. On October 2, 2013, following briefing on the issue of whether the Miller CTO should be vacated, the MDL Panel issued an order transferring the action to the Western District of North Carolina. The Company and the individual defendants filed motions to dismiss the complaint on March 20, 2014. Briefing on the motions to dismiss was completed on May 12, 2014. On June 2, 2014, plaintiffs filed a motion with the Western District of North Carolina seeking a suggestion for remand from that Courtcourt to the MDL Panel. Briefing on that motion was completed on June 26, 2014. Oral argument on the motions to dismiss and motion for suggestion for remand were heard on July 22, 2014. On August 5, 2014, the Western District of North Carolina denied plaintiffs' motion for suggestion for remand. On October 22, 2014, the Company filed a notice of supplemental authority in support of its motion to dismiss the complaint in this action.complaint. On November 4, 2014, plaintiffs filed a response to the notice of supplemental authority. On July 8, 2015, the Western District of North Carolina ruled on the motions to dismiss. The Western District of North Carolina dismissed plaintiffs' federal securities claims and certain of their state law claims. All claims against the former CFO were dismissed. After issuing its ruling, the Western District of North Carolina recommended by letter to the MDL Panel that the action be transferred back to the Southern District of Florida. On July 16, 2015, the Western District of North Carolina issued an order staying all proceedings in the action pending a determination by the MDL Panel on its recommendation. Thereafter, the MDL Panel issued a Conditional Remand Order, remanding the action to the Southern District of Florida, which was finalized and filed on July 28, 2015. On September 4, 2015, as requested by the Southern District of Florida, the parties submitted a Joint Status Report. On September 9, 2015, the Southern District of Florida issued an Order to Show Cause as to why the remaining state law claims should not be dismissed without prejudice pursuant to 28 U.S.C. § 1367(c)(3). On September 18, 2015, the parties filed their respective responses to the Order to Show Cause. On September 21, 2015, the Southern District of Florida issued an order dismissing the remaining state law claims in the action without prejudice on subject matter jurisdiction grounds pursuant to 28 U.S.C. § 1367(c)(3). On November 6, 2015, the parties reached a settlement of the matter. The terms of the settlement are confidential. The Company's financial obligation under the settlement will be covered by insurance and accordingly, the terms of the settlement did not have a material effect on the Company's financial position.
On December 17, 2013,September 8, 2015, a purported stockholder commencedlawsuit seeking to be certified as a putative securities class action on behalf of purchasers of the Company's common stock on the Toronto Stock Exchange or any other Canadian trading platforms in the Ontario Superior Court of Justice, captioned Edwards(Paul Berger v. Swisher Hygiene Inc., et al., CV 13-20282 CP, againstCase No. 2015 CH 13325 (Ill. Cir. Ct. Cook Co.)) was filed in the Company, the former CEO and former CFO. The action alleges claims under Canadian law for alleged misrepresentationsCircuit Court of the Company's financial position relating to its business acquisitions. On February 13, 2014, a Fresh Statement of Claim and Fresh Notice of Action were filed, adding an additional named plaintiff. On March 28, 2014, another purported stockholder commenced a putative securities class actionCook County, Illinois County Department, Chancery Division by Paul Berger, on behalf of purchasershimself and all others similarly situated, against Swisher Hygiene Inc., the members of Swisher Hygiene Inc.’s board of directors, individually, and Ecolab in connection with the Sale Transaction. The plaintiff has alleged that (i) faced with an ongoing investigation by the Securities and Exchange Commission and the USAO, the individual defendants embarked upon a self-interested scheme to sell off Swisher International, Inc.’s assets and to liquidate Swisher Hygiene Inc., (ii) the individual defendants, through an alleged insufficient process, caused Swisher Hygiene Inc. to agree to sell substantially all of its assets for insufficient consideration, (iii) each member of Swisher Hygiene Inc’s. Board of Directors is interested in the Sale Transaction and the plan of dissolution, and (iv) the proxy statement was materially misleading and/or incomplete. The causes of action set forth in the complaint are (i) a claim for breaches of the Company's common stock onfiduciary duties of good faith, loyalty, fair dealing and due care, (ii) a claim for failure to disclose, and (iii) a claim for aiding and abetting breaches of fiduciary duty. The plaintiff primarily seeks to enjoin the Toronto Stock Exchange or any other Canadian trading platformsconsummation of the Sale Transaction unless and until defendants provide all material facts in the Ontario Superiorproxy statement, and the plaintiff also seeks compensatory and/or rescissory damages as allowed by law for the plaintiff. This summary is qualified by reference to the full text of the complaint as filed with the Court. The Company believes the claims alleged by the plaintiff are without merit and it intends to vigorously defend against them.
On September 11, 2015, a derivative lawsuit (Malka Raul v. Swisher Hygiene Inc. et al., Case No. 15-CVS-16703 (Superior Court, Mecklenburg County, North Carolina)) seeking to be certified as a class was filed in the General Court of Justice, captioned Phillips v.Superior Court Division, Mecklenburg County, North Carolina by Malka Raul, derivatively on behalf of Swisher Hygiene Inc., et al.and individually and on behalf of all others similarly situated, against Swisher Hygiene Inc., CV 14-00501096-0000,the members of Swisher Hygiene Inc’s board of directors, individually, and Ecolab in connection with the Sale Transaction. The plaintiff has alleged that (i) the sale of Swisher International, Inc. to Ecolab contemplated by the purchase agreement is unfair and inequitable to the Swisher Hygiene Inc’s stockholders and constitutes a breach of the fiduciary duties of the directors in the sale of Swisher International, Inc. (ii) defendants have exacerbated their breaches of fiduciary duty by agreeing to lock up the Sale Transaction with deal protection devices that preclude other bidders from making a successful competing offer for Swisher International, Inc. and preclude stockholders from voting against the Company,Sale Transaction, (iii) the former CEO,Sale Transaction will divest the former CFOSwisher Hygiene Inc’s stockholders of their ownership interest in Swisher International, Inc. for inadequate consideration; (iv) each of the defendants violated and continues to violate applicable law by directly breaching and/or aiding and abetting the defendants’ breaches of fiduciary duties of loyalty, due care, independence, good faith and fair dealings, (v) the Sale Transaction is the product of a flawed process that was designed to sell Swisher International, Inc. to Ecolab on terms detrimental to plaintiff and the Company's former Senior Vice Presidentother Swisher Hygiene Inc’s stockholders, (vi) the proxy statement fails to provide Swisher Hygiene Inc’s stockholders with material information and/or provides them with materially misleading information and Treasurer.(vii) the proxy statement fails to provide Swisher Hygiene Inc.’s stockholders with all material information concerning the financial analysis of Cassel Salpeter & Co., LLC. The causes of action alleges claims under Canadian law stemmingset forth in the complaint are (i) a claim for breach of fiduciary duty against the individual defendants, (ii) a claim for aiding and abetting breaches of fiduciary duty against Ecolab, (iii) a derivative claim for breach of fiduciary duties against the individual defendants, and (iv) a derivative claim for unjust enrichment against the individual defendants. The plaintiff primarily seeks to (i) enjoin defendants from consummating the Company's restatement.
AlthoughSale Transaction unless and until the Company believed it had meritorious defensesindividual defendants adopt and implement a fair procedure or process to sell Swisher International, Inc. (ii) direct the individual defendants to exercise their fiduciary duties to obtain a transaction which is in the best interests of Swisher Hygiene Inc. and its stockholders and (iii) rescinding, to the assertedextent already implemented, the purchase agreement or any of the terms thereof. The plaintiff also seeks costs and disbursements, including reasonable attorneys’ and experts fees, and such other equitable and/or injunctive relief as the Court may deem just and proper. This summary is qualified by reference to the full text of the complaint as filed with the Court. The Company believes the claims in the two securities class actions pending in Canada, the defendants agreed to terms of settlement and executed a settlement agreement resolving all claims in both securities class actions pending there, which was approvedalleged by the Ontario Superior Court of Justice by Order dated February 13, 2015 (the "Canadian Settlement"). The Canadian Settlement provides that defendants will make a set cash payment totaling $0.7 million, including legal fees, all from insurance proceeds,plaintiff are without merit and it intends to settle all of the Canadian securities class actions, with full and complete releases provided to the defendants. Notice has been given of the Canadian Settlement.vigorously defend against them.
Other Matters
On October 7, 2015, the Company entered into a Deferred Prosecution Agreement (the “DPA”) with the USAO relating to the USAO’s investigation of the Company’s accounting practices. Under the terms of the DPA, the USAO filed, but deferred prosecution of, a criminal information charging Swisher Hygiene Inc. with conspiracy to commit securities fraud and other charges relating to the Company’s accounting and financial reporting practices reflected in the Company's originally filed Quarterly Reports on Form 10-Q for the periods ended March 31, 2011, June 30, 2011, and September 30, 2011. Pursuant to the DPA, the Company agreed to pay a $2 million fine to the USAO payable in four annual installments of $500,000 each if the Company is financially able to do so. Pursuant to the terms of the DPA, the fine became immediately due and payable in full on November 2, 2015 upon a change in control of the Company. As a result, the fine was paid in full upon the closing of the Sale Transaction, and was accrued at September 30, 2015 in other expenses.
The Company has been contacted by the staff of the Atlanta Regional Office of the SEC and by the United States Attorney's Office for the Western District of North Carolina (the "U.S. Attorney's Office") after the Company's March 28, 2012 public announcement of the Audit Committee's internal review and the delays in filing its periodic reports. The Company has been asked to make certain individuals available and to provide certain information about these matters to the SEC and the U.S. Attorney's Office.SEC. The Company is fully cooperating with the SEC and the U.S. Attorney's Office.SEC. Any action by the SEC the U.S. Attorney's Office or other government agency could result in fines and/or criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees.
NOTE 13 — SUBSEQUENT EVENTS
On November 2, 2015, the Company completed the Sale Transaction. At closing, Ecolab paid the closing purchase price of approximately $40.5 million, less a $2 million holdback to address working capital and other adjustments in accordance with the agreement governing the Sale Transaction (the “Agreement”). The closing purchase price proceeds received by the Company were reduced to pay (i) a $2.0 million fine pursuant to the terms of the DPA; (ii) indebtedness of the Company of approximately $5.7 million; (iii) a deposit securing letters of credit of approximately $1.6 million; (iv) certain transaction fees of approximately $1.2 million; and (v) other accrued and post-closing obligations that survived the transaction. Following the closing of the Sale Transaction, the Company will use the remaining balance of proceeds from the Sale Transaction to pay ongoing corporate and administrative costs and expenses associated with winding down the Company, should the Board of Directors decide to proceed with the Plan of Dissolution, liabilities and potential liabilities relating to or arising out of pension plan obligations to employees of its predecessor, outstanding litigation matters of the Company, including but not limited to pending stockholder litigation related to the Sale Transaction, and potential liabilities relating to the Company's indemnification obligations, if any, to Ecolab pursuant to the Agreement, or to current and former officers and directors pursuant to the Company's bylaws and certificate of incorporation (collectively, the "On-going Obligations"). As a result of the On-going Obligations, if the Board of Directors determines to proceed with the Plan of Dissolution and Complete Liquidation, which plan was approved by the Company's stockholders at its Annual Meeting on October 15, 2015, the Company believes the value of its remaining assets that will ultimately be available for distribution to stockholders, if any distribution is made, will be significantly and materially less, in the aggregate, than the proceeds received in the Sale Transaction. The Company can neither estimate nor provide any assurance regarding amounts to be distributed to stockholders if the Board of Directors proceeds with the dissolution. However, if the Board of Directors determines that the Dissolution is not in our best interests and the best interest of the shareholders, the Board of Directors may, in its sole discretion, abandon the Plan of Dissolution or may amend or modify the Plan of Dissolution to the extent permitted by Delaware law without the necessity of further stockholder approval.
As discussed in Notes 2 and 3, as a result of the Sale Transaction, the Company performed an impairment analysis of its assets in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets, and ASC 350, Intangible-Goodwill and Other, as of August 31, 2015. Based on the analysis performed, it was determined that an impairment of the Company’s fixed assets and intangible assets had occurred, resulting in an impairment charge of $12.6 million and $10.0 million, respectively, contributing to the current loss from discontinued operations. If the Company continues to incur losses at the current rate, it may result in a gain on sale which will be recorded in November 2015.
In connection with the Sale Transaction, on November 2, 2015, the Company terminated its Credit Facility with Siena Lending Group LLC and paid the outstanding indebtedness and fees under the Credit Facility of approximately $4.8 million and made a deposit securing remaining letters of credit of approximately $1.6 million.
On October 7, 2015, the Company entered into the DPA with the USAO relating to the USAO’s investigation of the Company’s accounting practices. Under the terms of the DPA, the USAO filed, but deferred prosecution of, a criminal information charging Swisher Hygiene Inc. with conspiracy to commit securities fraud and other charges relating to the Company’s accounting and financial reporting practices reflected in the Company’s originally filed Quarterly Reports on Form 10-Q for the periods ended March 31, 011, June 30, 2011, and September 30, 2011. Pursuant to the DPA, the Company agreed to pay a $2 million fine to the USAO payable in four annual installments of $500,000 each if the Company is financially able to do so. Pursuant to the terms of the DPA, the fine became immediately due and payable in full on November 2, 2015 upon a change in control of the Company. As a result, the fine was paid in full upon the closing of the Sale Transaction, and was accrued at September 30, 2015 in other expenses.
In connection with the Sale Transaction options to purchase 268,673 shares of common stock vested. All of these options have exercise prices greater than the current market price of the Company’s common stock. Also, in connection with the Sale Transaction, all restricted stock units representing the right to receive an aggregate of 80,272 shares of common stock are being cancelled and holders thereof will receive cash in lieu of shares, an aggregate of $84,286 in cash.
| MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis in conjunction with our unaudited Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of this Quarterly Report on Form 10-Q as well as our “Selected Financial Data” and our audited Consolidated Financial Statements and the related notes thereto included in Item 6 and Item 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). In addition to historical consolidated financial information, this discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Actual results could differ from these expectations as a result of certain risk factors, including those described under Item 1A, “Risk Factors,” of our 2014 Form 10-K and this Quarterly Report on Form 10-Q.
Business Overview
We currently operateDuring the nine months ended September 30, 2015 and September 30, 2014, we operated in one business segment, Hygiene, which encompassesencompassed providing essential hygiene and sanitizing service solutions to customers in a wide range of end-markets, including foodservice, hospitality, retail and healthcare industries. CertainAs described in Note 13, "Subsequent Events," on November 2, 2015, we completed the sale to Ecolab Inc. ("Ecolab") of the stock of our products are registered with the Environmental Protection Agency and follow the Center for Disease Control guidelines for disinfection of surface areas such as children’s playgrounds, hospitals, and assisted living environments. We sell consumable products such as detergents, cleaning chemicals, soap, paper, water filters and supplies, together with the rental and servicing of dish machineswholly owned U.S. subsidiary Swisher International, Inc. and other equipment for the dispensing of those products as well as additional services such as the deep cleaning and sanitizing of restrooms and other facilities. We continue to see the positive impact of cost efficiencies, capital resource management and planning, plant consolidations and route optimization efforts; however, we believe we still need to increase revenue in order to maximize our profitability. We are committedassets related to our philosophyU.S. operations, which comprised all of Service, Peopleour remaining operating interests (the "Sale Transaction"). As a result, the Company recorded an impairment charge at August 31, 2015 for $22.6 million as discussed in Note 2, "Discontinued Operations and ProfitabilityAssets Held for Sale," and to Selling Through Service. To that end,Note 3, "Goodwill and Other Intangible Assets." As a result of the Sale Transaction, we have commenced a realignmentno significant operating assets remaining and no material revenue producing business or operations. The Company’s operating companies are classified as held for sale on the balance sheet as of our field service and sales teams to better serve our customers since we believe this will ultimately drive increased revenues through improved customer retentionSeptember 30, 2015, and the ability to leverage our current customer base.results of the operating companies are presented as discontinued operations for all periods.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2014 Form 10-K, describe these significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting policies since the filing of the 2014 Form 10-K.
Newly Issued Accounting Pronouncements
In April, 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this accounting standard raiseASU raises the threshold for a disposal to qualify as a discontinued operation and require newrequires expanded disclosures of bothabout discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, expenses and certain othercash flows of discontinued operations. Under the new guidance, the disposal of a component or group of components of a business will be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Early adoption is permitted, but only for disposals that dohave not meet the definition of a discontinued operation.been reported in financial statements previously issued. This accounting standard update is effective for annual periods beginning on or after December 15, 2014 and related interim periods, with early adoption allowed. The adoption of thisThis standard did not have a material impact onhas been adopted by the Company’s consolidated financial results.Company.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is intended to clarify the principles for recognizing revenue by providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2016.2017. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.
In August 2014, the Financial Accounting Standards Board issued ASU Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. The new requirements are effective for the annual periods ending after December 15, 2016, and for interim periods and annual periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.
In July, 2015, the FASB issued Accounting Standards Update ASU No. 2015-11, Simplifying the Measurement of Inventory. This ASU applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out ("LILO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim and annual reporting period. This accounting standard update should be applied prospectively and is effective for annual periods beginning after December 15, 2016, and interim periods beginning in 2018, with early adoption allowed. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.
Discontinued Operations
As described above, on November 2, 2015, the Company completed the Sale Transaction. As a result, as described in Note 13, "Subsequent Events," the Company’s operating companies are classified as held for sale as of September 30, 2015. As a result, the Company recorded an impairment charge at August 31, 2015 for $22.6 million as discussed in Note 2, "Discontinued Operations and Assets Held for Sale," and Note 3, "Goodwill and Other Intangible Assets." Swisher Hygiene Inc. will no longer have any continuing involvement with the operations or cash flows of Swisher International, Inc., and as a result, Swisher Hygiene Inc. will present the operations of Swisher International, Inc. as discontinued operations.
In accordance with the criteria specified in ASC 205 Presentation of Financial Statements and ASC 360, Property, Plant and Equipment, the assets and liabilities sold in the Sale Transaction are reported as assets held for sale.
Assets Held for Sale
In accordance with ASC 360, Property, Plant and Equipment, these assets have been classified as assets held for sale in the Condensed Consolidated Balance Sheet and the assets were adjusted to the lower of historical carrying amount or fair value. Fair value is based on the estimated sales price, less selling costs, of the assets. Estimates of the net sales proceeds are derived using Level 3 inputs, including the Company’s estimates related to industry multiples of revenues or operating metrics, the status of ongoing sales negotiations and asset purchase agreements where available. The Company’s estimates of fair value require significant judgment and are regularly reviewed and subject to change based on market conditions, changes in the customer base of the operations or routes, and our continuing evaluation as to the facility's acceptable sale price.
During the second quarter of 2014, the Company updated its estimates of the fair value of certain linen routes and operations to reflect various events that occurred during the year.period. The cumulative impairment loss for the twelvesix months ended December 31,June 30, 2014 was $3.0 million, of which $1.9 million was attributable to a reduction in the estimate of net sale proceeds for a linen processing operation. The factors driving the $1.9 million reduction were the cancellation notifications, received from three major customers, resulting in a significant loss of forecasted revenue; and the operation’s 2014 year-to-date loss which was in excess of the Company’s estimates. The Company made the decision to close this linen processing operation and the fair value was written down to zero. During the three months ended March 31,first quarter of 2015, the Company completed the sale of equipment of this closed operation which resultedclassified as asset held for sale, resulting in the net receipt of $0.3 million in cash and a $0.3 million gain. The gain is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
During March 2015, the Board of Directors of the Company approved a resolution to sell the Company’s remaining linen operation. In accordance with ASC 360, Property, Plant and Equipment, these assets were classified as assets held for sale at March 31, 2015 and were adjusted to the lower of historical carrying amount or fair value, less costs to sell, which was $3.1 million at March 31, 2015.million. The estimated fair value was derived based on the assessment of the potential net selling price. The Company expects thatcompleted the sale of this linen operation will be soldon May 12, 2015 receiving $4.0 million in cash and notes receivable plus purchased accounts receivables, resulting in a gain of $0.9 million. The gain is included in “Other income (expense), net” in the second quarterCondensed Consolidated Statements of 2015.Operations and Comprehensive Loss.
For the three and nine months ended March 31,September 30, 2015, and 2014, linen related revenue attributable to the assets held for sale and sold linen assets was $1.6$0.0 million and $2.7$2.3 million, respectively, and $0.7 million and $3.1 million for the three and nine months ended September 30, 2014, respectively. The 2014 annual revenue was $9.6 million.million attributable to the assets held for sale and sold linen assets.
As described above, on November 2, 2015, we completed the Sale Transaction. In accordance with the criteria specified in ASC 360, Property, Plant and Equipment, the assets of Swisher International, Inc. are classified as assets held for sale, and the reconciliation of major classes of assets included as held for sale are presented in Note 2, "Discontinued Operations and Assets Held for Sale."
As a result of the Sale Transaction, the Company performed an impairment analysis of its long-lived assets in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets, and ASC 350, Intangible-Goodwill and Other, as of August 31, 2015. Based on the analysis performed, it was determined that an impairment of the Company’s fixed assets had occurred, resulting in an impairment charge of $12.6 million, as well as an impairment charge to the Company’s intangible assets of $10.0 million.
RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2015
Selling, General and Administrative Expenses
Selling, general and administrative expenses for continuing operations consist primarily of the costs incurred for:
● | Compensation related to the Chief Financial Officer and the Chief Executive Officer. |
● | Professional fees related to audit and review related fees, and financial statement printing and related filing expenses. |
● | Legal and investigation related expenses. |
● | Corporate governance expenses, investor relations, director and officer insurance fees and other corporate related professional fees. |
The details of selling, general and administrative expenses for the three months ended September 30, 2015 and 2014 reported as continuing operations are as follows:
| | 2015 | | | 2014 | |
Selling, General & Administrative Expenses | | | | | | |
Compensation | | $ | 193 | | | $ | 132 | |
Other | | | 2,314 | | | | 1,045 | |
Total selling, general & administrative expenses | | $ | 2,507 | | | $ | 1,177 | |
Selling, general and administrative expenses increased $1.3 million to $2.5 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The primary component of this change was an increase in other expenses of $1.3 million. Other expenses increased due to an increase in professional fees of $1.3 million, which included transaction fees.
Other Income (Expense), Net
The change in other expense from continuing operations is due to a $2.0 million fine paid to the United States of America pursuant to the terms of a Deferred Prosecution Agreement (as described in Part II -Item 1 Legal Proceedings).
RESULTS OF CONTINUING OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
Selling, General and Administrative Expenses
Selling, general and administrative expenses for continuing operations consist primarily of the costs incurred for:
● | Compensation related to the Chief Financial Officer and the Chief Executive Officer. |
● | Professional fees related to audit and review related fees, and financial statement printing and related filing expenses. |
● | Legal and investigation related expenses. |
● | Corporate governance expenses, investor relations, director and officer insurance fees and other corporate related professional fees. |
The details of selling, general and administrative expenses for the nine months ended September 30, 2015 and 2014 reported as continuing operations are as follows:
| | 2015 | | | 2014 | |
Selling, General & Administrative Expenses | | (In thousands) | |
Compensation | | $ | 611 | | | $ | 423 | |
Other | | | 5,796 | | | | 4,640 | |
Total selling, general & administrative expenses | | $ | 6,407 | | | $ | 5,063 | |
Selling, general and administrative expenses of continuing operations increased $1.3 million to $6.4 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The primary component of this change was an increase in professional fees of $1.2 million, which includes transaction fees.
Other Income (Expense), Net
The change in other expense from continuing operations is due to a $2.0 million fine paid to the United States of America pursuant to the terms of a Deferred Prosecution Agreement (as described in Part II-Item 1 Legal Proceedings).
RESULTS OF DISCONTINUED OPERATIONS
The following table provides the results for discontinued operations for the three and nine months ended September 30, 2015 and 2014.
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Revenue | | $ | 41,370 | | | $ | 49,650 | | | $ | 130,046 | | | $ | 147,900 | |
| | | | | | | | | | | | | | | | |
Cost of sales | | | 20,012 | | | | 22,671 | | | | 60,680 | | | | 67,456 | |
Route expense | | | 10,794 | | | | 13,192 | | | | 34,116 | | | | 38,153 | |
Selling, general and administrative | | | 12,227 | | | | 15,180 | | | | 40,695 | | | | 48,198 | |
Depreciation and amortization | | | 3,728 | | | | 5,044 | | | | 12,847 | | | | 15,577 | |
Impairments | | | 22,641 | | | | - | | | | 22,807 | | | | 8,810 | |
Other (income) expenses | | | (775 | ) | | | 185 | | | | (1,332 | ) | | | 1,330 | |
Income tax expense | | | (66 | ) | | | (55 | ) | | | (43 | ) | | | (78 | ) |
Net loss from discontinued operations | | $ | (27,191 | ) | | $ | (6,567 | ) | | $ | (39,724 | ) | | $ | (31,546 | ) |
RESULTS OF DISCONTINUED OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
Revenue
Revenue from products is primarily comprised of the sales and delivery of consumable products such as detergents and cleaning chemicals, the rental, sales and servicing of dish machines and other equipment used to dispense those products, the sale of paper items, rental fees, linen processing and other ancillary product sales. Revenues from services are primarily comprised of manual cleaning and delivery service fees. Franchise and other consists of fees charged to franchisees.
Total revenue and the revenue derived from each revenue type for the three months ended March 31, 2015 and 2014 are as follows:
| | 2015 | | | % | | | 2014 | | | % | |
Revenue | | | | | (In thousands) | | | | |
Products | | $ | 39,263 | | | | 89.5% | | | $ | 43,241 | | | | 89.6% | |
Services | | | 4,328 | | | | 9.9% | | | | 4,694 | | | | 9.7% | |
Franchise and other | | | 250 | | | | 0.6% | | | | 360 | | | | 0.7% | |
Total revenue | | $ | 43,841 | | | | 100.0% | | | $ | 48,295 | | | | 100.0% | |
Consolidated revenue of discontinued operations decreased $4.5$8.3 million or 9.2%16.7% to $43.8$41.4 million for the three months ended March 31,September 30, 2015 compared to 2014. Excluding revenue generated from linen assets sold and held for sale for the three months ended March 31, 2015 and 2014, consolidated revenue decreased 7.2% on a comparable basis. Product revenue decreased $4.0$7.2 million partially due to a $1.2$2.3 million decrease related to linen assets sold or held for sale.sale, and $0.6 million due to the sale of the Company’s Canadian operations during August 2015. The remaining $2.8$4.3 million decrease is primarily due to a $1.8 million reduction in purchasing from large wholesale and distribution customers, and the attrition of $0.3 million in customers resulting from the termination of the Manufacturing and Supply Agreement (the “Cavalier Agreement”) which was terminated in September 2014.2014, as well as additional attrition, volume reductions and strategic separations from customers. Service revenuesrevenue declined $0.4$1.1 million of which $0.5 million was due to the sale of the Company’s Canadian operations. The remaining decline of $0.6 million was due to the loss of other hygiene customers and customers sold in connection with assets held for sale. Franchise and other revenue declined $0.1 million primarily due to the timinglost as a result of purchases with one of our international licensee.linen sale agreements.
Cost of Sales
Cost of sales related to discontinued operations consists primarily of the cost of chemical, paper, air freshener and other consumable products sold to, or used in the servicing of, our customers. These costs are exclusive of route expense and related depreciation and amortization. Cost of sales for the three months ended March 31, 2015 and 2014 are as follows:
| | 2015 | | | | %(1) | | | | 2014 | | | | %(1) | |
Cost of Sales | | | | | | | | | (In thousands) | | | | | |
Products | | $ | 19,852 | | | | 50.6% | | | $ | 21,580 | | | | 49.9% | |
Services | | | 1 | | | | 0.0% | | | | 134 | | | | 2.9% | |
Franchise and other | | | 109 | | | | 43.9% | | | | 98 | | | | 27.2% | |
Total cost of sales | | $ | 19,962 | | | | 45.5% | | | $ | 21,812 | | | | 45.2% | |
(1) Represents cost as a percentage of the respective product and service line revenue.
Cost of sales for discontinued operations decreased $1.9$2.7 million or 8.5%11.7% to $20.0 million for the three months ended March 31,September 30, 2015 compared to 2014 primarily due to a declinethe sale of Canadian operations and other declines in sales volume. The increase in cost of sales as a percentage of revenue from the prior-year period primarily reflects the impact of exiting the linen business, partially offset by cost efficiencies. As a percentage of sales, consolidated cost of sales increased slightly2.7% from 45.2%45.7% to 45.5%48.4%.
Route Expenses
Route expenses related to discontinued operations consist of costs incurred by the Company for the delivery of products and providing services to customers. The components of route expenses for the three months ended March 31, 2015 and 2014 are as follows:
| | 2015 | | | | %(1) | | | | 2014 | | | | %(1) | |
Route Expenses | | | | | | | | | (In thousands) | | | | | |
Compensation | | $ | 9,127 | | | | 20.9% | | | $ | 9,417 | | | | 19.7% | |
Vehicle and other expenses | | | 2,565 | | | | 5.9% | | | | 2,947 | | | | 6.1% | |
Total route expenses | | $ | 11,692 | | | | 26.8% | | | $ | 12,364 | | | | 25.8% | |
(1)Represents route expenses as a percentage of total non-franchise revenue.
Route expenses of discontinued operations decreased $0.7$2.4 million or 5.4%18.2% to $11.7$10.8 million for the three months ended March 31,September 30, 2015 compared to 2014. The components of this change were decreases in compensation, primarily through route optimization efforts, of $0.3$2.0 million and also decreasesdecrease in vehicle and other expenses of $0.4 million. Route expense as a percentage of total revenue was 26.8%26.2% and 25.8%26.7% for the three months ended March 31,September 30, 2015 and 2014, respectively. The increasedecrease as a percentage of revenue was primarily due to the decline in revenue from the prior period.route optimization.
Selling, General and Administrative Expenses
Selling, general and administrative expenses related to discontinued operations consist primarily of the costs incurred for:
● | Local office and field management support costs that are related to field operations. These costs include compensation, occupancy expense and other general and administrative expenses. |
● | Selling expenses which include compensation and commissions for local sales representatives and corporate account representatives. |
● | Corporate office expenses which include executive management, informationInformation technology, human resource, accounting, purchasing and other support costs. |
The details of selling, general and administrative expenses for the three months ended March 31, 2015 and 2014 are as follows:
| | 2015 | | | | %(1) | | | | 2014 | | | | %(1) | |
Selling, General & Administrative Expenses | | | | | | | | | (In thousands) | | | | | |
Compensation | | $ | 8,646 | | | | 19.7% | | | $ | 10,916 | | | | 22.6% | |
Occupancy | | | 1,664 | | | | 3.8% | | | | 2,081 | | | | 4.3% | |
Other | | | 6,204 | | | | 14.2% | | | | 6,773 | | | | 14.0% | |
Total selling, general & administrative expenses | | $ | 16,514 | | | | 37.7% | | | $ | 19,770 | | | | 40.9% | |
(1) Represents expenses as a percentage of total revenue.
Selling, general and administrative expenses of discontinued operations decreased $3.3$3.0 million to $16.5$12.2 million for the three months ended March 31,September 30, 2015 compared to the three months ended September 30, 2014. The components of this change were decreases in compensation of $2.3$1.9 million, occupancy of $0.4$0.6 million, and other expenses of $0.6$0.5 million. Compensation expense decreased primarily due to headcount reductions related to the sale of the linen business, a reduction in stock based compensation and the sale of the linen businesses.other operational efforts. Occupancy decreased due to the closure of a linen plant, the sale of a linen plant and due to ongoing efforts to reduce facility infrastructure costs. Other expenses decreased primarily due to the decrease in professional fees.
Depreciation and Amortization
Depreciation and amortization reported as components of discontinued operations consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $0.8$1.3 million to $4.6$3.7 million or 14.4%26.1% for the three months ended March 31,September 30, 2015. The decrease is primarily due to the categorizationresult of certain fixed assets as assets held for sale.being fully depreciated, sales of Canadian operations and linen businesses, a decrease in capital expenditures, and impairment.
Other Income (Expense), Net
DetailsThe increase of $0.9 million in other income (expense), net for three months ended March 31, 2015 and 2014 are as follows:
| | 2015 | | | 2014 | |
| | (In thousands) | |
Interest income | | $ | - | | | $ | 4 | |
Interest expense | | | (95 | ) | | | (78 | ) |
Foreign currency loss | | | (71 | ) | | | (15 | ) |
Other income (expense) | | | 280 | | | | (628 | ) |
Total other income (expense), net | | $ | 114 | | | $ | (717 | ) |
The increase in other income related to discontinued operations is due primarily to the $0.3$1.3 million gain related to the sale of equipment of a closed operation during the first quarter of 2015, compared to the loss on sales of certain assets held for sale during the first quarter of 2014.Canadian operations offset by $0.5 million increase in foreign currency losses.
Income Tax Expense
In projecting the Company’s income tax expense for 2015, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2015. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended March 31, 2015.
For the three months ended March 31,September 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded indue to the firstimpairment of tradenames for book purposes during the third quarter of 2015, includeda deferred tax asset now exists related to tradenames. The change from a net deferred tax liability to a net deferred tax asset resulted in a tax benefit.
RESULTS OF DISCONTINUED OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
Revenue
Revenue from products is primarily comprised of the accrualsales and delivery of consumable products such as detergents and cleaning chemicals, the rental, sales and servicing of dish machines and other equipment used to dispense those products, the sale of paper items, rental fees, linen processing and other ancillary product sales. Revenues from services are primarily comprised of manual cleaning and delivery service fees. Franchise and other consists of fees charged to franchisees.
Consolidated revenue of discontinued operations decreased $17.9 million or 12.1% to $130.0 million for the nine months ended September 30, 2015 compared to 2014. Product revenue decreased $15.8 million partially due to a $4.4 million decrease related to linen assets sold. The remaining $11.4 million decrease is primarily due to a reduction in purchasing from large wholesale and distribution customers, the attrition in customers resulting from the termination of the Cavalier Agreement which was terminated in September 2014, as well as additional attrition, volume reductions and strategic separations from customers. Service revenue declined $1.8 million primarily due to the sale of Canadian operations of $0.6 million. The remaining decline was due to a loss of hygiene customers due to attrition and customers sold in connection with linen businesses. Franchise and other revenue declined $0.3 million primarily due to the timing of purchases with one of our international licensees.
Cost of Sales
Cost of sales related to discontinued operations consists primarily of the cost of chemical, paper, air freshener and other consumable products sold to, or used in the servicing of our customers. These costs are exclusive of route expense and related depreciation and amortization.
Cost of sales related to discontinued operations decreased $6.8 million or 10.0% to $60.7 million for the nine months ended September 30, 2015, compared to 2014 primarily due to a decline in sales volume. The increase in cost of sales as a percentage of revenue from the prior-year period primarily reflects the impact of exiting the linen business, partially offset by cost efficiencies. As a percentage of sales, consolidated cost of sales increased from 45.6% to 46.7%.
Route Expenses
Route expenses related to discontinued operations consist of costs incurred by the Company for the delivery of products and providing services to customers.
Route expenses of discontinued operations decreased $4.0 million or 10.6% to $34.1 million for the nine months ended September 30, 2015 compared to 2014. The components of this change were decreases in compensation, primarily through route optimization efforts of $3.2 million and decreases in vehicle and other expenses of $0.8 million. Route expense as a percentage of total revenue was 26.4% and 26.0% for the nine months ended September 30, 2015 and 2014, respectively. The increase as a percentage of revenue was primarily due to the decline in revenue from the prior period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of discontinued operations consist primarily of the costs incurred for:
● | Local office and field management support costs that are related to field operations. These costs include compensation, occupancy expense and other general and administrative expenses. |
● | Selling expenses which include compensation and commissions for local sales representatives and corporate account representatives. |
● | Information technology, human resource, accounting, purchasing and other support costs. |
Selling, general and administrative expenses related to discontinued operations decreased $7.5 million to $40.7 million for the nine months ended September 30, 2015 compared to 2014. The components of this change were decreases in compensation of $6.4 million, occupancy of $1.2 million, offset by an increase in other expenses of $0.1 million. Compensation expense decreased primarily due to headcount reductions, the sale of Canadian operations and the linen businesses, a reduction in stock based compensation and other optimization efforts. Occupancy decreased due to the closure of a linen plant and due to ongoing efforts to reduce facility infrastructure costs.
Depreciation and Amortization
Depreciation and amortization reported as components of discontinued operations consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $2.7 million to $12.8 million or 17.5% for the nine months ended September 30, 2015. The decrease is primarily the result of fixed assets being fully depreciated, the sale of Canadian operations and linen businesses and a decrease in capital expenditures.
Other Income (Expense), Net
The increase of $2.7 million in other income (expense) related to discontinued operations is due primarily to the $1.3 million gain related to the sale of Canadian operations, offset by a $0.5 million increase in foreign currency losses, as well as a gain related to the sale of a linen facility of $0.9 million, and a reduction in expense due to the large linen loss on sale in the prior year.
Income Tax Expense
In projecting the Company’s income tax expense related to an additional valuation allowance in connection withfor 2015, management has concluded that it is not more likely than not that the tax amortizationCompany will realize the benefit of the Company’s indefinite-lived intangible assets that was not available to offset existingits deferred tax assets (termedand as a “naked credit”).result a full valuation allowance will be required as of December 31, 2015.
For the nine months ended September 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company does not considerCompany’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax liabilitiesasset valuation allowance. This circumstance generally results in a zero tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, due to the impairment of tradenames for book purposes during the third quarter of 2015, a deferred tax asset now exists related to indefinite lived intangible assets when determining the need fortradenames. The change from a valuation allowance.net deferred tax liability to a net deferred tax asset resulted in a tax benefit.
Cash FlowsFlow Summary
Cash flows from continuing operations for the threenine months ended March 31,September 30, 2015 and 2014 were:
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| | (In thousands) | | | (In thousands) | |
Net cash (used in) provided by operating activities | | $ | (5,938 | ) | | $ | 724 | | |
Net cash used in investing activities | | | (1,369 | ) | | | (1,487 | ) | |
Net cash used in operating activities | | | $ | (6,594 | ) | | $ | (3,364 | ) |
Net cash provided by (used) in investing activities | | | | - | | | | - | |
Net cash provided by (used in) financing activities | | | 3,870 | | | | (1,182 | ) | | | 2,168 | | | | (2,516 | ) |
Net decrease in cash and cash equivalents from continuing operations | | $ | (3,437 | ) | | $ | (1,945 | ) | | $ | (4,426 | ) | | $ | (5,880 | ) |