United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________. |
001-35067
Commission File Number
SWISHER HYGIENE INC.
(Exact Name Of Registrant as Specified in Its Charter)
Delaware | 27-3819646 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
Incorporation or Organization) | ||
4725 Piedmont Row Drive, Suite 400 | ||
Charlotte, North Carolina | 28210 | |
(Address of Principal Executive Offices) | (Zip Code) |
(704) 364-7707
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Larger Accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Number of shares outstanding of each of the registrant's classes of Common Stock at August 12, 2011: 173,473,566 shares of Common Stock, $0.001 par value per share.
SWISHER HYGIENE INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
EXPLANATORY NOTE
Swisher Hygiene Inc. (the "Company" or "Swisher") is filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A for the three and six month periods ended June 30, 2011 (the "Amended 10-Q") to reflect adjustments to previously reported financial information, as discussed in Note 2, "Restatement of Condensed Consolidated Financial Statements" to the accompanying Notes to Condensed Consolidated Financial Statements. The adjustments reflect changes to the previously reported information identified as a result of the audit process conducted by our independent registered public accounting firm, the independent Audit Committee review, senior management's evaluation of the prior accounting for the related findings and concerns raised by a former employee, and certain other matters. For the reader's convenience, we refer to these collectively as the "Audit and Review Process." As part of the Audit and Review Process, additional adjustments to the Prior Financial Information, including adjustments to the financial information in this Amended 10-Q were identified. We refer to the adjustments identified in the Audit and Review Process as the "Restatement Adjustments." The term Restatement Adjustments refers to adjustments to correct errors in the Company's prior accounting and an adjustment to reflect the impact of a change in accounting estimate resulting from the Company's reassessment of the remaining useful lives of its property and equipment. In summary, the Restatement Adjustments have resulted in the following changes to the previously reported financial information as follows:
June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands) | ||||||||||||
Total assets | $ | 426,838 | $ | (389 | ) | $ | 426,449 | |||||
Total liabilities | $ | 79,614 | $ | 3,277 | $ | 82,891 | ||||||
Total stockholders' equity | $ | 347,224 | $ | (3,666 | ) | $ | 343,558 | |||||
Three Months Ended June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands except per share amounts) | ||||||||||||
Revenue | $ | 51,676 | $ | 239 | $ | 51,915 | ||||||
Net loss | $ | (7,127 | ) | $ | (966 | ) | $ | (8,093 | ) | |||
Loss per share | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | |||
Six Months Ended June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands except per share amounts) | ||||||||||||
Revenue | $ | 79,073 | $ | 127 | $ | 79,200 | ||||||
Net loss | $ | (10,342 | ) | $ | (3,747 | ) | $ | (14,089 | ) | |||
Loss per share | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.10 | ) |
ii
Audit Committee Review and Restatements
On March 21, 2012, Swisher's Board of Directors (the "Board") determined that the Company's previously issued interim financial statements for the quarterly periods ended 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. Subsequently, on March 27, 2012, the Audit Committee concluded that the Company's previously issued interim financial statements for the quarterly period ended March 31, 2011 should no longer be relied upon. The Board and Audit Committee made these determinations in connection with the Audit Committee's then ongoing review into certain accounting matters. We refer to the interim financial statements and the other financial information described above as the "Prior Financial Information."
The Audit Committee initiated its review after an informal inquiry by the Company and its independent auditor regarding a former employee's concerns with the application of certain accounting policies. The Company first initiated the informal inquiry by requesting that both the Audit Committee and the Company’s independent auditor look into the matters raised by the former employee. Following this informal inquiry, the Company’s senior management and its independent auditor advised the Chairman of the Company’s Audit Committee regarding the matters. Subsequently, the Audit Committee determined that an independent review of the matters presented by the former employee should be conducted. During the course of its independent review, and due in part to the significant number of acquisitions made by the Company, the Audit Committee determined that it would be in the best interest of the Company and its stockholders to review the accounting entries relating to each of the 63 acquisitions made by the Company during the year ended December 31, 2011.
On May 17, 2012, Swisher announced that the Audit Committee had substantially completed the investigative portion of its internal review. In connection with the substantial completion of its internal review, the Audit Committee recommended to the Board that the Company's Chief Financial Officer and two additional senior accounting personnel be separated from the Company as a result of their conduct in connection with the preparation of the Prior Financial Information. Following this recommendation, the Board determined that these three accounting personnel be separated from the Company, effective immediately. In making these employment determinations, the Board did not identify any conduct by these employees intended for or resulting in any personal benefit.
On May 17, 2012, the Company further announced that it had commenced a search process for a new Chief Financial Officer and that Steven Berrard, then the Company’s President and Chief Executive Officer, would also serve as the Company’s Chief Financial Officer.
iii
NASDAQ and TSX Matters
On April 11, 2012, the Company notified the NASDAQ Stock Market LLC ("NASDAQ") that the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 would be delayed beyond the April 16, 2012 extended due date. On April 11, 2012, the Company received a letter from NASDAQ indicating that the Company was not in compliance with the filing requirements for continued listing under NASDAQ Listing Rule 5250(c)(1) as a result of the Company's notification to NASDAQ that the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 would be delayed beyond the April 16, 2012 extended due date.
On May 15, 2012, the Company notified NASDAQ that the filing of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2012 would not be timely filed.
Subsequently, on May 15, 2012, the Company received a letter from NASDAQ indicating that the Company was not in compliance with the filing requirements for continued listing under NASDAQ Listing Rule 5250(c)(1) as a result of the Company's notification to NASDAQ that (1) the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 would be delayed beyond the April 16, 2012 extended due date and (2) the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2012 would be delayed beyond the May 21, 2012 extended due date.
In accordance with the April 11, 2012 and May 15, 2012 letters from NASDAQ, the Company submitted a plan to regain compliance with NASDAQ's filing requirements for continued listing on June 11, 2012. NASDAQ accepted the Company's plan of compliance, pursuant to which the Company agreed to file the late reports no later than July 30, 2012.
On July 25, 2012, the Company notified NASDAQ that the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2012 would be delayed beyond the July 30, 2012 extended due date and requested an extension to file the late reports until September 26, 2012.
On July 30, 2012, the Company received a letter from NASDAQ indicating that NASDAQ granted the Company's request for an extension to file the late reports until September 26, 2012.
On August 15, 2012, the Company received notification regarding the Company's additional non-compliance with NASDAQ Listing Rule 5250(c)(1) due to the Company's failure to timely file the Quarterly Report on Form 10-Q for the period ended June 30, 2012 with the Securities and Exchange Commission (the "SEC").
On August 30, 2012, the Company notified NASDAQ of the Company's plan to file the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2012 and the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2012 by the existing extension date of September 26, 2012.
iv
On September 20, 2012, the Company notified NASDAQ that the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and the Form 10-Qs for the quarterly periods ended March 31, 2012 and June 30, 2012 would not be filed with the SEC by September 26, 2012, which was the extended deadline for the filings previously granted to the Company by NASDAQ. As a result of this notification, on September 21, 2012, the Company received a letter from NASDAQ advising that it remained non-compliant with the requirements for continued listing under NASDAQ Listing Rule 5250(c)(1) due to the Company's failure to timely file the late filings. The letter further indicated that the Company's common stock was subject to delisting from NASDAQ unless it requested a hearing before a NASDAQ Listing Qualifications Panel (the "Panel") within seven calendar days of receipt of the letter.
On September 28, 2012, the Company requested a hearing before the Panel to review the Company's plan to regain compliance.
On November 7, 2012, the Company presented its plan to regain compliance before the Panel.
On November 16, 2012, the Company received notification regarding the Company's additional non-compliance with NASDAQ Listing Rule 5250(c)(1) due to the Company's failure to timely file the Quarterly Report on Form 10-Q for the period ended September 30, 2012 with the SEC.
On November 28, 2012, NASDAQ granted the Company's request to remain listed on NASDAQ, subject to meeting specific conditions for continued listing. The conditions to remain listed on NASDAQ were as follows:
● | On or before December 31, 2012, the Company must provide a written update to NASDAQ regarding the status of the work toward compliance. |
● | On or before January 15, 2013, the audit field work for the delinquent filings must be completed, and a further update shall be provided to NASDAQ regarding the status of work toward compliance. |
● | On or before February 19, 2013, the Company must file with the SEC its restated 2011 Form 10-Qs and the 2011 Annual Report on Form 10-K. |
● | On or before February 28, 2013, the Company must file all 2012 Form 10-Qs, as well as provide NASDAQ with an update with respect to its progress on its audit and filing of its Annual Report on Form 10-K for the year ended December 31, 2012. |
v
In order to fully comply with the terms of the extension, the Company must be able to demonstrate compliance with all requirements for continued listing on NASDAQ. In the event the Company is unable to do so, its securities may be delisted from NASDAQ.
On December 31, 2012, the Company provided the Panel an update of the status of its work toward compliance and that work on the related reports was expected to continue through their respective filing dates.
On January 2, 2013, the Company received notification regarding the Company's additional non-compliance due to the Company's failure to hold its 2012 annual meeting of stockholders by December 31, 2012, as required by NASDAQ Listing Rule 5620.
On January 15, 2013, the Company provided the Panel a further update on the status of its work toward compliance.
On January 22, 2013, the Company received a letter from the Panel noting that the Company did not satisfy the January 15, 2013 deadline regarding the completion of audit field work.
On January 29, 2013, the Company provided the Panel with a further update on the status of its work toward compliance. The Company noted that it continued to believe it would file the restated Form 10-Qs and Annual Report on Form 10-K for 2011 with the SEC by February 19, 2013 and the Form 10-Qs for 2012 by February 28, 2013.
On February 1, 2013, the Company provided the Panel with a further update on the status of its work toward compliance.
On February 4, 2013, the Company received notice from the Panel that it had determined to delist the Company's shares of common stock from NASDAQ, and would suspend trading in the Company's shares of common stock effective at the open of business on Wednesday, February 6, 2013.
On February 5, 2013, the Company requested that the Panel reconsider its February 4th delisting determination and advised the Panel that it continued to expect to file the Restated 2011 Forms 10-Q and 2011 Form 10-K with the SEC by February 19, 2013 and the 2012 Forms 10-Q by February 28, 2013.
On February 5, 2013, the Panel granted the Company's request for reconsideration and determined not to delist the Company's shares of common stock from NASDAQ.
On February 19, 2013, the Company provided the Panel with a further update on the status of its work toward compliance.
During the process of regaining compliance with NASDAQ, the Company expects that its common stock will continue trading on NASDAQ under the symbol "SWSH," however the Company can provide no assurance that it will satisfy the conditions required to maintain its listing on NASDAQ or, even if the Company satisfies the conditions, that NASDAQ will determine to continue the Company's listing.
Also, the Company has been noted in default of its continuous disclosure obligations by the securities regulators in several provinces of Canada for certain failures stemming from the non-compliance described above, including the failure to timely file its annual financial statements for the year ended December 31, 2011 and related information, and for publicly acknowledging that certain of its previously filed financial statements may no longer be relied upon. In the event that the continuous disclosure defaults are not remedied, the Canadian securities regulators may issue a general cease trade order against the Company prohibiting trading of the Company's shares in Canada.
vi
On February 11, 2013, the Company received notice from the TSX indicating the TSX had determined to delist the common stock of the Company at the close of market on March 11, 2013, subject to the Company meeting TSX continued listing requirements, primarily relating to its failure to file certain of its financial statements. If the Company is able to complete its filings and meet all conditions for continued listing on the TSX before March 11, 2013, the Company may maintain its listing on the TSX. The Company can provide no assurance that it will satisfy the conditions required to maintain its listing on TSX or, even if the Company satisfies the conditions, that TSX will determine to continue the Company's listing.
Employee Matters
On May 14, 2012, the Board, following the recommendation of the Audit Committee, determined that Mike Kipp, the Company's Senior Vice President and Chief Financial Officer should be separated from the Company. The Board also determined that Steven Berrard, then the Company's President and Chief Executive Officer, would also serve as the Company's interim Chief Financial Officer.
On June 6, 2012, the Board appointed Brian Krass as the Senior Vice President and Chief Financial Officer of the Company.
On August 17, 2012, Steven Berrard resigned as President and Chief Executive Officer of the Company. Mr. Berrard continued his service as a member of the Board.
On August 19, 2012, the Board appointed Thomas Byrne as Interim President and Chief Executive Officer of the Company.
On September 21, 2012, Mr. Krass resigned as Senior Vice President and Chief Financial Officer of the Company.
On September 27, 2012, the Board appointed William T. Nanovsky as Senior Vice President and Chief Financial Officer of the Company, effective September 24, 2012.
Effective November 9, 2012, Hugh Cooper resigned as Senior Vice President of the Company.
On February 18, 2013, the Board removed "Interim" from the officer titles of Messrs. Byrne and Nanovsky, making them President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, respectively.
Securities Litigation
There have been six shareholder lawsuits filed in federal courts in North Carolina and New York asserting claims relating to the Company's March 28, 2012 announcement regarding the Company's Board 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 March 30, 2012, a purported Company shareholder commenced a putative securities class action on behalf of purchasers and sellers of the Company's common stock in the U.S. District Court for the Southern District of New York against the Company, the former President and Chief Executive Officer ("CEO"), and the former Vice President and Chief Financial Officer ("CFO"). The plaintiff asserted claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), based on alleged false and misleading disclosures in the Company's public filings. In April and May 2012, four more putative securities class actions were filed by purported Company shareholders in the U.S. District Court for the Western District of North Carolina against the same set of defendants. The plaintiffs in these cases have asserted claims alleging violations of Sections 10(b) and 20(a) of the Exchange Act based on alleged false and misleading disclosures in the Company's public filings. In each of the putative securities class actions, the plaintiffs seek damages for losses suffered by the putative class of investors who purchased Swisher common stock.
vii
On May 21, 2012, a shareholder derivative action was brought against the Company's former CEO and CFO and the Company's directors for alleged breaches of fiduciary duty by another purported Company shareholder in the U.S. District Court for the Southern District of New York. In this derivative action, the plaintiff seeks to recover for the Company damages arising out of a possible restatement of the Company's financial statements.
On May 30, 2012, the Company, and its former CEO and former CFO filed a motion with the United States Judicial Panel on Multidistrict Litigation ("MDL Panel") to centralize all of the cases in the Western District of North Carolina by requesting that the actions filed in the Southern District of New York be transferred to the Western District of North Carolina.
In light of the motion to centralize the cases in the Western District of North Carolina, the Company, and its former CEO and former CFO requested from both courts a stay of all proceedings pending the MDL Panel's ruling. On June 4, 2012, the U.S. District Court for the Southern District of New York adjourned all pending dates in the cases in light of the motion to transfer filed before the MDL Panel. On June 13, 2012, the U.S. District Court for the Western District of North Carolina issued a stay of proceedings pending a ruling by the MDL Panel.
On August 13, 2012, the MDL Panel granted the motion to centralize, transferring the actions filed in the Southern District of New York to the Western District of North Carolina. In response, 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 defendant's time to answer or otherwise respond to the consolidated class action complaint. The Western District of North Carolina stayed the derivative action pending the outcome of the securities class actions.
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 publicly announcing the Audit Committee's internal review and the delays in filing our periodic reports. The Company has been asked to provide information about these matters on a voluntary basis to the SEC and the U.S. Attorney's Office. The Company is fully cooperating with the SEC and the U.S. Attorney's Office. Any action by the SEC, the U.S. Attorney's Office or other government agency could result in criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees.
The Amended 10-Q
For the convenience of the reader, this Amended 10-Q amends and restates in its entirety the Quarterly Report on Form 10-Q for the three and six months ended June 30, 2011 (the "Original 10-Q"), which was filed with the SEC on August 15, 2011. However, this Amended 10-Q amends only those items necessary to reflect the Restatement Adjustments, as well as to disclose events that have occurred subsequent to the original filing date that are of such significance that their omission could be materially misleading to the users of the restated financial statements. No other information from the Original 10-Q is amended in this document. In particular, forward-looking statements included in this Amended 10-Q represent management's views as of the date of filing of the Original 10-Q. Such forward-looking statements should not be assumed to be accurate as of any later date. Swisher undertakes no duty to update such information whether as a result of new information, future events or otherwise.
viii
SWISHER HYGIENE INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
TABLE OF CONTENTS
Page | |||||
PART I. FINANCIAL INFORMATION | |||||
ITEM 1. | Unaudited Financial Statements | 1 | |||
Condensed Consolidated Balance Sheets June 30, 2011 and December 31, 2010 | 1 | ||||
Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2011 and 2010 | 2 | ||||
Condensed Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2011 | 3 | ||||
Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010 | 4 | ||||
Notes to Condensed Consolidated Financial Statements | 5 | ||||
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 30 | |||
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 51 | |||
ITEM 4. | Controls and Procedures | 52 | |||
PART II. OTHER INFORMATION | |||||
ITEM 1. | Legal Proceedings | 54 | |||
ITEM 1A. | Risk Factors | 54 | |||
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 55 | |||
ITEM 6. | Exhibits | 56 |
ix
PART I. FINANCIAL INFORMATION
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
June 30, 2011 | ||||||||
(Unaudited) | December 31, | |||||||
(As Restated) | 2010 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 112,468 | $ | 38,932 | ||||
Restricted cash | - | 5,193 | ||||||
Accounts receivable (net of allowance for doubtful accounts of $1,120 | ||||||||
at June 30, 2011 and $334 at December 31, 2010) | 23,251 | 7,069 | ||||||
Inventory | 10,371 | 2,968 | ||||||
Other assets | 2,414 | 895 | ||||||
Total current assets | 148,504 | 55,057 | ||||||
Property and equipment, net | 58,564 | 11,324 | ||||||
Goodwill | 123,592 | 29,660 | ||||||
Other intangibles, net | 91,240 | 7,669 | ||||||
Other noncurrent assets | 4,549 | 2,524 | ||||||
Total assets | $ | 426,449 | $ | 106,234 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 27,425 | $ | 9,335 | ||||
Long-term debt and obligations due within one year | 9,840 | 13,379 | ||||||
Advances from shareholder | 2,000 | 2,000 | ||||||
Total current liabilities | 39,265 | 24,714 | ||||||
Long-term debt and obligations | 29,830 | 31,029 | ||||||
Deferred income tax liabilities | 9,697 | 1,700 | ||||||
Other long-term liabilities | 4,099 | 2,763 | ||||||
Total noncurrent liabilities | 43,626 | 35,492 | ||||||
Commitments and contingencies | - | - | ||||||
Equity | ||||||||
Swisher Hygiene Inc. stockholders’ equity | ||||||||
Common stock, par value $0.001, authorized 400,000,000 shares; 172,559,865 and 114,015,063 | ||||||||
shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively | 173 | 114 | ||||||
Additional paid-in capital | 366,396 | 54,726 | ||||||
Accumulated deficit | (23,086 | ) | (8,996 | ) | ||||
Accumulated other comprehensive income | 46 | 74 | ||||||
Total Swisher Hygiene Inc. stockholders’ equity | 343,529 | 45,918 | ||||||
Non-controlling interest | 29 | 110 | ||||||
Total stockholders' equity | 343,558 | 46,028 | ||||||
Total liabilities and equity | $ | 426,449 | $ | 106,234 |
See Notes to Condensed Consolidated Financial Statements
1
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated) | 2010 | (As Restated) | 2010 | |||||||||||||
Revenue | ||||||||||||||||
Products | $ | 27,977 | $ | 8,547 | $ | 43,404 | $ | 16,711 | ||||||||
Services | 22,662 | 4,478 | 33,127 | 8,857 | ||||||||||||
Franchise and other | 1,276 | 2,139 | 2,669 | 4,325 | ||||||||||||
Total revenue | 51,915 | 15,164 | 79,200 | 29,893 | ||||||||||||
Costs and expenses | ||||||||||||||||
Cost of revenue | 18,337 | 5,454 | 28,345 | 10,763 | ||||||||||||
Route expenses | 13,571 | 3,174 | 20,669 | 6,348 | ||||||||||||
Selling, general, and administrative | 20,207 | 6,867 | 34,867 | 13,374 | ||||||||||||
Acquisition and merger expenses | 2,734 | - | 3,998 | - | ||||||||||||
Depreciation and amortization | 5,353 | 1,084 | 8,248 | 2,127 | ||||||||||||
Loss on extinguishment of debt | - | - | 1,500 | - | ||||||||||||
Total costs and expenses | 60,202 | 16,579 | 97,627 | 32,612 | ||||||||||||
Loss from operations | (8,287 | ) | (1,415 | ) | (18,427 | ) | (2,719 | ) | ||||||||
Other expense, net | (3,761 | ) | (355 | ) | (6,015 | ) | (646 | ) | ||||||||
Net loss before income taxes | (12,048 | ) | (1,770 | ) | (24,442 | ) | (3,365 | ) | ||||||||
Income tax benefit | 3,955 | - | 10,353 | - | ||||||||||||
Net loss | $ | (8,093 | ) | $ | (1,770 | ) | $ | (14,089 | ) | $ | (3,365 | ) | ||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.05 | ) | $ | (0.03 | ) | $ | (0.10 | ) | $ | (0.06 | ) | ||||
Weighted-average common shares used in the | ||||||||||||||||
computation of loss per share | ||||||||||||||||
Basic and diluted | 164,972,640 | 57,894,852 | 144,097,478 | 57,862,241 |
See Notes to Condensed Consolidated Financial Statements
2
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(As Restated)
(In thousands except share data)
Accumulated | Swisher | |||||||||||||||||||||||||||||||
Additional | Other | Hygiene Inc. | Non- | |||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Shareholders' | Controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income | Equity | Interest | Equity | |||||||||||||||||||||||||
Balance at | ||||||||||||||||||||||||||||||||
December 31, 2010 | 114,015,063 | $ | 114 | $ | 54,726 | $ | (8,996 | ) | $ | 74 | $ | 45,918 | $ | 110 | $ | 46,028 | ||||||||||||||||
Shares issued in connection | ||||||||||||||||||||||||||||||||
with private placements | 34,119,643 | 34 | 191,147 | - | - | 191,181 | - | 191,181 | ||||||||||||||||||||||||
Shares issued in connection | ||||||||||||||||||||||||||||||||
with the acquisition of Choice | 8,281,920 | 8 | 48,772 | - | - | 48,780 | - | 48,780 | ||||||||||||||||||||||||
Shares issued in connection | ||||||||||||||||||||||||||||||||
with acquisitions and purchases of property and equipment and settle liabilities | 6,705,780 | 7 | 45,243 | - | - | 45,250 | - | 45,250 | ||||||||||||||||||||||||
Shares issued for | ||||||||||||||||||||||||||||||||
non-controlling interest | 25,000 | 0 | 110 | - | - | 110 | (110 | ) | - | |||||||||||||||||||||||
Conversion of promissory | ||||||||||||||||||||||||||||||||
note payable | 3,207,459 | 4 | 21,191 | - | - | 21,195 | - | 21,195 | ||||||||||||||||||||||||
Stock based compensation | 1,846 | - | - | 1,846 | - | 1,846 | ||||||||||||||||||||||||||
Exercise of stock options | ||||||||||||||||||||||||||||||||
and warrants | 6,205,000 | 6 | 3,361 | - | - | 3,367 | - | 3,367 | ||||||||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||||||||||||||
adjustment | - | - | - | - | (28 | ) | (28 | ) | - | (28 | ) | |||||||||||||||||||||
Noncontrolling interest in | ||||||||||||||||||||||||||||||||
AML2 acquisition | - | - | - | - | - | - | 28 | 28 | ||||||||||||||||||||||||
Net loss | (14,090 | ) | - | (14,090 | ) | 1 | (14,089 | ) | ||||||||||||||||||||||||
Balance at | ||||||||||||||||||||||||||||||||
June 30, 2011 | 172,559,865 | $ | 173 | $ | 366,396 | $ | (23,086 | ) | $ | 46 | $ | 343,529 | $ | 29 | $ | 343,558 |
See Notes to Condensed Consolidated Financial Statements
3
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||||
2011 | ||||||||
(As Restated) | 2010 | |||||||
Cash used in operating activities | ||||||||
Net loss | $ | (14,089 | ) | $ | (3,365 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 8,248 | 2,127 | ||||||
Stock based compensation | 1,846 | - | ||||||
Unrealized loss on fair value of convertible promissory notes | 5,586 | - | ||||||
Deferred income tax liabilities | (9,657 | ) | - | |||||
Changes in working capital components: | - | |||||||
Accounts receivable | (3,621 | ) | (47 | ) | ||||
Inventory | (2,486 | ) | (337 | ) | ||||
Other assets and noncurrent assets | (1,199 | ) | (330 | ) | ||||
Accounts payable, accrued expenses, and other current liabilities | 2,855 | 1,692 | ||||||
Cash used in operating activities | (12,517 | ) | (260 | ) | ||||
Cash used in investing activities | ||||||||
Purchases of property and equipment | (6,791 | ) | (2,766 | ) | ||||
Acquisitions, net of cash acquired | (105,396 | ) | (49 | ) | ||||
Restricted cash | 5,193 | - | ||||||
Cash used in investing activities | (106,994 | ) | (2,815 | ) | ||||
Cash provided by financing activities | ||||||||
Proceeds from private placements, net of issuance costs | 191,181 | - | ||||||
Proceeds from line of credit, net of issuance costs | 27,661 | - | ||||||
Payoff of lines of credit | (27,779 | ) | - | |||||
Principal payments on debt | (1,382 | ) | (1,372 | ) | ||||
Proceeds from exercise of stock options | 3,366 | - | ||||||
Payment of shareholder advance | - | (800 | ) | |||||
Proceeds from advances from shareholders | - | 4,600 | ||||||
Cash provided by financing activities | 193,047 | 2,428 | ||||||
Net increase (decrease) in cash and cash equivalents | 73,536 | (647 | ) | |||||
Cash and cash equivalents at the beginning of the period | 38,932 | 1,270 | ||||||
Cash and cash equivalents at the end of the period | $ | 112,468 | $ | 623 |
See Notes to Condensed Consolidated Financial Statements
4
SWISHER HYGIENE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 — BUSINESS DESCRIPTION
Principal Operations
Swisher Hygiene Inc. and its wholly-owned subsidiaries (the "Company," "Swisher," "we," or "our") provide essential hygiene and sanitation solutions to customers throughout much of North America and internationally through its global network of Company- owned operations, franchises and master licensees. These solutions include essential products and services that are designed to promote superior cleanliness and sanitation in commercial environments, while enhancing the safety, satisfaction and well-being of employees and patrons. These solutions are typically delivered by employees on a regularly scheduled basis and involve providing our customers with: (i) consumable products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products; (ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor mats, mops, bar towels and linens; (iii) manual cleaning of their facilities; and (iv) solid waste collection services. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries. In addition, our solid waste collection services provide services primarily to commercial and residential customers through contracts with municipalities or other governmental agencies.
Prospectively, we intend to grow in both existing and new geographic markets through a combination of organic and acquisition growth. However, we will focus our investments towards those opportunities which will most benefit our core businesses, chemical and linen processing services. Subsequent to the sale of our Waste segment in November 2012, we will offer our solid waste services through outsourced waste and recycling services delivered by third-party providers.
As of June 30, 2011, the Company has 83 Company-owned operations and 6 franchise operations located throughout the United States and Canada and has entered into 9 Master License Agreements covering the United Kingdom, Portugal, the Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.
See Note 17, "Subsequent Events" for additional information concerning the sale of the Waste Segment in November of 2012.
NOTE 2 — RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 21, 2012, Swisher's Board of Directors (the "Board") determined that the Company's previously issued interim financial statements for the quarterly periods ended 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. Subsequently, on March 27, 2012, the Audit Committee concluded that the Company's previously issued interim financial statements for the quarterly period ended March 31, 2011 should no longer be relied upon. The Board and Audit Committee made these determinations in connection with the Audit Committee's then ongoing review into certain accounting matters. We refer to the interim financial statements and the other financial information described above as the "Prior Financial Information."
The Audit Committee initiated its review after an informal inquiry by the Company and its independent auditor regarding a former employee's concerns with the application of certain accounting policies. The Company first initiated the informal inquiry by requesting that both the Audit Committee and the Company’s independent auditor look into the matters raised by the former employee. Following this informal inquiry, the Company’s senior management and its independent auditor advised the Chairman of the Company’s Audit Committee regarding the matters. Subsequently, the Audit Committee determined that an independent review of the matters presented by the former employee should be conducted. During the course of its independent review, and due in part to the significant number of acquisitions made by the Company, the Audit Committee determined that it would be in the best interest of the Company and its stockholders to review the accounting entries relating to each of the 63 acquisitions made by the Company during the year ended December 31, 2011.
5
On May 17, 2012, Swisher announced that the Audit Committee had substantially completed the investigative portion of its internal review. In connection with the substantial completion of its internal review, the Audit Committee recommended to the Board that the Company's Chief Financial Officer and two additional senior accounting personnel be separated from the Company as a result of their conduct in connection with the preparation of the Prior Financial Information. Following this recommendation, the Board determined that these three accounting personnel be separated from the Company, effective immediately. In making these employment determinations, the Board did not identify any conduct by these employees intended for or resulting in any personal benefit.
On May 17, 2012, the Company further announced that it had commenced a search process for a new Chief Financial Officer and that Steven Berrard, then the Company’s President and Chief Executive Officer, would also serve as the Company’s interim Chief Financial Officer.
On February 19 and 20, 2013, the Company filed amended quarterly reports on Form 10-Q/A for the quarterly periods ended March 31, 2011and June 30, 2011(the "Affected Periods"), including restated financial statements for the Affected Periods, to reflect adjustments to previously reported financial information, as discussed in Note 2, "Restatement of Condensed Consolidated Financial Statements" to the accompanying Notes to Condensed Consolidated Financial Statements. The adjustments reflect changes to the previously reported information identified as a result of the audit process conducted by our independent registered public accounting firm, the independent Audit Committee review, senior management's evaluation of the prior accounting for the related findings and concerns raised by a former employee, and certain other matters. For the reader's convenience, we refer to these collectively as the "Audit and Review Process." As part of the Audit and Review Process, additional adjustments to the Prior Financial Information were identified. We refer to the adjustments identified in the Audit and Review Process as the "Restatement Adjustments." The term Restatement Adjustments refers to adjustments to correct errors in the Company's prior accounting and an adjustment to reflect the impact of a change in accounting estimate resulting from the Company's reassessment of the remaining useful lives of its property and equipment.
6
Restatement of Condensed Consolidated Financial Statements
The following tables present the impact of the Restatement Adjustments on the Company's previously reported Condensed Consolidated Balance Sheet as of June 30, 2011, the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2011, and the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2011:
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands)
June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 112,434 | $ | 34 | $ | 112,468 | ||||||
Accounts receivable, net | 23,986 | (735 | ) | 23,251 | ||||||||
Inventory | 10,849 | (478 | ) | 10,371 | ||||||||
Other assets | 2,328 | 86 | 2,414 | |||||||||
Total current assets | 149,597 | (1,093 | ) | 148,504 | ||||||||
Property and equipment, net | 58,517 | 47 | 58,564 | |||||||||
Goodwill | 139,637 | (16,045 | ) | 123,592 | ||||||||
Other intangibles, net | 74,377 | 16,863 | 91,240 | |||||||||
Other noncurrent assets | 4,710 | (161 | ) | 4,549 | ||||||||
Total assets | $ | 426,838 | $ | (389 | ) | $ | 426,449 | |||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Accounts payable and accrued expenses | $ | 26,798 | $ | 627 | $ | 27,425 | ||||||
Long-term debt and obligations due within one year | 9,350 | 490 | 9,840 | |||||||||
Advances from shareholder | 2,000 | - | 2,000 | |||||||||
Total current liabilities | 38,148 | 1,117 | 39,265 | |||||||||
Long-term debt and obligations | 31,172 | (1,342 | ) | 29,830 | ||||||||
Deferred income tax liabilities | 6,274 | 3,423 | 9,697 | |||||||||
Other long-term liabilities | 4,020 | 79 | 4,099 | |||||||||
Total noncurrent liabilities | 41,466 | 2,160 | 43,626 | |||||||||
- | ||||||||||||
Commitments and contingencies | ||||||||||||
Stockholders' equity | ||||||||||||
Swisher Hygiene Inc. stockholders’ equity | ||||||||||||
Common stock | 173 | - | 173 | |||||||||
Additional paid-in capital | 366,361 | 35 | 366,396 | |||||||||
Accumulated deficit | (19,339 | ) | (3,747 | ) | (23,086 | ) | ||||||
Accumulated other comprehensive income | 29 | 17 | 46 | |||||||||
Total Swisher Hygiene Inc. stockholders’ equity | 347,224 | (3,695 | ) | 343,529 | ||||||||
Non-controlling interest | - | 29 | 29 | |||||||||
Total stockholders' equity | 347,224 | (3,666 | ) | 343,558 | ||||||||
Total liabilities and stockholders' equity | $ | 426,838 | $ | (389 | ) | $ | 426,449 |
7
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per share data)
Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 | |||||||||||||||||||||||
Restatement | Restatement | |||||||||||||||||||||||
As Reported | Adjustments | As Restated | As Reported | Adjustments | As Restated | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Products | $ | 27,977 | $ | - | $ | 27,977 | $ | 43,404 | $ | - | $ | 43,404 | ||||||||||||
Services | 22,663 | (1 | ) | 22,662 | 33,121 | 6 | 33,127 | |||||||||||||||||
Franchise and other | 1,036 | 240 | 1,276 | 2,548 | 121 | 2,669 | ||||||||||||||||||
Total revenue | 51,676 | 239 | 51,915 | 79,073 | 127 | 79,200 | ||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||
Cost of revenue | 17,715 | 622 | 18,337 | 27,298 | 1,047 | 28,345 | ||||||||||||||||||
Route expenses | 13,158 | 413 | 13,571 | 20,274 | 395 | 20,669 | ||||||||||||||||||
Selling, general, and administrative | 18,891 | 1,316 | 20,207 | 31,216 | 3,651 | 34,867 | ||||||||||||||||||
Acquisition and merger expenses | 2,775 | (41 | ) | 2,734 | 4,091 | (93 | ) | 3,998 | ||||||||||||||||
Depreciation and amortization | 6,084 | (731 | ) | 5,353 | 8,792 | (544 | ) | 8,248 | ||||||||||||||||
Loss on extinguishment of debt | - | - | - | - | 1,500 | 1,500 | ||||||||||||||||||
Total costs and expenses | 58,623 | 1,579 | 60,202 | 91,671 | 5,956 | 97,627 | ||||||||||||||||||
Loss from operations | (6,947 | ) | (1,340 | ) | (8,287 | ) | (12,598 | ) | (5,829 | ) | (18,427 | ) | ||||||||||||
Other expense, net | (3,693 | ) | (68 | ) | (3,761 | ) | (5,966 | ) | (48 | ) | (6,015 | ) | ||||||||||||
Net loss before income taxes | (10,640 | ) | (1,408 | ) | (12,048 | ) | (18,564 | ) | (5,878 | ) | (24,442 | ) | ||||||||||||
Income tax benefit | 3,513 | 442 | 3,955 | 8,223 | 2,130 | 10,353 | ||||||||||||||||||
Net loss | $ | (7,127 | ) | $ | (966 | ) | $ | (8,093 | ) | $ | (10,341 | ) | $ | (3,747 | ) | $ | (14,089 | ) | ||||||
Loss per share | ||||||||||||||||||||||||
Basic and diluted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.10 | ) | ||||||
Weighted-average common shares used in the | ||||||||||||||||||||||||
computation of loss per share | ||||||||||||||||||||||||
Basic and diluted | 164,972,640 | - | 164,972,640 | 144,097,478 | - | 144,097,478 |
8
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
Net loss | $ | (10,342 | ) | $ | (3,747 | ) | $ | (14,089 | ) | |||
Cash used in operating activities | (10,204 | ) | (2,313 | ) | (12,517 | ) | ||||||
Cash used in investing activities | (69,977 | ) | (37,017 | ) | (106,994 | ) | ||||||
Cash provided by financing activities | 153,684 | 39,363 | 193,047 | |||||||||
Net increase in cash and cash equivalents | 73,503 | 33 | 73,536 | |||||||||
Cash and cash equivalents at the beginning of the period | 38,932 | - | 38,932 | |||||||||
Cash and cash equivalents at the end of the period | $ | 112,435 | $ | 33 | $ | 112,468 |
9
The significant portions of the Restatement Adjustments presented above are explained as follows:
Accounts receivable – The decrease in accounts receivable of $0.7 million is due primarily to a $1.2 million increase in the allowance for doubtful accounts which is offset by a $0.6 million of entries to adjust the opening balances of business combinations occurring during the period, and for the correction of general valuation matters.
Inventory – The decrease in inventory of $0.5 million is due to the revaluation of inventories in conjunction with purchase accounting which is separately discussed in the following section, Restatement of Net Assets Acquired.
Goodwill – The adjustment to decrease goodwill by $16.0 million is primarily due to the other intangible adjustments to tradenames, permits and formulas, and customer relationships and contracts, which is separately discussed in the following section, Restatement of Net Assets Acquired.
Other intangibles, net – The adjustment to increase other intangibles, net of $16.9 million primarily consists of entries to adjust the opening balances of business combinations occurring during the period including an increase of $28.2 million in the value assigned to purchased tradenames, permits and formulas, offset by a decrease of $11.3 million in customer relationships and contracts, which are separately discussed in the following section, Restatement of Net Assets Acquired.
Accounts payable and accrued expenses – The increase in accounts payable and accrued expenses of $0.6 million primarily consists of entries to accrue professional fees in the appropriate period included in selling, general and administrative expenses and certain acquisition and merger expenses.
Long-term debt and obligations due within one year – The adjustment to increase these obligations by $0.5 million is due to the reclassification of leases to capital from operating leases through purchase accounting considerations.
Long-term debt and obligations – The adjustment to decrease long-term obligations by $1.3 million consists of entries to correct opening balances of liabilities assumed in business combinations occurring during the period which are separately discussed in the following section, Restatement of Net Assets Acquired.
Deferred income tax liabilities – The adjustment to increase deferred income tax liabilities by $3.4 million is primarily due to the tax effect of book related adjustments to other intangibles which is separately discussed in the following section, Restatement of Net Assets Acquired.
Accumulated deficit and net loss – The increase in accumulated deficit and net loss of $3.7 million comprises the net restatement entries made during the period.
Three Months Ended June 30, 2011
Cost of revenue – The increase in cost of revenue of $0.6 million is primarily due to $0.5 million due to the revaluation of inventories in connection with business combinations occurring during the period for which the purchased inventory turned during the same period.
10
Selling, general and administrative – The increase in selling, general and administrative expenses of $1.3 million primarily consists of adjustments to bad debt expense totaling $1.2 million.
Depreciation and Amortization – The net decrease in depreciation and amortization expense of $0.7 million is due primarily to a decrease resulting from the change in estimate of the remaining useful lives for certain property and equipment of $0.5 million, and an entry of $0.3 million to correct for computational errors resulting in excess depreciation expense originally recorded in the period, partially off-set by several less significant entries.
Income tax benefit – The increase in income tax benefit $0.4 million consists of the tax effect of the additional book loss related to this quarter.
Six Months Ended June 30, 2011
Cost of revenue – The increase in cost of revenue of $1.0 million is primarily due to a $0.6 million revaluation of inventories in connection with business combinations occurring during the period for which the purchased inventory turned during the same period, and for the correction of valuation errors.
Selling, general and administrative – The increase in selling, general and administrative expenses of $3.7 million primarily consists of entries to bad debt expense totaling $1.5 million, plus entries to accrue expenses in the appropriate period of $2.1 million for selling, general and administrative and merger and acquisition expenses.
Depreciation and Amortization – The net decrease in depreciation and amortization expense of $0.5 million is due to a decrease of $0.6 million resulting from the change in estimate of the remaining useful lives for certain property and equipment, an entry of $0.3 million to correct for computational errors resulting in excess expense recorded in the period, partially offset by several insignificant entries, offset by an increase in amortization due to the amortization of the changes described above in Other intangibles, net.
Income tax benefit – The increase in income tax benefit of $2.1 million consists of the tax effect of the additional book loss year to date.
Loss on extinguishment of debt – The expense totaling $1.5 million reflects a penalty incurred and paid with the closing of the Company’s acquisition of Choice Environmental Services, Inc. which was previously treated by the Company as an element of purchase price recorded in goodwill.
Cash used in operating activities – The increase in cash used in operating activities of $2.3 million consists of the increase in net loss, partially offset by adjustments impacting working capital.
Cash used in investing activities – The increase in cash used in investing activities of $37.0 million consists primarily of reclassifying $39.2 million of Choice debt paid off at closing from financing activities to cash paid on acquisitions, partially offset by a $1.5 million decrease in the amount treated as acquisition purchase prices provided by as discussed above under loss on extinguishment of debt.
Cash provided by financing activities – The increase in cash provided by financing activities of $39.4 million consists primarily reclassifying $39.2 million of Choice debt paid off at closing from financing activities to cash paid for investing activities and $.2 million of adjustments to proceeds received on lines of credit.
11
Restatement of Net Assets Acquired
As referenced in the explanations above, significant balance sheet changes resulted from Restatement Adjustments to the original fair value of assets acquired and liabilities assumed in business combinations completed during the six month period ended June 30, 2011. These adjustments, which consist primarily of increases in intangible assets and deferred income tax liabilities and decreases to goodwill, reflect a final assessment completed in connection with the Audit and Review Process and included valuation analyses prepared by the valuation groups of two nationally recognized public accounting firms. Restatement Adjustments for the acquisition of Choice Environmental Services, Inc. ("Choice") and all other acquisitions are shown separately as follows:
Restatement | ||||||||||||
Choice Acquisition | As Reported | Adjustments | As Restated | |||||||||
Net tangible assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 341 | $ | (82 | ) | $ | 259 | |||||
Accounts receivable | 6,096 | 329 | 6,425 | |||||||||
Inventory | 151 | - | 151 | |||||||||
Property and equipment | 29,618 | (135 | ) | 29,483 | ||||||||
Customer contracts & relationships | 27,840 | (1,390 | ) | 26,450 | ||||||||
Non-compete agreements | 2,880 | 3,670 | 6,550 | |||||||||
Trademarks & permits | - | 9,300 | 9,300 | |||||||||
Deferred income tax assets and other assets | 2,234 | (5 | ) | 2,229 | ||||||||
Accounts payable and accrued expenses | (7,960 | ) | (1,358 | ) | (9,318 | ) | ||||||
Capital lease obligations | (3,524 | ) | 1,015 | (2,509 | ) | |||||||
Deferred income tax liabilities | (12,002 | ) | (4,744 | ) | (16,746 | ) | ||||||
Total net assets acquired | 45,674 | 6,599 | 52,274 | |||||||||
Goodwill | 51,601 | (8,099 | ) | 43,502 | ||||||||
Total purchase price - Choice Acquisition | $ | 97,275 | $ | (1,500 | ) | $ | 95,776 | |||||
Total purchase price | ||||||||||||
Less: debt assumed | (40,941 | ) | 39,219 | (1,722 | ) | |||||||
Less: cash received | - | (254 | ) | (259 | ) | |||||||
Less: issuance of shares | (48,781 | ) | 1 | (48,780 | ) | |||||||
Cash Paid | $ | 7,553 | $ | 37,461 | $ | 45,015 |
The significant portions of the Restatement of Net Assets Acquired - Choice are explained as follows:
Other intangibles, net – The increase in other intangibles of $11.6 million consists of entries to record the estimated fair value of trademarks and permits of $9.3 million, to increase the estimated fair value of non-compete agreements by $3.7 million and to reduce the estimated fair value of customer contracts and relationships by $1.4 million as a result of final valuation analysis completed by third party firms. These entries, on a net basis, reduce the amount of recorded goodwill.
Accounts payable and accrued expenses – The increase of accounts payable and accrued expenses of $1.4 million is due to a $0.4 million increase to adjust the fair market value of the opening balances for unfavorable contracts and a $1.0 million increase primarily to reflect the accrual of preacquisition liabilities.
Capital lease obligations – The net decrease in long-term obligations of $1.0 million is a result of changes to the capital vs. operating classification of leases.
Deferred income tax liabilities – The increase in deferred income tax liabilities of $4.7 million and a corresponding increase to goodwill is to record deferred income tax liabilities related to the tax effect of the difference between the book and tax basis of the separately identifiable acquired intangible assets, which were not previously valued, as discussed in other intangibles.
Goodwill – The net decrease in goodwill of $8.1 million primarily consists of the net increase of $6.6 million in total net assets acquired as detailed above, and a $1.5 million reduction in goodwill resulting in the recharacterization of the penalty paid by Choice as a loss on extinguishment of debt as described in the Restatement Adjustments section.
12
Six Months Ended June 30, 2011 | ||||||||||||
All Other Acquisitions | Restatement | |||||||||||
As Reported | Adjustments | As Restated | ||||||||||
Number of business acquired | 31 | 31 | ||||||||||
Net assets acquired: | ||||||||||||
Cash and cash equivalents | $ | - | $ | 122 | $ | 122 | ||||||
Accounts receivable and other assets | 6,173 | 276 | 6,449 | |||||||||
Inventory | 4,725 | 35 | 4,760 | |||||||||
Property and equipment | 14,074 | 765 | 14,839 | |||||||||
Other intangibles | 40,533 | 4,909 | 45,442 | |||||||||
Accounts payable and accrued expenses | (7,139 | ) | 1,449 | (5,690 | ) | |||||||
Deferred income tax liabilities | - | (910 | ) | (910 | ) | |||||||
Total net assets acquired | 58,366 | 6,646 | 65,012 | |||||||||
Goodwill | 58,314 | (7,957 | ) | 50,357 | ||||||||
Aggregate purchase price | $ | 116,680 | $ | (1,311 | ) | $ | 115,369 | |||||
Aggregate purchase price | $ | 116,680 | (1,311 | ) | $ | 115,369 | ||||||
Less: debt assumed | 8,599 | - | 8,599 | |||||||||
Less: contingent consideration | 3,018 | (1,340 | ) | 1,678 | ||||||||
Less: issuance of shares | 44,126 | - | 44,126 | |||||||||
Less: cash received | - | 500 | 500 | |||||||||
Less: cash held back | 500 | (378 | ) | 122 | ||||||||
Less: minority interest | - | 29 | 29 | |||||||||
Cash Paid | $ | 60,437 | $ | (122 | ) | $ | 60,315 |
13
The significant portions of the Restatement of Net Assets Acquired – All Other Acquisitions are explained as follows:
Property and equipment – The increase of property and equipment of $0.7 million primarily consists of entries to increase the value of property and equipment in accordance with the results of final valuation analysis.
Other intangibles – The increase in other intangibles of $4.9 million primarily consists of entries to increase the value assigned to customer contracts and relationships in accordance with the results of final valuation analysis.
Accounts payable and accrued expenses – The net decrease in accounts payable and accrued expenses of $1.4 million is primarily to remove certain accrued expenses in accordance with the results of final valuation analysis.
Deferred income tax liabilities – The increase in deferred tax liabilities of $0.9 million and corresponding increase to goodwill is to record deferred tax liabilities related to the tax effect of the difference between the book and tax basis of certain acquired fixed assets and indentifiable intangible assets.
Goodwill – The net decrease of $8.0 million consists of a $6.6 million increase in total net assets acquired, and to reverse $1.3 million for an estimate associated with an acquisition earnout.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission ("SEC") and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The Company's Condensed Consolidated Financial Statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented. The information at December 31, 2010 in the Company's Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 31, 2011. The Company's 2010 Annual Report on Form 10-K, together with the information included in such report, is referred to in this quarterly report as the "2010 Annual Report." This quarterly report should be read in conjunction with the 2010 Annual Report.
All material intercompany balances and transactions have been eliminated in consolidation. Certain adjustments have been made to conform prior periods to the current year presentation.
Financial information, other than share and per share data, is presented in thousands of dollars.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
The Company's significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements in our 2010 Annual Report. Any significant changes to those policies or new significant policies are described below.
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Change in Estimate
The Company continues to accumulate and analyze data regarding the operating performance of certain assets and their economic life. This analysis indicated that overall these assets will continue to be used in the business for different periods than originally anticipated. As a result, the Company revised the estimated useful lives of certain property and equipment as follows:
Useful Life in Months | ||||||||
Previous | Revised | |||||||
Linen | 36 | 24 | ||||||
Dust control | 3 | 36 | ||||||
Dish machines | 60 | 84 | ||||||
Dispensers | 24 to 36 | 24 to 60 | ||||||
Mops and bar towels | 3 to 36 | expensed | ||||||
Vehicles | 36 | 60 | ||||||
Office furniture and fixtures | 36 | 60 |
The change in the useful life for these assets reflect the Company's current estimate of future periods to benefit. The effect of this change in estimate for the six months ended June 30, 2011 was a reduction of depreciation expense of $0.8 million. Had this change taken place in 2010 and 2009, depreciation expense would have decreased by $0.3 million and $0.1 million, respectively.
Acquisition and merger expenses
Acquisition and merger expenses include costs directly related to the acquisition of three of our franchises and fifteen independent businesses during the three months ended June 30, 2011 and the acquisition of seven of our franchisees and twenty-five independent businesses during the six months ended June 30, 2011, and costs directly related to the merger with CoolBrands International, Inc. as discussed in Note 1, "Business Description" of the Notes to Consolidated Financial Statements in our 2010 Annual Report. These costs include third party due diligence, legal, accounting and professional service expenses.
Segments
On March 1, 2011, the Company completed its acquisition of Choice, a Florida based company that provides a complete range of solid waste and recycling collection, transportation, processing and disposal services. As a result of the acquisition of Choice, the Company now has two segments: 1) Hygiene and 2) Waste. The Company's Hygiene segment provides commercial hygiene services and products throughout much of the United States and operates a worldwide franchise and license system to provide the same products and services in markets where Company-owned operations do not exist. The Company's Waste segment consists of the operations of Choice and will include future acquisitions of solid waste collection businesses. Prior to the acquisition of Choice, the Company managed, allocated resources, and reported in one segment, the Hygiene segment. See Note 15, "Segments".
The Company sold its Waste segment during the fourth quarter of 2012 as more fully described in Note 17, "Subsequent Events."
Adoption of Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the FASB issued new standards for multiple-deliverable revenue arrangements. These new standards affect the determination of when individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. In addition, these new standards modify the manner in which the transaction consideration is allocated across separately identified deliverables, eliminate the use of the residual value method of allocating arrangement consideration and requires expanded disclosure. These new standards became effective for multiple-element arrangements entered into or materially modified on or after January 1, 2011. Earlier application was permitted with required transition disclosures based on the period of adoption. We adopted these standards for multiple-element arrangements entered into or materially modified on or after January 1, 2011. The adoption of this accounting standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued new standards defining when step two of the goodwill impairment test for reporting units with zero or negative carrying amounts should be performed and modifies step one of the goodwill impairment test for reporting units with zero or negative carrying amounts. For reporting units with zero or negative carrying amounts, an entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The standards are effective for fiscal years and interim periods within those years, beginning after December 15, 2010 and were effective for the Company on January 1, 2011. The adoption of this accounting standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
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Business Combinations: In December 2010, the FASB issued new standards that clarify that if comparative financial statements are presented, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The standards are effective prospectively for material (either on an individual or aggregate basis) business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company has included the required disclosures in Note 4, "Acquisitions".
NOTE 4 — ACQUISITIONS
Choice Acquisition
On February 13, 2011, we entered into an Agreement and Plan of Merger (the "Choice Agreement") by and among Swisher Hygiene, Swsh Merger Sub, Inc., a Florida corporation and wholly-owned subsidiary of Swisher Hygiene, Choice, and other parties, as set forth in the Choice Agreement. The Choice Agreement provided for the acquisition of Choice by Swisher Hygiene by way of merger.
In connection with the merger with Choice, on February 23, 2011, we entered into an agency agreement, which the agents agreed to market, on a best efforts basis 12,262,500 subscription receipts ("Subscription Receipts") at a price of $4.80 per Subscription Receipt for gross proceeds of up to $58.9 million. Each Subscription Receipt entitled the holder to acquire one share of our common stock, without payment of any additional consideration, upon completion of our acquisition of Choice.
On March 1, 2011, we closed the acquisition of Choice and issued 8,281,920 shares of our common stock to the former shareholders of Choice, assumed $1.7 million of debt, and paid off $39.2 million of Choice debt. In paying the balance on this Choice debt, we incurred a prepayment penalty of $1.5 million which is included in loss on extinguishment of debt in the Condensed Consolidated Statement of Operations. Certain shareholders of Choice received $5.7 million in cash for warrants to purchase an additional 918,076 shares of common stock at an exercise price of $6.21, which expired on March 31, 2011 and were not exercised.
On March 1, 2011, in connection with the closing of the acquisition of Choice, the 12,262,500 Subscription Receipts were exchanged for 12,262,500 shares of our common stock. We agreed to use commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock underlying the Subscription Receipts. If the registration statement was not filed or declared effective within specified time periods, or if the registration statement had ceased to be effective for a period of time exceeding certain grace periods, between the date such shares of common stock were issued and November 10, 2011, the initial subscribers of Subscription Receipts would have been entitled to receive an additional 0.1 share of common stock for each share of common stock underlying Subscription Receipts held by any such initial subscriber at the time such grace period lapsed. On April 21, 2011, the SEC declared effective a resale registration statement relating to the 8,281,920 shares issued to the former shareholders of Choice and the 12,262,500 shares issued in connection with the private placement. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statement relating to shares issued in exchange for the Subscription Receipts is not effective.
Choice has been in business since 2004 and serves more than 150,000 residential and 7,500 commercial customers in the Southern and Central Florida regions through its 320 employees and over 150 collection vehicles by offering a complete range of solid waste and recycling collection, transportation, processing and disposal services. Choice operates six hauling operations and three transfer and materials recovery facilities.
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The following table presents the purchase price consideration as of March 1, 2011:
As Restated | ||||
Issuance of shares at a price of $5.89 per share | $ | 48,780 | ||
Debt | 1,722 | |||
Cash paid | 45,274 | |||
Total purchase price consideration | $ | 95,776 |
The following table summarizes the allocation of the purchase price, after considering the Restatement Adjustments, based on the fair value of the acquired assets and assumed liabilities of Choice as of March 1, 2011:
As Restated | ||||
Net assets acquired: | ||||
Cash and cash equivalents | $ | 259 | ||
Accounts receivable | 6,425 | |||
Inventory | 151 | |||
Property and equipment | 29,484 | |||
Customer contracts & relationships | 26,450 | |||
Non-compete agreements | 6,550 | |||
Trademarks & permits | 9,300 | |||
Deferred income tax assets and other assets | 2,228 | |||
Accounts payable and accrued expenses | (9,318 | ) | ||
Capital lease obligations | (2,509 | ) | ||
Deferred income tax liabilities | (16,746 | ) | ||
Total net assets acquired | 52,274 | |||
Goodwill | 43,502 | |||
Total purchase price | $ | 95,776 |
Other assets include $0.7 million of notes receivable from Choice shareholders. In addition, the Company's Condensed Consolidated Statement of Operations for the six months ended June 30, 2011 includes $17.7 million of revenue and $0.5 million of net income before income taxes from Choice operations.
Supplemental pro forma information
The following supplemental pro forma information presents the financial results as if the acquisiiton of Choice had occurred on January 1, 2010 for the three and six months ended June 30, 2011 and 2010. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition of Choice been completed on January 1, 2010, nor are they indicative of any future results.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated) | 2010 | (As Restated) | 2010 | |||||||||||||
Supplemental Pro Forma Information: | ||||||||||||||||
Revenue | $ | 51,915 | $ | 27,151 | $ | 90,808 | $ | 54,328 | ||||||||
Loss from operations | $ | (8,287 | ) | $ | (1,487 | ) | $ | (16,605 | ) | $ | (3,868 | ) | ||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.08 | ) | $ | (0.06 | ) | ||||
Weighted-average common shares used in the | ||||||||||||||||
computation of loss per share | ||||||||||||||||
Basic and diluted | 164,972,640 | 78,439,272 | 150,945,618 | 78,406,661 |
Pro forma adjustments include adjustments for (a) additional amortization related to the acquired identifiable intangibles; (b) additional depreciation as a result of an adjustment to the fair value of the property and equipment acquired; (c) a reduction of rent expense, offset by an increase for depreciation for leased properties with related parties treated as capital leases in connection with the acquisition, and (d) a reduction for interest expense and amortization of debt discounts and financing costs for debt that was paid off as part of the acquisition, offset by interest expense related to capital leases entered into in connection with the acquisition. The proforma adjustments reflect treatment of $1.5 million loss on the extinguishment of debt in 2010, which is included in the Company’s Condensed Consolidated Statement of Operations in 2011.
The Company sold its Waste segment, which consisted principally of Choice, during the fourth quarter of 2012, as more fully described in Note 17, "Subsequent Events."
Other Acquisitions
During the six months ended June 30, 2011, the Company acquired seven of its franchisees and twenty-five independent businesses, in addition to the acquisition of Choice. The results of operations of these acquisitions have been included in the Company's Condensed Consolidated Statement of Operations since their respective acquisition dates. None of the other acquisitions were significant to the Company's consolidated financial results and therefore, supplemental pro forma financial information is not presented.
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The following table summarizes the allocation of the purchase price of these acquisitions, after considering the Restatement Adjustments, based on the fair value of the acquired assets and assumed liabilities:
As Restated | ||||
Number of businesses acquired | 31 | |||
Net assets acquired: | ||||
Cash and cash equivalents | $ | 122 | ||
Accounts receivable and other assets | 6,449 | |||
Inventory | 4,760 | |||
Property and equipment | 14,839 | |||
Other intangibles | 45,442 | |||
Accounts payable and accrued expenses | (5,690 | ) | ||
Deferred income tax liabilities | (910 | ) | ||
Total net assets acquired | 65,012 | |||
Goodwill | 50,357 | |||
Aggregate purchase price | $ | 115,369 | ||
Less: debt assumed | 8,599 | |||
Less: contingent consideration | 1,678 | |||
Less: issuance of shares | 44,126 | |||
Less: cash held back | 500 | |||
Less: cash received | 122 | |||
Less: minority interest | 29 | |||
Cash Paid | $ | 60,315 |
Contingent consideration is payable to the former owners of our acquired businesses and consists of earn-out obligations which are based on the achievement of contractually negotiated levels of performance by certain of our acquired businesses and are payable in cash quarterly for three years ending March 31, 2014. These contingent earnouts are recorded at fair market value as of the acquisition date. There are no continuing employment obligations associated with any of the earnouts and they have therefore been treated as acquisition consideration. See Note 17, "Subsequent Events" for additional acquisitions subsequent to June 30, 2011.
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NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets have been recognized in connection with the acquisitions described in Note 4, "Acquisitions" and substantially all of the balance is expected to be fully deductible for income tax purposes, except for goodwill related to the acquisition of Choice, which was a stock acquisition. Changes in the carrying amount of goodwill and other intangibles for each of the Company's segments during the six months ended June 30, 2011 were as follows:
Hygiene | Waste | |||||||
(As Restated) | (As Restated) | |||||||
Goodwill | ||||||||
Balance — December 31, 2010 | ||||||||
Gross goodwill | $ | 30,530 | $ | - | ||||
Accumulated impairment losses | (870 | ) | - | |||||
Total goodwill | 29,660 | - | ||||||
Goodwill acquired | 41,674 | 52,186 | ||||||
Foreign exchange translation | 72 | - | ||||||
Balance — June 30, 2011 | ||||||||
Gross goodwill | 72,276 | 52,186 | ||||||
Accumulated impairment losses | (870 | ) | - | |||||
Total goodwill | $ | 71,406 | $ | 52,186 | ||||
Customer Relationships | ||||||||
Balance — December 31, 2010 | $ | 5,780 | $ | - | ||||
Customer contracts and relationships acquired | 29,985 | 36,230 | ||||||
Amortization | (1,972 | ) | (1,250 | ) | ||||
Foreign exchange translation | 67 | - | ||||||
Balance — June 30, 2011 | $ | 33,860 | $ | 34,980 | ||||
Non-compete Agreements | ||||||||
Balance — December 31, 2010 | $ | 1,889 | $ | - | ||||
New Non-compete Agreements | 3,627 | 6,870 | ||||||
Amortization | (327 | ) | (703 | ) | ||||
Foreign exchange translation | 23 | - | ||||||
Balance — June 30, 2011 | $ | 5,212 | $ | 6,167 | ||||
Trademarks | ||||||||
Balance — December 31, 2010 | $ | - | $ | - | ||||
Trademarks acquired | 520 | 9,420 | ||||||
Amortization | - | - | ||||||
Balance — June 30, 2011 | $ | 520 | $ | 9,420 | ||||
Formulas | ||||||||
Balance — December 31, 2010 | $ | - | $ | - | ||||
Agreements | 1,090 | - | ||||||
Amortization | (9 | ) | - | |||||
Balance — June 30, 2011 | $ | 1,081 | $ | - |
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Hygiene Segment
The fair value of the customer relationships and contracts acquired is based on future discounted cash flows expected to be generated from those customers. These customer relationships and contracts will be amortized on a straight-line basis over five to ten years, which is primarily based on historical customer attrition rates and length of contracts. The fair value of the non-compete agreements will be amortized on a straight-line basis over the length of the agreements, typically not exceeding five years. The fair values of formulas are amortized on a straight-line basis over twenty years. Trademarks and tradenames are generally indefinite lived intangibles with no amortization. In instances where there is a finite life remaining on a particular trademark or tradename, the Company amortizes them on a straight-line basis over this period.
Waste Segment
The fair value of the customer relationships and contracts is based on future discounted cash flows expected to be generated from contracts with municipalities and customers. These customer relationships and contracts will be amortized on a straight-line basis over seven years, which is the weighted-average of the estimated life of the customers acquired. The fair value of the non-compete agreements will be amortized on a straight-line basis over the length of the agreements, typically not exceeding five years. Trademarks, tradenames and permits are considered to be indefinite lived intangibles and therefore no amortization expense has been recorded.
NOTE 6 — STOCKHOLDERS’ EQUITY
Changes in stockholders’ equity for the six months ended June 30, 2011 consisted of the following:
As Restated | ||||
Balance at December 31, 2010 | $ | 46,028 | ||
Issuance of shares in connection with Choice acquisition (See Note 4) | 48,780 | |||
Issuance of shares in connection with private placements | 191,181 | |||
Issuance of shares in connection with acquisitions (See Note 4) | 44,067 | |||
Issuance of shares in connection with purchases of property and equipment | 1,183 | |||
Stock based compensation | 1,846 | |||
Exercise of stock options & warrants | 3,367 | |||
Conversion of convertible promissory note payable (See Note 7) | 21,195 | |||
Foreign currency translation | (28 | ) | ||
Non-controlling interest | 28 | |||
Net loss | (14,089 | ) | ||
Balance at June 30, 2011 | $ | 343,558 |
Choice
As part of the purchase price of Choice, we issued 8,281,920 shares of our common stock to the previous shareholders of Choice. See Note 4, "Acquisitions."
Private Placements
As discussed in Note 4, on March 1, 2011, in connection with the closing of the Choice acquisition, the 12,262,500 Subscription Receipts were exchanged for 12,262,500 shares of our common stock. As part of this transaction, we received cash of $56.3 million, net of issuance costs paid in cash of approximately $160,000.
On March 22, 2011, we entered into a series of arm's length securities purchase agreements to sell 12,000,000 shares of our common stock at a price of $5.00 per share, for net proceeds of $59.8 million to certain funds of a global financial institution (the "March Private Placement"). On March 23, 2011, we closed the March Private Placement and issued 12,000,000 shares of our common stock. Pursuant to the securities purchase agreements, the shares of common stock issued in the March Private Placement could not be transferred on or before June 24, 2011 without our consent. We agreed to use our commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock sold in the March Private Placement. If the registration statement was not filed or declared effective within specified time periods the investors would have been, or if the registration statement ceases to remain effective for a period of time exceeding a sixty day grace period, the investors will be entitled to receive monthly liquidated damages in cash equal to one percent of the original offering price for each share purchased in the private placement that at such time remain subject to resale restrictions, with an interest rate of one percent per month accruing daily for liquidated damages not paid in full within ten business days. On April 21, 2011, the SEC declared effective a resale registration statement relating to the 12,000,000 shares issued in the March Private Placement. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statement relating to shares issued in the March Private Placement is not effective, and as such we may be subject to liability under the penalty provision.
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On April 15, 2011, we entered into a series of arm's length securities purchase agreements to sell 9,857,143 shares of our common stock at a price of $7.70 per share, for net proceeds of $75.1 million to certain funds of a global financial institution (the "April Private Placement"). On April 19, 2011, we closed the April Private Placement and issued 9,857,143 shares of our common stock. Pursuant to the securities purchase agreements, the shares of common stock issued in the April Private Placement could not be transferred on or before June 24, 2011 without our consent. We agreed to use commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock sold in the April Private Placement. If the registration statement was not filed or declared effective within the specified time periods, the investors would have been, or if the registration statement ceases to remain effective for a period of time exceeding certain grace periods, the investors will be, entitled to receive monthly liquidated damages in cash equal to one percent of the original offering price for each share purchased in the April Private Placement that at such time remain subject to resale restrictions, with an interest rate of one percent per month accruing daily for liquidated damages not paid in full within ten business days. On August 12, 2011, the SEC declared effective a resale registration statement relating to the 9,857,143 shares issued in the April Private Placement. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statement relating to shares issued in the April Private Placement is not effective, and as such we may be subject to the liquidated damages penalty.
Acquisitions and Asset Purchases
We issued a total of 325,386 shares of our common stock in connection with certain acquisitions of franchisees and businesses during the six months ended June 30, 2011. Our stock price was at a weighted-average price of $5.97 at the time these shares were issued. In addition, during the six months ended June 30, 2011, we issued 32,751 shares at a fair value of $6.15 for purchases of property and equipment.
Stock Based Compensation
Stock based compensation is the result of the recognition of the fair value of share based compensation on the date of grant over the service period for which the awards are expected to vest. Options to purchase 705,000 shares were exercised at a weighted average exercise price of $0.88 during 2011.
In May 2011, warrants to purchase 5,500,000 shares with an exercise price of $0.50 in Canadian dollars per warrant issued to a director of CoolBrands and the Company and certain parties related to the director, were exercised and as a result, we received cash of $2,750,000 in Canadian dollars.
Convertible Promissory Note
During 2011, convertible promissory notes with aggregate principal amounts of $13.6 million were converted into 3,207,459 shares of the Company’s stock.
The Company sold its Waste segment, which consisted principally of Choice, during the fourth quarter of 2012, as more fully described in Note 17, "Subsequent Events."
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NOTE 7 — LONG-TERM OBLIGATIONS
Long-term obligations consist of the following as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, | |||||||
(As Restated) | 2010 | |||||||
Line of credit agreement dated March 2011 and matures in July 2013, | ||||||||
interest rate of 3.2% at June 30,2011. | $ | 24,797 | $ | - | ||||
Line of credit agreement dated March 2008. Interest payable | ||||||||
monthly at one month LIBOR plus 2.85% at December 31, 2010, | ||||||||
interest rate of 3.11% at December 31, 2010. | - | 9,947 | ||||||
Line of credit agreement dated June 2008. Interest payable | ||||||||
monthly at one month LIBOR plus 1.50% at December 31, 2010, | ||||||||
interest rate of 1.76% at December 31, 2011. | - | 15,000 | ||||||
Acquisition notes payables | 9,219 | 7,891 | ||||||
Capitalized lease obligations with related parties | 3,459 | - | ||||||
Capitalized lease obligations | (1,607 | ) | 550 | |||||
Notes payable under Master Loan and Security Agreement, due in | ||||||||
monthly installments and maturing in 2012. Interest is payable | ||||||||
monthly at a weighted-average interest rate of 8% at June 30, | ||||||||
2011 and December 31, 2010. | 55 | 249 | ||||||
Convertible promissory notes: | ||||||||
6% Note due June 30, 2011 | - | 5,000 | ||||||
4% Notes at various dates through December 15, 2011 | 3,748 | 5,771 | ||||||
Total obligations | 39,671 | 44,408 | ||||||
Amounts due within one year | (9,841 | ) | (13,379 | ) | ||||
Long-term debt and obligations | $ | 29,830 | $ | 31,029 |
Revolving Credit Facilities
In March 2011, we entered into a $100.0 million senior secured revolving credit facility (the "credit facility"). Under the credit facility, the Company has an initial borrowing availability of $32.5 million, which will increase to the fully committed $100.0 million upon delivery of our unaudited quarterly financial statements for the quarter ended March 31, 2011 and satisfaction of certain financial covenants regarding leverage and coverage ratios and a minimum liquidity requirement, which requirements we have met as of March 31, 2011.
Borrowings under the credit facility are secured by a first priority lien on substantially all of our existing and hereafter acquired assets, including $25.0 million of cash on borrowings in excess of $75.0 million. Furthermore, borrowings under the facility are guaranteed by all of our domestic subsidiaries and secured by substantially all the assets and stock of our domestic subsidiaries and substantially all of the stock of our foreign subsidiaries. Interest on borrowings under the credit facility will typically accrue at London Interbank Offered Rate ("LIBOR") plus 2.5% to 4.0%, depending on the ratio of senior debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") (as such term is defined in the new credit facility, which includes specified adjustments and allowances authorized by the lender, as provided for in such definition). We also have the option to request swingline loans and borrowings using a base rate. Interest is payable monthly or quarterly on all outstanding borrowings. The credit facility matures on July 31, 2013.
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Borrowings and availability under the new credit facility are subject to compliance with financial covenants, including achieving specified consolidated EBITDA levels, which will depend on the success of our acquisition strategy, and maintaining leverage and coverage ratios and a minimum liquidity requirement. The consolidated EBITDA covenant, the leverage and coverage ratios, and the minimum liquidity requirements should not be considered indicative of the Company's expectations regarding future performance. The credit facility also places restrictions on our ability to incur additional indebtedness, make certain acquisitions, 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. Failure to achieve or maintain the financial covenants in the credit facility or failure to comply with one or more of the operational covenants could adversely affect our ability to borrow monies and could result in a default under the credit facility. The credit facility is subject to other standard default provisions.
The credit facility replaced our aggregated $25.0 million credit facilities, which are discussed in the 2010 Annual Report.
See Note 17, "Subsequent Events" which discusses subsequent amendments to the credit facility as well as the payoff of the credit facility in conjunction with the sale of the Company's Waste segment in the fourth quarter of 2012.
Choice Capital Lease Obligations with Related Parties
In connection with the acquisition of Choice, we entered into capital leases that have initial terms of five or ten years with companies owned by shareholders of Choice, to finance the cost of leasing office buildings and properties, including warehouses. The fair value of these leased properties of $1.0 million is included in property and equipment and will be depreciated over the term of the respective leases.
The Company sold its Waste segment, which consists principally of Choice, during the fourth quarter of 2012, as more fully described in Note 17, "Subsequent Events" and in connection therewith, transferred all remaining capital lease obligations to the buyers.
Convertible Notes
In February 2011, the 6% convertible promissory note of $5.0 million due on June 30, 2011 that was issued in November 2010 as part of consideration paid for an acquisition was converted into 1,312,864 of the Company's common shares. Since the convertible note was issued as part of a business combination, the note was recorded at fair value of $6.4 million on the date of issuance including $5.2 million recorded as a current liability and $1.2 million recorded as additional paid-in capital reflecting the promissory note's beneficial conversion feature. As of December 31, 2010, the net carrying amount of this promissory note was $6.4 million ($6.3 million principal and conversion feature and $0.1 million unamortized premium).
In addition during 2010, the Company issued convertible promissory notes with an aggregate principal value of $4,746,480. The notes have a 4% interest rate, mature at various times up to September 30, 2011 and are convertible into shares of our common stock at conversion rates from $3.88 to $4.18. The holder may convert the principal and interest into a variable number of the Company's common stock at any time following both (i) conditional approval by the Toronto Stock Exchange ("TSX") of the listing of the shares of Company's common shares issuable upon conversion of each note and (ii) the date that the Company's Registration Statement on Form S-1 for the resale of the Company's common stock is declared effective by the SEC, but not later than the maturity date of each note.
During the six months ended June 30, 2011 and in connection with certain acquisitions, the Company issued convertible promissory notes with an aggregate principal value of $7.1 million. The notes have a 4% interest rate and are convertible into a maximum aggregate of 3,666,204 shares of our common stock from $4.82 to $5.68. The holder may convert the principal and interest into a variable number of the Company's common stock at any time following both (i) conditional approval by the TSX of the listing of the shares of Company's common shares issuable upon conversion of each note and (ii) the date that the Company's Registration Statement on Form S-1 for the resale of the Company's common stock is declared effective by the SEC but not later than the maturity date of each note.
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NOTE 8 — FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The Company determines the fair value of certain assets and liabilities based on assumptions that market participants would use in pricing the assets or liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or the "exit price." The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and gives precedence to observable inputs in determining fair value. The following levels were established for each input:
Level 1: "Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets."
Level 2: "Include other inputs that are observable for the asset or liability either directly or indirectly in the marketplace."
Level 3: "Unobservable inputs for the asset or liability."
The above convertible promissory notes that are convertible into a variable number of shares of the Company's common stock were recorded at fair value on the date of issuance and subsequently at each reporting period. The fair value of these convertible promissory notes was based primarily on a Black-Scholes pricing model. The significant management assumptions and estimates used in determining the fair value included the expected term and volatility of our common stock. The expected volatility was based on an analysis of industry peer's historical stock price over the term of the notes as the Company did not have sufficient history of its own stock volatility, which was estimated at approximately 25%. Subsequent changes in the fair value of these instruments were recorded in other expense, net on the Condensed Consolidated Statements of Operations. Future movement in the market price of our stock could significantly change the fair value of these instruments and impact our earnings.
The convertible promissory notes that are convertible into a variable number of the Company's shares issued during 2010 and 2011 are Level 3 financial instruments since they are not traded on an active market and there are unobservable inputs, such as expected volatility used to determine the fair value of these instruments. The following table is a reconciliation of changes in carrying value of these notes including changes in fair value for notes that are convertible into a variable number of the Company's common shares for the six months ended June 30, 2011:
As Restated | ||||
Balance at December 31, 2010 | $ | 5,771 | ||
Issuance of convertible promissory notes | 8,324 | |||
Unrealized losses included in earnings | 1,961 | |||
Balance at March 31, 2011 | 16,056 | |||
Issuance of convertible promissory notes | 574 | |||
Settlement/conversion of convertible promissory note | (15,933 | ) | ||
Unrealized losses included in earnings | 3,625 | |||
Balance at June 30, 2011 | $ | 4,322 |
Financial Instruments
The Company's financial instruments, which may expose the Company to concentrations of credit risk, include cash and cash equivalents, account receivables, accounts payable, and debt. Cash and cash equivalents are maintained at financial institutions. The carrying amounts of cash and the current portion of accounts receivable and accounts payable approximate fair value due to the short maturity of these instruments. 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. In addition, the convertible promissory notes that are convertible into a variable number of the Company's common shares are recorded at fair value at each reporting period date.
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NOTE 9 — INVENTORY
At June 30, 2011 and December 31, 2010, inventory consists of finished goods of $10.4 million and $3.0 million, respectively. At June 30, 2011, inventory consisted of finished goods of $9.4 million and raw materials of $1.0 million. At December 31, 2010, inventory consisted of finished goods of $3.0 million.
NOTE 10 — OTHER EXPENSE, NET
Other expense, net consists of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated) | 2010 | (As Restated) | 2010 | |||||||||||||
Interest expense | $ | (414 | ) | $ | (377 | ) | $ | (759 | ) | $ | (682 | ) | ||||
Unrealized loss on debt related fair value | ||||||||||||||||
measurements | (3,555 | ) | - | (5,586 | ) | - | ||||||||||
Foreign currency gain | 128 | - | 163 | - | ||||||||||||
Interest income | 80 | 22 | 97 | 36 | ||||||||||||
Other | 70 | - | 70 | - | ||||||||||||
Total other expense, net | $ | (3,761 | ) | $ | (355 | ) | $ | (6,015 | ) | $ | (646 | ) |
NOTE 11 — COMPREHENSIVE LOSS
Comprehensive loss consists of the following:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated) | 2010 | (As Restated) | 2010 | |||||||||||||
Net loss | $ | (8,093 | ) | $ | (1,770 | ) | $ | (14,089 | ) | $ | (3,365 | ) | ||||
Foreign currency translation | (187 | ) | - | (29 | ) | - | ||||||||||
Comprehensive loss | $ | (8,280 | ) | $ | (1,770 | ) | $ | (14,060 | ) | $ | (3,365 | ) |
NOTE 12 — SUPPLEMENTAL CASH FLOW INFORMATION
The following table includes supplemental cash flow information, including noncash investing and financing activity for the six months ended June 30, 2011 and 2010.
2011 | ||||||||
As Restated | 2010 | |||||||
Cash received for interest | 167 | 6 | ||||||
Cash paid for interest | 464 | 447 | ||||||
Conversion of promissory note | 21,195 | - | ||||||
Issuance of shares for acquisitions | 92,845 | - | ||||||
Issuance of shares for puchases of property and settle liabilities | 1,182 | - |
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NOTE 13 — LOSS PER SHARE
Loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The following were not included in the computation of diluted loss per share for the six months ended June 30, 2011 and 2010 as their inclusion would be antidilutive:
· | Warrants to purchase 5,500,000 shares of common stock at $0.50 per share were outstanding and expire in November 2011. |
· | Stock options and restricted units to purchase 5,055,428 shares of common stock. |
· | Convertible promissory notes that if-converted would result in 659,062 shares of common stock. |
NOTE 14 — INCOME TAXES
As a result of the merger with CoolBrands International, Inc. on November 2, 2010, as discussed in Note 1, "Business Description" of the Notes to Consolidated Financial Statements in our 2010 Annual Report, the Company converted from a corporation taxed under the provisions of Subchapter S of the Internal Revenue Code to a tax-paying entity and accounts for income taxes under the asset and liability method. For the six months ended June 30, 2011, the Company has recorded an estimate for income taxes based on the Company's net income for the year ending December 31, 2011 and an effective income tax rate of 42.3%. In addition, during the six months ended June 30, 2011, the Company reversed the valuation allowance of $2.4 million recorded as of December 31, 2010 as a result of the Company's net deferred tax liability balance of $9.7 million at June 30, 2011. The majority of these deferred tax liabilities were recorded as part of the acquisition of Choice on March 1, 2011 as discussed in Note 4, "Acquisitions".
See Note 17, "Subsequent Events" for information concerning the sale of the Waste segment, which consists principally of Choice, and further discussion of the valuation allowance referred to above.
NOTE 15 — SEGMENTS
On March 1, 2011, the Company completed its acquisition of Choice, a Florida based company that provides a complete range of solid waste and recycling collection, transportation, processing and disposal services. As a result of the acquisition of Choice, the Company now has two operating segments 1) Hygiene and 2) Waste. The Company's Hygiene operating segment primarily provides commercial hygiene services and products throughout much of the United States and operates a worldwide franchise and license system to provide the same products and services in markets where Company-owned operations do not exist. The Company's Waste segment primary consists of the operations of Choice and future acquisitions of solid waste collections acquisitions. Prior to the acquisition of Choice, the Company managed, allocated resources, and reported in one segment, Hygiene.
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The following table presents financial information for each of the Company's reportable segments for the three and six months ended and as of June 30, 2011:
Hygiene | Waste | Total | ||||||||||
(As Restated) | (As Restated) | (As Restated) | ||||||||||
Three Months Ended June 30, 2011 | ||||||||||||
Revenue | $ | 34,243 | $ | 17,672 | $ | 51,915 | ||||||
Depreciation and amortization | $ | 2,470 | $ | 2,883 | $ | 5,353 | ||||||
Loss from operations | $ | (8,269 | ) | $ | (18 | ) | $ | (8,287 | ) | |||
Other (expense) income, net | $ | (3,688 | ) | $ | (73 | ) | $ | (3,761 | ) | |||
Net loss before income taxes | $ | (11,957 | ) | $ | (91 | ) | $ | (12,048 | ) | |||
Capital expenditures, including non-cash | $ | 4,782 | $ | 108 | $ | 4,890 | ||||||
Total assets | $ | 308,527 | $ | 117,922 | $ | 426,449 |
Hygiene | Waste | Total | ||||||||||
(As Restated) | (As Restated) | (As Restated) | ||||||||||
Six Months Ended June 30, 2011 | ||||||||||||
Revenue | $ | 55,718 | $ | 23,482 | $ | 79,200 | ||||||
Depreciation and amortization | $ | 4,734 | $ | 3,514 | $ | 8,248 | ||||||
Loss from operations | $ | (18,150 | ) | $ | (277 | ) | $ | (18,427 | ) | |||
Other (expense) income, net | $ | (5,936 | ) | $ | (79 | ) | $ | (6,015 | ) | |||
Net loss before income taxes | $ | (24,086 | ) | $ | (356 | ) | $ | (24,442 | ) | |||
Capital expenditures, including non-cash | $ | 7,246 | $ | 402 | $ | 7,648 | ||||||
Total assets | $ | 308,527 | $ | 117,922 | $ | 426,449 |
The Company sold its Waste segment during the fourth quarter of 2012 as more fully described in Note 17, "Subsequent Events."
NOTE 16 — COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
In connection with a distribution agreement entered into in December 2010, the Company provided a guarantee that the distributor'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'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 June 30, 2011 and December 31, 2010 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 three financial instruments given the unobservable inputs used in the projected cash flow model. See Note 8, "Fair Value Measurements and Financial Instruments" for the fair value hierarchy.
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NOTE 17 — SUBSEQUENT EVENTS
Acquisitions
Subsequent to June 30, 2011, the Company acquired several businesses. While the terms, price, and conditions of each of these acquisitions were negotiated individually, consideration to the sellers typically consists of a combination of cash and our common stock. Aggregate consideration paid for these acquired businesses was approximately $49.9 million consisting of approximately $43.3 million in cash and 1.3 million shares of our common stock with a fair value of approximately $6.6 million.
Sale of Waste Segment
On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment, to Waste Services of Florida, Inc. for $123.3 million. The stock purchase agreement contains earn-out provisions that could provide additional sale proceeds to the Company of $1.8 million upon achievement of a predetermined revenue target and is also subject to customary purchase price adjustments, including revenue and EBITDA metrics. Ten percent of the purchase price is subject to a holdback and adjustment upon delivery of audited financial statements to the buyer.
As a result of the sale of Choice and all of its operations in the Waste segment, the Company operates in one business segment, Hygiene, effective with the filing of the 2012 Annual Report on Form 10-K.
In connection with the acquisition of Choice on March 1, 2011, the Company recorded deferred tax liabilities that allowed the Company to make a determination that the valuation allowance for the deferred tax asset of $2.4 million recorded at December 31, 2010 was no longer necessary at March 31, 2011. Upon the sale of Choice in the fourth quarter of 2012 and with our history of operating losses, a valuation allowance may be necessary in the fourth quarter of 2012, or quarters prior to then.
The following supplemental pro forma information presents the financial results of the Company as if the purchase of Choice, which comprised the Waste segment at that time, had not occurred on March 1, 2011. The information also includes a valuation allowance for the deferred tax asset described in the previous paragraph. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the purchase of Choice not occurred on March 1, 2011, nor is the pro forma information indicative of any future results:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2011 | |||||||||||||||
(As Restated) | 2010 | (As Restated) | 2010 | |||||||||||||
Supplemental Pro Forma Information: | ||||||||||||||||
Revenue | $ | 34,243 | $ | 15,164 | $ | 55,718 | $ | 29,893 | ||||||||
Loss from operations | $ | (9,212 | ) | $ | (1,415 | ) | $ | (19,161 | ) | $ | (2,719 | ) | ||||
Loss per share | ||||||||||||||||
Basic and diluted | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.15 | ) | (0.06 | ||||||
Weighted-average common shares used in the computation of loss per share | ||||||||||||||||
Basic and diluted | 164,972,640 | 57,894,852 | 144,097,478 | 57,862,241 |
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Revolving Credit Facility
During 2012, we amended our credit facility with Wells Fargo Bank, National Association, on each of April 12, 2012, May 15, 2012, June 28, 2012, July 30, 2012, August 31, 2012, September 27, 2012, and October 31, 2012, in each case, primarily to extend the dates by which we were required to file our Form 10-K for the year ended December 31, 2011 and Forms 10-Q for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 and to avoid potential defaults for not timely filing these reports. In addition, the August 31, 2012 amendment reduced the Company’s maximum borrowing limit to $50.0 million, provided that the Company meets certain borrowing base requirements. The September 27, 2012 amendment further reduced the Company’s maximum borrowing limit to $25.0 million, provided that the Company met certain modified borrowing base requirements. The October 31, 2012 amendment required the Company to place certain amounts in a collateral account under the sole control of the administrative agent to meet the Company’s unencumbered liquidity requirements. In connection with the sale of our Waste segment on November 15, 2012, we paid off the credit facility, which resulted in the termination of the credit facility.
Conversion of Convertible Promissory Notes
Subsequent to June 30, 2011, convertible promissory notes with an aggregate principal amount of $3.0 million and an aggregate fair value of $1.9 million in short-term obligations on the Condensed Consolidated Balance Sheets as of June 30, 2011 were converted into 821,019 shares of Company's common stock.
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ITEM 2. MANAGEMENT’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 included in Item 1 of this Quarterly Report on Form 10-Q/A 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, 2010 (the "2010 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 2010 Form 10-K.
Restatement and Audit Committee Review
On March 21, 2012, Swisher's Board of Directors (the "Board") determined that the Company's previously issued interim financial statements for the quarterly periods ended 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. Subsequently, on March 27, 2012, the Audit Committee concluded that the Company's previously issued interim financial statements for the quarterly period ended March 31, 2011 should no longer be relied upon. The Board and Audit Committee made these determinations in connection with the Audit Committee's then ongoing review into certain accounting matters. We refer to the interim financial statements and the other financial information described above as the "Prior Financial Information."
The Audit Committee initiated its review after an informal inquiry by the Company and its independent auditor regarding a former employee's concerns with the application of certain accounting policies. The Company first initiated the informal inquiry by requesting that both the Audit Committee and the Company’s independent auditor look into the matters raised by the former employee. Following this informal inquiry, the Company’s senior management and its independent auditor advised the Chairman of the Company’s Audit Committee regarding the matters. Subsequently, the Audit Committee determined that an independent review of the matters presented by the former employee should be conducted. During the course of its independent review, and due in part to the significant number of acquisitions made by the Company, the Audit Committee determined that it would be in the best interest of the Company and its stockholders to review the accounting entries relating to each of the 63 acquisitions made by the Company during the year ended December 31, 2011.
On May 17, 2012, Swisher announced that the Audit Committee had substantially completed the investigative portion of its internal review. In connection with the substantial completion of its internal review, the Audit Committee recommended to the Board that the Company's Chief Financial Officer and two additional senior accounting personnel be separated from the Company as a result of their conduct in connection with the preparation of the Prior Financial Information. Following this recommendation, the Board determined that these three accounting personnel be separated from the Company, effective immediately. In making these employment determinations, the Board did not identify any conduct by these employees intended for or resulting in any personal benefit.
On May 17, 2012, the Company further announced that it had commenced a search process for a new Chief Financial Officer and that Steven Berrard, then the Company’s President and Chief Executive Officer, would also serve as the Company’s interim Chief Financial Officer.
On February 19 and 20, 2013, the Company filed amended quarterly reports on Form 10-Q/A for the quarterly periods ended March 3, 2011and June 30, 2011(the "Affected Periods"), including restated financial statements for the Affected Periods, to reflect adjustments to previously reported financial information, as discussed in Note 2, "Restatement of Condensed Consolidated Financial Statements" to the accompanying Notes to Condensed Consolidated Financial Statements. The adjustments reflect changes to the previously reported information identified as a result of the audit process conducted by our independent registered public accounting firm, the independent Audit Committee review, senior management's evaluation of the prior accounting for the related findings and concerns raised by a former employee, and certain other matters. For the reader's convenience, we refer to these collectively as the "Audit and Review Process." As part of the Audit and Review Process, additional adjustments to the Prior Financial Information were identified. We refer to the adjustments identified in the Audit and Review Process as the "Restatement Adjustments." The term Restatement Adjustments refers to adjustments to correct errors in the Company's prior accounting and an adjustment to reflect the impact of a change in accounting estimate resulting from the Company's reassessment of the remaining useful lives of its property and equipment.
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June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands) | ||||||||||||
Total assets | $ | 426,838 | $ | (389 | ) | $ | 426,449 | |||||
Total liabilities | $ | 79,614 | $ | 3,277 | $ | 82,891 | ||||||
Total stockholders' equity | $ | 347,224 | $ | (3,666 | ) | $ | 343,558 |
Three Months Ended June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands except per share amounts) | ||||||||||||
Revenue | $ | 51,676 | $ | 239 | $ | 51,915 | ||||||
Net loss | $ | (7,127 | ) | $ | (966 | ) | $ | (8,093 | ) | |||
Loss per share | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.05 | ) |
Six Months Ended June 30, 2011 | ||||||||||||
Restatement | ||||||||||||
As Reported | Adjustments | As Restated | ||||||||||
(In thousands except per share amounts) | ||||||||||||
Revenue | $ | 79,073 | $ | 127 | $ | 79,200 | ||||||
Net loss | $ | (10,342 | ) | $ | (3,747 | ) | $ | (14,089 | ) | |||
Loss per share | $ | (0.07 | ) | $ | (0.03 | ) | $ | (0.10 | ) |
Details of the Restatement Adjustments are included in Note 2, "Restatement of Condensed Consolidated Financial Statements" of the Notes to Condensed Consolidated Financial Statements. Throughout the remainder of Management's Discussion and Analysis of Financial Condition and Results of Operations, all referenced amounts give effect to the restatement.
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Business Overview and Outlook
We provide essential hygiene and sanitation solutions to customers throughout much of North America and internationally through our global network of company owned operations, franchises and master licensees. These solutions include essential products and services that are designed to promote superior cleanliness and sanitation in commercial environments, while enhancing the safety, satisfaction and well-being of employees and patrons. These solutions are typically delivered by employees on a regularly scheduled basis and involve providing our customers with: (i) consumable products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products; (ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor mats, mops, bar towels and linens; (iii) manual cleaning of their facilities; and (iv) solid waste collection services. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries. In addition, our solid waste collection services provide services primarily to commercial and residential customers through contracts with commercial customers, municipalities, or other agencies. See “Sale of Waste Segment” below and Note 17, "Subsequent Events" of the Notes to Condensed Consolidated Financial Statements for information concerning the sale of the Waste segment.
Prospectively, we intend to grow in both existing and new geographic markets through a combination of organic and acquisition growth. However, we will continue to focus our investments towards those opportunities which will most benefit our core businesses, chemical and linen processing services. Subsequent to the sale of our Waste segment in November 2012, we will offer our solid waste services through outsourced waste and recycling services delivered by third-party providers.
As of June 30, 2011, the Company has 83 Company-owned operations and 6 franchise operations located throughout the United States and Canada and has entered into 9 Master License Agreements covering the United Kingdom, Portugal, the Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.
Segments
On March 1, 2011, we completed our acquisition of Choice Environmental Services, Inc. (“Choice”), a Florida based company that provides a complete range of solid waste and recycling collection, transportation, processing and disposal services. As a result of the acquisition of Choice, we now have two segments (1) Hygiene and (2) Waste. The Company’s hygiene segment primarily provides commercial hygiene services and products throughout much of the United States, and additionally operates a worldwide franchise and license system to provide the same products and services in markets where Company owned operations do not exist. The Company’s waste segment primarily consists of the operations of Choice and acquisitions of solid waste collection businesses. Prior to the acquisition of Choice, the Company managed, allocated resources, and reported in one segment, Hygiene. See Note 15 in the Notes to the Condensed Consolidated Financial Statements. The results of operations for the three and six months ended June 30, 2011 have been presented in the Company’s segments. Also, see Note 17, "Subsequent Events" of the Notes to Condensed Consolidated Financial Statements for information concerning the sale of the Waste segment.
Acquisition and merger expenses
Acquisition and merger expenses include costs directly related to the acquisition of three of our franchises and fifteen independent businesses during the three months ended June 30, 2011 and the acquisition of seven of our franchises and twenty-five independent businesses during the six months ended June 30, 2011. Acquisition and merger expenses also include costs directly related to the merger with CoolBrands International, Inc. as discussed in Note 1 of our 2010 Annual Report. These costs include third party due diligence, legal, accounting and professional service expenses.
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Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with United States generally accepted accounting principles involves the use of estimates and assumptions that affect the recorded amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenue and expenses, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. See Note 2 in the 2010 Annual Report for additional discussion of the application of these and other accounting policies. Any significant changes to those policies or new significant policies are described below.
In conjunction with the Company's final assessment of the fair value of assets acquired and liabilities assumed in 2011, the Company reviewed its estimates of the remaining useful lives of its property and equipment and separately identifiable intangible assets. This analysis indicated that overall these assets will continue to be used in the business for different periods than originally anticipated. As a result, the Company revised the useful lives of property and equipment and separately identifiable intangible assets as follows:
Useful Life in Months | ||||||||
Previous | Revised | |||||||
Linen | 36 | 24 | ||||||
Dust control | 3 | 36 | ||||||
Dish machines | 60 | 84 | ||||||
Dispensers | 24 to 36 | 24 to 60 | ||||||
Mops and bar towels | 3 to 36 | expensed | ||||||
Vehicles - Hygiene | 36 | 60 | ||||||
Office furniture and fixtures | 36 | 60 |
The change in the useful life for these assets reflects the Company’s current estimate of future periods to be benefited. The effect of this change in estimate for the six months ended June 30, 2011 was a reduction in depreciation expense of $0.8 million. Had the change been made for the six months ended June 30, 2010, depreciation would have been reduced by $0.3 million. See Note 3, “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements.
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Adoption of Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the Financial Accounting Standards Board (“FASB”) issued new standards for multiple-deliverable revenue arrangements. These new standards affect the determination of when individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. In addition, these new standards modify the manner in which the transaction consideration is allocated across separately identified deliverables, eliminate the use of the residual value method of allocating arrangement consideration and require expanded disclosure. These new standards will become effective for multiple-element arrangements entered into or materially modified on or after January 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We adopted these standards for multiple-element arrangements entered into or materially modified on or after January 1, 2011. The adoption of this accounting standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued new standards defining when step two of the goodwill impairment test for reporting units with zero or negative carrying amounts should be performed and modifies step one of the goodwill impairment test for reporting units with zero or negative carrying amounts. For reporting units with zero or negative carrying amounts an entity is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The standards are effective for fiscal years and interim periods within those years, beginning December 15, 2010 and were effective for the Company on January 1, 2011. The adoption of this accounting standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Business Combinations: In December 2010, the FASB issued new standards that clarify that if comparative financial statements are presented the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The standards are effective prospectively for material (either on an individual or aggregate basis) business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company has included the required disclosures in Note 3 to the Condensed Consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Comprehensive Income: In June 2011, the FASB issued new standards to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. These standards are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is permitted. We are currently evaluating the effect of these standards on our Condensed Consolidated Financial Statements.
Fair Value Measurements: In May 2011, the FASB issued new standards clarifying the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements and expands fair value disclosures. These standards are to be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is not permitted. We are currently evaluating the effect of these standards on our Condensed Consolidated Financial Statements.
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RESULTS OF OPERATIONS
Impact of Acquisitions
During the year ended December 31, 2010, we acquired four franchises and five independent businesses. During the three months ended June 30, 2011, we acquired three franchises and fifteen independent businesses, and seven franchises and twenty-five independent businesses during the six months ended June 30, 2011. The term “Hygiene Acquisitions” refers to the three franchises and twelve independent hygiene and chemical businesses acquired during the three months ended June 30, 2011 or the seven franchises and twenty-two hygiene and chemical independent businesses acquired during the six months ended June 30, 2011. The waste segment includes Choice, acquired in March 2011, and two additional acquisitions of solid waste and collection companies during the three and six months ended June 30, 2011. We refer to these acquisitions as “Waste Acquisitions.” The term “Acquisitions” refers to both the Hygiene Acquisitions and Waste Acquisitions during the respective periods.
FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND 2010
Revenue
Total revenue and the revenue derived from each revenue type by segment for the three months ended June 30, 2011 and 2010 is as follows:
2011 | ||||||||||||||||
(Restated) | % | 2010 | % | |||||||||||||
Revenue | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations: | ||||||||||||||||
Chemical products | $ | 19,968 | 38.5 | % | $ | 4,022 | 26.5 | % | ||||||||
Hygiene services | 6,618 | 12.7 | 4,478 | 29.5 | ||||||||||||
Paper and supplies | 4,312 | 8.3 | 3,104 | 20.5 | ||||||||||||
Rental and other | 2,070 | 4.0 | 1,421 | 9.4 | ||||||||||||
Total Company-owned operations | 32,968 | 63.5 | 13,025 | 85.9 | ||||||||||||
Franchise products and fees | 1,276 | 2.5 | 2,139 | 14.1 | ||||||||||||
Total hygiene | 34,244 | 66.0 | 15,164 | 100.0 | ||||||||||||
Waste - services and products | 17,671 | 34.0 | - | - | ||||||||||||
Total revenue | $ | 51,915 | 100 | % | $ | 15,164 | 100.0 | % |
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Consolidated revenue increased $36.8 million or 242.4% to $51.9 million for the three months ended June 30, 2011 as compared to $15.2 million for the same period in 2010. This increase includes $17.7 million or 34.0% of consolidated revenue related to Waste Acquisitions and an increase of $16.4 million or 31.5% of consolidated revenues from Hygiene Acquisitions. Excluding the impact of Acquisitions, consolidated revenue increased $2.7 million or 17.9% to $17.9 million for the three months ended June 30, 2011. This increase is comprised of an increase of $3.6 million in hygiene products and services revenue and a decrease of $0.9 million in hygiene franchise revenue.
Hygiene products and services revenue increased $20.0 million or 153.1% to $33.0 million during the three months ended June 30, 2011 as compared to $13.0 million for the same period in 2010. This increase includes $16.4 million related to Hygiene Acquisitions. Excluding the impact from Hygiene Acquisitions, hygiene products and services revenue increased $3.6 million or 27.4% to $16.6 million. This increase is comprised primarily of $3.5 million or 85.8% increase in chemical revenue. During 2011, our sales mix has continued to shift towards our core chemical product sales from our legacy hygiene business. Three principal factors contribute to this trend: (i) we have placed particular emphasis on the development of our core markets including our chemical offering, particularly as it relates to ware washing and laundry solutions and a lesser focus on our legacy hygiene service offerings; (ii) we have aggressively managed customer profitability terminating less favorable arrangements; and (iii) from time to time, we are impacted by the challenging economic conditions that result in customer attrition, lower consumption levels of products and services, and a reduction or elimination in spending for hygiene-related products and services by our customers.
Hygiene franchise revenue decreased $0.9 million or 40.3% to $1.3 million for the three months ended June 30, 2011 as compared to $2.1 million in the same period in 2010. This decrease includes $0.9 million from Hygiene Acquisitions partially offset by growth in the remaining franchisees. Acquisitions of our franchisees during the period result in less revenue from franchisee revenue, which is offset by an increase in hygiene product and service revenue.
Cost of Revenue
Hygiene cost of revenue consists primarily of paper, air freshener, chemical and other consumable products sold to our customers, franchisees and international licensees. Waste costs of revenue include costs related to the disposal of collections and cost of recycled paper purchases. Cost of revenue for the three months ended June 30, 2011 and 2010 are as follows:
2011 | ||||||||||||||||
(Restated) | % (1) | 2010 | % (1) | |||||||||||||
Cost of Revenue | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations | $ | 12,590 | 38.2 | % | $ | 4,254 | 32.7 | % | ||||||||
Franchise products and fees | 597 | 46.8 | 1,200 | 56.1 | ||||||||||||
Total hygiene | 13,187 | 38.5 | 5,454 | 36.0 | ||||||||||||
Waste - services and products | 5,150 | 29.1 | - | - | ||||||||||||
Total cost of revenue | $ | 18,337 | 35.3 | % | $ | 5,454 | 36.0 | % |
(1) Represents cost as a percentage of the respective segment’s product and service line revenue.
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Consolidated cost of sales increased $12.9 million or 236.2% to $18.3 million for the three months ended June 30, 2011 as compared to $5.5 million in the same period in 2010. This increase includes $5.2 million related to Waste Acquisitions and $6.7 million from Hygiene Acquisitions in the three months ended June 30, 2011 as compared to the same period of 2010. Excluding the impact from Acquisitions, consolidated cost of sales increased $1.1 million or 19.7% to $6.5 million for the three months ended June 30, 2011 as compared to the same period in 2010.
Hygiene company owned operations cost of sales increased $8.3 million or 196.0% to $12.6 million for the three months ended June 30, 2011 as compared to $4.3 million in the same period in 2010 and includes $6.7 million related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions, hygiene company-owned operations cost of sales increased $1.7 million or 39.4% to $5.9 million or 35.7% of related revenue for the three months ended June 30, 2011 as compared to 32.7% for the same period in 2010. This increase is primarily due to a $1.2 million or 27.4% impact from the continued change in sales mix from lower cost hygiene services to higher cost chemical product sales as well as a $0.5 million or 12.0% impact from increased volume.
Hygiene cost of sales to franchisees decreased $0.6 million or 50.3% to $0.6 million for the three months ended June 30, 2011 as compared to $1.2 million in the same period in 2010 in part due to Hygiene Acquisitions. We charge franchises a percentage of our costs, and, therefore, we earn a lower margin on product sales to franchises.
Route Expenses
Route expenses consist primarily of the costs incurred by the Company for the delivery of products and providing services to customers. The details of route expenses for the three months ended June 30, 2011 and 2010 are as follows:
2011 | ||||||||||||||||
(As Restated) | % (1) | 2010 | % (1) | |||||||||||||
Route Expenses | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations: | ||||||||||||||||
Compensation | $ | 5,697 | 17.3 | % | $ | 2,261 | 17.4 | % | ||||||||
Vehicle and other expenses | 1,973 | 6.0 | 913 | 7.0 | ||||||||||||
Total Company-owned operations | 7,670 | 23.3 | 3,174 | 24.4 | ||||||||||||
Waste | 5,901 | 33.4 | - | - | ||||||||||||
Total route expenses | $ | 13,571 | 26.1 | % | $ | 3,174 | 20.9 | % |
(1) Represents cost as a percentage of Products and Services revenue for the respective operating segment.
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Consolidated route expenses increased $10.4 million or 327.6% to $13.6 million for the three months ended June 30, 2011 as compared to $3.2 million in the same period in 2010. This increase includes $5.9 million related to Waste Acquisitions, which is 33.4% of waste service revenue, and $3.1 million related to Hygiene Acquisitions. Excluding the impact of Acquisitions, route expenses increased $1.4 million or 45.5% to $4.6 million or 27.8% of total hygiene products and services related revenue for the three months ended June 30, 2011 as compared to 24.4% for the same period in 2010. The increase of $1.4 million consists primarily of $1.1 million or 115.2% in vehicle and other route expenses. These increases are primarily the result of headcount and vehicles added as part of a distribution agreement entered into in December 2010 as well as increasing fuel costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of the costs incurred for:
● | Regional, branch office, and field management support costs that are related to field operations. These costs include compensation, occupancy expense and other general and administrative expenses. |
● | Sales expenses, which include marketing expenses and compensation and commission for branch field sales representatives and corporate account and distribution sales personnel. |
● | Corporate office expenses that are related to general support services, which include executive management compensation and related costs, as well as department costs for information technology, human resources, accounting, purchasing and other support functions. |
The details of selling, general, and administrative expenses for the three months ended June 30, 2011 and 2010 are as follows:
2011 | ||||||||||||||||
(As Restated) | % (1) | 2010 | % (1) | |||||||||||||
Selling, General & Administrative Expenses | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Compensation | $ | 10,335 | 31.3 | % | $ | 4,900 | 37.6 | % | ||||||||
Occupancy | 1,077 | 3.1 | 642 | 4.2 | ||||||||||||
Other | 4,686 | 13.7 | 1,325 | 8.7 | ||||||||||||
Waste | 4,109 | 23.3 | - | - | ||||||||||||
Total selling, general & administrative expenses | $ | 20,207 | 38.9 | % | $ | 6,867 | 45.3 | % |
(1) Represents cost as a percentage of revenue for the respective segment.
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Consolidated selling, general, and administrative expenses increased $13.3 million or 194.3% to $20.2 million for the three months ended June 30, 2011 as compared to $6.9 million in the same period of 2010. This increase includes $4.1 million related to Waste acquisitions and $4.3 million related to Hygiene acquisitions. Excluding the impact of acquisitions, selling, general, and administrative expenses increased $5.0 million or 72.6%.
Hygiene compensation increased $5.4 million or 110.9% to $10.3 million for the three months ended June 30, 2011 as compared to $4.9 million in the same period of 2010 and includes an increase of $2.6 million related to Hygiene acquisitions. Excluding the impact of acquisitions, hygiene compensation expense increased $2.8 million or 57.5% to $7.7 million for the three months ended June 30, 2011 as compared to the same period in 2010. This increase was primarily the result of an increase of approximately $1.6 million in costs and expenses related to our expansion of our corporate, field and distribution sales organizations to accelerate the growth in the core chemical program and an increase of approximately $1.2 million of salaries and other costs largely associated with our transition from a private company to a public company, which includes $1.0 million of stock based compensation.
Occupancy expenses increased $0.4 million or 67.8% to $1.1 million for the three months ended June 30, 2011 as compared to $0.6 million in the same period of 2010, which includes an increase of $0.4 million related to Acquisitions.
Other expenses increased $3.4 million or 253.7% to $4.7 million for the three months ended June 30, 2011 as compared to $1.3 million in the same period in 2010 and includes an increase of $1.3 million related to Hygiene acquisitions. Excluding the impact of acquisitions, other expenses increased $2.1 million or 157.1% to $3.4 million for the three months ended June 30, 2011 as compared to the same period of 2010. This increase was primarily the result of increases of approximately $0.5 million in costs associated with the cost of public filings and securities, as well as increases to bad debt expense of $1.2 million.
Acquisition and merger expenses
Acquisition and merger expenses of $2.7 million for the three months ended June 30, 2011 include costs of $1.8 million directly related to the acquisition of our three franchisees and fifteen independent companies during the three months ended June 30, 2011. In addition $1.0 million of these costs is related to the merger with CoolBrands International, Inc. These costs include costs for third party due diligence, legal, accounting and professional service expenses.
Depreciation and amortization
Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization increased $4.3 million or 390.9% to $5.4 million for the three months ended June 30, 2011 as compared to $1.1 million during the same period of 2010. This increase includes $3.7 million for Acquisitions.
The increase for Acquisitions is primarily the result of amortization for acquired other intangible assets including customer relationships and non-compete agreements obtained in connection with these acquisitions. The remaining increase is primarily related to depreciation on capital expenditures of $0.6 million made since June 30, 2010.
Other expense, net
2011 | ||||||||
(As Restated) | 2010 | |||||||
Other Expense, Net | (In thousands) | |||||||
Interest expense | $ | (414 | ) | $ | (377 | ) | ||
Net loss on debt related fair value | ||||||||
measurements | (3,625 | ) | - | |||||
Foreign currency loss | 128 | - | ||||||
Interest income | 80 | 22 | ||||||
Other | 70 | - | ||||||
Total other expense, net | $ | (3,761 | ) | $ | (355 | ) |
Interest expense represents interest on borrowings under our credit facilities, notes incurred in connection with acquisitions, including convertible promissory notes, advances from shareholders and the purchase of equipment and software
For the three months ended June 30, 2011, the unrealized loss, net consists primarily of $3.6 million related to the required adjustment for each reporting period for the fair value of the convertible promissory notes. The fair value of these convertible promissory notes is impacted by the market price of our stock. See Note 7 of the Condensed Consolidated Financial Statements.
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FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Revenue
Total revenue and the revenue derived from each revenue type by segment for the six months ended June 30, 2011 and 2010 is as follows:
2011 | ||||||||||||||||
(Restated) | % | 2010 | % | |||||||||||||
Revenue | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations: | ||||||||||||||||
Chemical products | $ | 29,442 | 37.2 | % | $ | 7,978 | 26.7 | % | ||||||||
Hygiene services | 11,986 | 15.1 | 8,801 | 29.4 | ||||||||||||
Paper and supplies | 7,998 | 10.1 | 6,015 | 20.1 | ||||||||||||
Rental and other | 3,623 | 4.6 | 2,774 | 9.3 | ||||||||||||
Total Company-owned operations | 53,049 | 67.0 | 25,568 | 85.5 | ||||||||||||
Franchise products and fees | 2,669 | 3.4 | 4,325 | 14.5 | ||||||||||||
Total hygiene | 55,718 | 70.4 | 29,893 | 100.0 | ||||||||||||
Waste - services and products | 23,482 | 29.6 | - | - | ||||||||||||
Total revenue | $ | 79,200 | 100 | % | $ | 29,893 | 100.0 | % |
Consolidated revenue increased $49.3 million or 165.0% to $79.2 million for the six months ended June 30, 2011 as compared to $29.9 million in the same period in 2010. This increase includes increases of $23.5 million or 29.6% of consolidated revenue related to Waste Acquisitions and $21.8 million or 27.5% of consolidated revenue from Hygiene Acquisitions. Excluding the impact of Acquisitions, consolidated revenue increased $4.0 million or 13.6% to $33.9 million for the six months ended June 30, 2011. This increase is comprised of an increase of $5.7 million in hygiene products and services revenue and a decrease of $1.7 million in hygiene franchise revenue, which are due to the continued change in sales mix from lower priced hygiene services to higher priced chemical product sales.
Hygiene products and services revenue increased $27.4 million or 107.5% to $53.0 million during the six months ended June 30, 2011 as compared to $25.6 million in the same period in 2010. This increase includes $21.8 million related to Hygiene Acquisitions. Excluding the impact from Hygiene Acquisitions, hygiene products and services revenue increased $5.7 million or 22.3% and is due to increases in chemical revenue of $6.1 or 76.1%, partially offset by a decrease in hygiene services, paper and supplies, and rental and other.
During the first six months of 2011, our sales mix has continued to shift toward our core chemical product sales from our legacy hygiene business. Three principal factors have contributed to this trend: (i) we have placed particular emphasis on the development of our core markets including our chemical offering, particularly as it relates to ware washing and laundry solutions and a lesser focus on our legacy hygiene service offerings; (ii) we have aggressively managed customer profitability terminating less favorable arrangements; and (iii) from time to time, we are impacted by the challenging economic conditions that result in customer attrition, lower consumption levels of products and services, and a reduction or elimination in spending for hygiene-related products and services by our customers.
Hygiene franchise revenue decreased $1.6 million, or 38.3% to $2.7 million for the six months ended June 30, 2011 as compared to $4.3 million in the same periods in 2010. This decrease is the result of $1.8 million from Hygiene Acquisitions for the six months ended June 30, 2011 as compared to the comparable period in 2010. Acquisitions of our franchisees during the period result in less revenue from franchisee revenue, which is offset by an increase in hygiene product and service revenue.
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Cost of Revenue
2011 | ||||||||||||||||
(Restated) | %(1) | 2010 | %(1) | |||||||||||||
Cost of Revenue | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations | $ | 19,835 | 37.4 | % | $ | 8,260 | 32.3 | % | ||||||||
Franchise products and fees | 1,594 | 59.7 | 2,503 | 57.9 | ||||||||||||
Total hygiene | 21,429 | 38.5 | 10,763 | 36.0 | ||||||||||||
Waste - services and products | 6,916 | 29.5 | - | - | ||||||||||||
Total cost of revenue | $ | 28,345 | 35.8 | % | $ | 10,763 | 36.0 | % |
(1) Represents cost as a percentage of the respective segment’s product and service line revenue.
Consolidated cost of revenue increased $17.6 million or 163.4% to $28.3 million for the six months ended June 30, 2011 as compared to $10.8 million in the same period in 2010. This increase includes $6.9 million related to Waste Acquisitions and $8.2 million from Hygiene Acquisitions in the six months ended June 30, 2011 as compared to the same period of 2010. Excluding the impact from Acquisitions, consolidated cost of revenue increased $2.4 million or 22.7% to $13.2 million for the six months ended June 30, 2011 as compared to the same period in 2010.
Hygiene company owned operations cost of revenue increased $11.5 million or 138.6% to $19.8 million for the six months ended June 30, 2011 as compared to $8.3 million in the same period in 2010 and includes $8.2 million related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions, cost of revenue for company owned operations increased $3.2 million or 39.0% to $11.5 million or 36.7% of related revenue for the six months ended June 30, 2011 as compared to 32.3% for the same period in 2010, primarily due to the continued change in sales mix from lower cost hygiene services to higher cost chemical product sales, and consisted primarily of approximately $1.8 million or 22.3% in sales mix change from lower cost hygiene services to higher cost chemical product sales, and approximately $1.4 million or 16.7% due to the current periods higher product sales volume.
Hygiene cost of revenue to franchisees decreased $0.9 million or 36.4% to $1.6 million for the six months ended June 30, 2011 as compared to $2.5 million in the same period in 2010 in part due to Hygiene Acquisitions. We charge franchises a percentage of our costs and, therefore, we earn a lower margin on product sales to franchises, which was 9.3% and 10.7% for the six months ended June 30, 2011 and 2010, respectively.
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Route expenses
2011 | ||||||||||||||||
(As Restated) | %(1) | 2010 | %(1) | |||||||||||||
Route Expenses | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Company-owned operations: | ||||||||||||||||
Compensation | $ | 9,584 | 29.1 | % | $ | 4,527 | 34.8 | % | ||||||||
Vehicle and other expenses | 3,241 | 9.8 | 1,821 | 14.0 | ||||||||||||
Total Company-owned operations | 12,825 | 38.9 | 6,348 | 48.7 | ||||||||||||
Waste | 7,844 | 44.4 | - | - | ||||||||||||
Total route expenses | $ | 20,669 | 39.8 | % | $ | 6,348 | 41.9 | % |
(1) Represents cost as a percentage of Products and Services revenue for the respective operating segment.
Consolidated route expenses increased $14.3 million or 225.6% to $20.7 million for the six months ended June 30, 2011 as compared to $6.3 million in the same period in 2010. This increase includes $7.8 million related to Waste Acquisitions, which is 33.4% of total waste revenue, and $4.4 million related to Hygiene Acquisitions. Excluding the impact of Acquisitions, route expenses increased $2.1 million or 33.2% to $8.4 million or 27.0% of related revenue for the six months ended June 30, 2011 as compared to 24.8% for the same period in 2010. The increase of $2.1 million consisted of $1.2 million or 68.1% in vehicle and other route expenses and $0.9 million or 19.2% in compensation. These increases are primarily the result of headcount and vehicles added as part of a distribution agreement entered into in December 2010 and increasing fuel costs.
Selling, general, and administrative
The details of selling, general, and administrative expenses for the six months ended June 30, 2011 and 2010 are as follows:
2011 | ||||||||||||||||
(As Restated) | %(1) | 2010 | %(1) | |||||||||||||
Selling, General & Administrative Expenses | (In thousands) | |||||||||||||||
Hygiene | ||||||||||||||||
Compensation | $ | 18,533 | 33.3 | % | $ | 9,375 | 31.4 | % | ||||||||
Occupancy | 2,203 | 4.0 | 1,627 | 5.4 | ||||||||||||
Other | 8,846 | 15.9 | 2,372 | 7.9 | ||||||||||||
Waste | 5,285 | 22.5 | - | - | ||||||||||||
Total selling, general & administrative expenses | $ | 34,867 | 44.0 | % | $ | 13,374 | 44.7 | % |
(1) Represents cost as a percentage of revenue for the respective segment.
Consolidated selling, general, and administrative expenses increased $21.5 million or 160.7% to $34.9 million for the six months ended June 30, 2011 as compared to $13.4 million in the same period of 2010. This increase includes $5.3 million related to Waste Acquisitions and $5.5 million related to Hygiene Acquisitions. Excluding the impact of Acquisitions, selling, general, and administrative expenses increased $10.7 million or 80.0% to $24.0 million.
Hygiene compensation increased $9.2 million or 97.7% to $18.5 million for the six months ended June 30, 2011 as compared to $9.4 million in the same period of 2010 and includes an increase of $3.5 million related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions, hygiene compensation expense increased $5.6 million or 60.2% to $15.0 million for the six months ended June 30, 2011 as compared to the same period in 2010. This increase was primarily the result of an increase of approximately $3.7 million in costs and expenses related to our expansion of our corporate, field and distribution sales organizations to accelerate growth in the core chemical program, and an increase of approximately $1.8 million of salaries and other costs largely associated with our transition from a private company to a public company, which includes $1.7 million for stock based compensation.
42
Occupancy expenses increased $0.6 million or 35.4% to $2.2 million for the six months ended June 30, 2011 as compared to $1.6 million in the same period of 2010, which includes an increase of $0.5 million related to Acquisitions.
Other expenses increased $6.4 million or 272.9% to $8.8 million for the six months ended June 30, 2011 as compared to $2.4 million in the same period in 2010 and includes an increase of $1.4 million for Hygiene Acquisitions. Excluding the impact of these acquisitions, other expenses increased $5.0 million or 211.0% to $7.4 million for the six months ended June 30, 2011 as compared to the same period of 2010. This increase was primarily due to increases in professional fees associated with being a public company totaling $1.3 million as well as increases to expenses related to the expansion of our business and included increases in insurance, travel costs and marketing expenses totaling $1.1. In addition, bad debt expense adjustments totaled $1.5 million.
Acquisition and merger expenses
Acquisition and merger expenses of $4.0 million for the six months ended June 30, 2011 include costs of $2.1 million directly-related to the acquisition of our seven franchisees and twenty-five independent companies during the six months ended June 30, 2011. In addition $1.9 million of these costs is related to the merger with CoolBrands International, Inc. These costs include costs for third party due diligence, legal, accounting and professional service expenses.
Loss on Extinguishment of Debt
On March 1, 2011, we closed the acquisition of Choice and issued 8,281,920 shares of our common stock to the former shareholders of Choice, assumed $1.7 million of debt, and paid off $39.2 million of Choice debt. In paying the balance on this Choice debt, we incurred a prepayment penalty of $1.5 million which is included in loss on extinguishment of debt in the Condensed Consolidated Statement of Operations.
Depreciation and amortization
Depreciation and amortization increased $6.1 million or 287.8% to $8.2 million for the six months ended June 30, 2011 as compared to $2.1 million during the same period of 2010. This increase includes $0.3 million due to the change in estimate of useful lives more fully described in Note 3, "Summary of Significant Accounting Policies" of the Condensed Consolidated Financial Statements. This increase also includes $4.9 million for Acquisitions.
The increase for Acquisitions is primarily the result of amortization for acquired other intangible assets including customer relationships and non-compete agreements obtained in connection with these acquisitions. The remaining increase is primarily related to depreciation on capital expenditures of $0.9 million made since June 30, 2010.
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Other expense, net
2011 | ||||||||
(As Restated) | 2010 | |||||||
(In thousands) | ||||||||
Other Expense, Net | ||||||||
Interest expense | $ | (759 | ) | $ | (682 | ) | ||
Net loss on debt related fair value | (5,586 | ) | - | |||||
measurements | 163 | - | ||||||
Foreign currency loss | 97 | 36 | ||||||
Interest income | 70 | - | ||||||
Other | ||||||||
Total other expense, net | $ | (6,015 | ) | $ | (646 | ) |
Interest expense represents interest on borrowings under our credit facilities, notes incurred in connection with acquisitions including convertible promissory notes, advances from shareholders and the purchase of equipment and software.
For the six months ended June 30, 2011, the unrealized loss, net consists primarily of $5.6 million related to the required adjustment for each reporting period for the fair value of the convertible promissory notes. The fair value of these convertible promissory notes is impacted by the market price of our stock. See Note 7 of the Condensed Consolidated Financial Statements.
Cash Flow Summary
2011 | ||||||||
(As Restated) | 2010 | |||||||
(In thousands) | ||||||||
Cash Flows Summary | ||||||||
Net cash used in operating activities | $ | (12,517 | ) | $ | (260 | ) | ||
Net cash used in investing activities | (106,994 | ) | (2,815 | ) | ||||
Net cash provided by financing activities | 193,047 | 2,428 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 73,536 | $ | (647 | ) |
Operating Activities
Net cash used in operating activities increased $12.3 million to $12.5 million for the six months ended June 30, 2011, compared with net cash used in operating activities of $0.2 million for the same period of 2010. The increase is due to increases in the net loss of $10.7 million, (which includes $4.0 million of acquisition and merger expenses) and a $3.5 million increase in the use of working capital, partially offset by an increase in depreciation and amortization of $6.1 million, increase in stock based compensation of $1.8 million, unrealized loss on convertible notes of $5.6 million and a change in deferred tax liabilities totaling $2.2 million for the six months ended June 30, 2011 as compared to the same period in 2010.
44
Investing Activities
Net cash used in investing activities increased $104.2 million to $107.0 million for the six months ended June 30, 2011, compared with net cash used in investing activities of $2.8 million for the same period of 2010. This increase is due to increases in cash paid for acquisitions, partially offset by the increase in restricted cash, totaling $5.2 million.
Financing Activities
Net cash provided by financing activities increased $190.6 million to $193.0 million for the six months ended June 30, 2011, compared with net cash provided by financing activities of $2.4 million during the same period in 2010. Net cash provided from financing activities consists primarily of: (i) cash received from private placements and lines of credit, net of issuance costs; (ii) proceeds from advances to shareholders; and (iii) proceeds from stock option and warrant exercises, partially offset by (iv) principal payments of debt and (v) net borrowing under credit facilities.
During the six months ended June 30, 2011, we received $191.2 million, net of issuance costs, from the issuance of 34,119,643 shares of our common stock; and received $3.4 million from the exercise of stock options and warrants. During the six months ended June 30, 2011 as compared to the same period in 2010, principal payments on debt increased by $40.6 million, while in the six months ended June 30, 2011, there were no net proceeds and payments of shareholder advances, while there were proceeds of shareholder advances $4.6 million during the same period in 2010.
Liquidity and Capital Resources
We fund the development and growth of our business with cash generated from operations, shareholder advances, bank credit facilities, the sale of equity, third party financing for acquisitions, and capital leases for equipment.
Revolving credit facilities
In March 2011, we entered into a $100.0 million senior secured revolving credit facility (the “credit facility”). Borrowings under the credit facility are secured by a first priority lien on substantially all of our existing and hereafter acquired assets, including $25.0 million of cash on borrowings in excess of $75.0 million. Furthermore, borrowings under the facility are guaranteed by all of our domestic subsidiaries and secured by substantially all the assets and stock of our domestic subsidiaries and substantially all of the stock of our foreign subsidiaries. Interest on borrowings under the credit facility will typically accrue at London Interbank Offered Rate (“LIBOR”) plus 2.5% to 4.0%, depending on the ratio of senior debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (as such term is defined in the credit facility, which includes specified adjustments and allowances authorized by the lender, as provided for in such definition). We also have the option to request swingline loans and borrowings using a base rate. Interest is payable monthly or quarterly on all outstanding borrowings. The credit facility matures in July 2013.
Borrowings and availability under the credit facility are subject to compliance with financial covenants, including achieving specified consolidated EBITDA levels, which will depend on the success of our acquisition strategy, and maintaining leverage and coverage ratios and a minimum liquidity requirement. The consolidated EBITDA covenant, the leverage and coverage ratios, and the minimum liquidity requirements should not be considered indicative of the Company’s expectations regarding future performance. The credit facility also places restrictions on our ability to incur additional indebtedness, make certain acquisitions, 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. Failure to achieve or maintain the financial covenants in the credit facility or failure to comply with one or more of the operational covenants could adversely affect our ability to borrow monies and could result in a default under the credit facility. The credit facility is subject to other standard default provisions. We were in compliance with such covenants as of June 30, 2011.
The credit facility replaces our prior $25.0 million aggregated credit facilities, which are discussed in the 2010 Annual Report.
See Note 17, "Subsequent Events" of the Notes to Condensed Consolidated Financial Statements which discusses the sale of the Company's Waste segment in the fourth quarter of 2012 and the payoff of this credit facility.
In August 2011, the Company entered into agreements to provide borrowings of up to $37.5 million that would be collateralized by the Waste segment’s vehicles and containers and the Company’s technology and related equipment. In connection with these financing agreements, the Company entered into an amendment that modifies the covenants contained in the credit facility, including an increase in permitted indebtedness to $40.0 million. In addition the Company obtained additional financing of up to $25 million for new and replacement vehicles for its fleet.
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Private Placements
In connection with the merger with Choice, on February 23, 2011, we entered into an agency agreement, which the agents agreed to market, on a best efforts basis 12,262,500 subscription receipts (“Subscription Receipts”) at a price of $4.80 per Subscription Receipt for gross proceeds of up to $58,859,594. Each Subscription Receipt entitled the holder to acquire one share of our common stock, without payment of any additional consideration, upon completion of our acquisition of Choice.
On March 1, 2011, we closed the acquisition of Choice and issued 8,281,920 shares of our common stock to the former shareholders of Choice and assumed $ 1.7 million of debt. In addition, cash was paid to Choice debt holders of $40.7 million, including a prepayment penalty of $1.5 million, and certain shareholders of Choice received $5,700,000 in cash and warrants to purchase an additional 918,076 shares at an exercise price of $6.21, which expired on March 31, 2011 and were not exercised. The prepayment penalty of $1.5 million was treated as a period expense in other expense on the Company’s income statement.
On March 1, 2011, in connection with the closing of the acquisition of Choice, the 12,262,500 Subscription Receipts were exchanged for 12,262,500 shares of our common stock. We agreed to use commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock underlying the Subscription Receipts. If the registration statement was not filed or declared effective within specified time periods, or if the registration statement ceased to be effective for a period of time exceeding certain grace periods, the initial subscribers of Subscription Receipts would be entitled to receive an additional 0.1 share of common stock for each share of common stock underlying Subscription Receipts held by any such initial subscriber at that time. The Company filed a resale registration statement with the SEC relating to the 8,291,920 shares issued to the former shareholders of Choice and the 12,262,500 shares issued in connection with the private placement. The registration statement was effective as of the date of this filing of the Original 10-Q. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statements relating to shares issued in exchange for the Subscription Receipts is not effective.
On March 22, 2011, we entered into a series of arm's length securities purchase agreements to sell 12,000,000 shares of our common stock at a price of $5.00 per share, for aggregate proceeds of $60,000,000 to certain funds of a global financial institution (the "March Private Placement"). On March 23, 2011, we closed the March Private Placement and issued 12,000,000 shares of our common stock. Pursuant to the securities purchase agreements, the shares of common stock issued in the March Private Placement could not be transferred on or before June 24, 2011 without our consent. We agreed to use our commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock sold in the March Private Placement. If the registration statement was not filed or declared effective within specified time periods the investors would have been, or if the registration statement ceases to remain effective for a period of time exceeding a sixty day period, the investors will be entitled to receive monthly liquidated damages in cash equal to one percent of the original offering price for each share purchased in the private placement that at such time remain subject to resale restrictions, with an interest rate of one percent per month accruing daily for liquidated damages not paid in full within ten business days. On April 21, 2011, the SEC declared effective a resale registration statement relating to the 12,000,000 shares issued in the March Private Placement. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statement relating to shares issued in the March Private Placement is not effective, and as a result, we may be subject to liability under the penalty provision.
On April 15, 2011, we entered into a series of arm's length securities purchase agreements to sell 9,857,143 shares of our common stock at a price of $7.70 per share, for aggregate proceeds of $75.9 million to certain funds of a global financial institution (the "April Private Placement"). On April 19, 2011, we closed the April Private Placement and issued 9,857,143 shares of our common stock. Pursuant to the securities purchase agreements, the shares of common stock issued in the April Private Placement could not be transferred on or before June 24, 2011 without our consent. We agreed to use commercially reasonable efforts to file a resale registration statement with the SEC relating to the shares of common stock sold in the April Private Placement. If the registration statement was not filed or declared effective within the specified time periods the investors would have been, or if the registration statement ceases to remain effective for a period of time exceeding certain grace periods, the investors will be, entitled to receive monthly liquidated damages in cash equal to one percent of the original offering price for each share purchased in the April Private Placement that at such time remain subject to resale restrictions, with an interest rate of one percent per month accruing daily for liquidated damages not paid in full within ten business days. On August 12, 2011, the SEC declared effective a resale registration statement relating to the 9,857,143 shares issued in the April Private Placement. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our Annual Report on Form 10-K for the year ended December 31, 2011, the registration statement relating to shares issued in the April Private Placement is not effective, and as a result, we may be subject to liability under the penalty provision.
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Acquisitions and Sales
During the three month period ended June 30, 2011, we paid cash of $55,739,581 for acquisitions. During the six month period ended June 30, 2011, we paid cash of $67,717,485 for acquisitions, which $7,212,914 was for the acquisition of Choice. In addition subsequent to June 30, 2011, we acquired several businesses. While the terms, price, and conditions of each of these acquisitions were negotiated individually, consideration to the sellers typically consists of a combination of cash, our common stock, and debt issued. Aggregate consideration paid for these acquired businesses was approximately $21.0 million consisting of approximately $14.3 million in cash, 815,726 shares of our common stock, and issuance of promissory notes of approximately $2.1 million.
On November 15, 2012, we completed a stock sale of Choice and other acquired businesses in the Waste segment to Waste Services of Florida, Inc. for $123.3 million in cash.
See Note 17, "Subsequent Events" of the Notes to Condensed Consolidated Financial Statements.
Cash Requirements
Our cash requirements for the next twelve months consist primarily of: (i) capital expenditures associated with dispensing equipment, dish machines and other items in service at customer locations, equipment, vehicles, and software; (ii) financing for acquisitions; (iii) working capital; and (iv) payment of principal and interest on borrowings under our credit facility, debt obligations and convertible promissory notes incurred or assumed in connection with acquisitions, and other notes payable for equipment and software.
As a result of the Private Placements discussed above our cash and cash equivalents increased by $191.2 million and were $112.5 million at June 30, 2011, respectively. We expect that our cash on hand and the cash flow provided by operating activities will be sufficient to fund working capital, general corporate needs and planned capital expenditure for the next twelve months. However, there is no assurance that these sources of liquidity will be sufficient to fund our internal growth initiatives or the investments and acquisition activities that we may wish to pursue. If we pursue significant internal growth initiatives or if we wish to acquire additional businesses in transactions that include cash payments as part of the purchase price, we may pursue additional debt or equity sources to finance such transactions and activities, depending on market conditions.
As discussed above, we sold the Waste segment, which consisted principally of Choice, for $123.3 million in cash on November 15, 2012. In conjunction with the closing of the transaction, Swisher paid off a credit facility of $17.2 million, equipment leases associated with the operations of Choice totaling $13.2 million and an outstanding note in the amount of $2.0 million.
See Note 17, “Subsequent Events” of the Notes to Condensed Consolidated Financial Statements.
Financial Instruments — Convertible Promissory Notes
We determine the fair value of certain convertible debt instruments issued as part of business combinations based on assumptions that market participants would use in pricing the liabilities. We have used a Black Scholes pricing model to estimate fair value of our convertible promissory notes, which requires the use of certain assumptions such as expected term and volatility of our common stock. The expected volatility was based on an analysis of industry peer’s historical stock price over the term of the notes as we currently do not have our own stock price history. The expected volatility was estimated at approximately 25%. Changes in the fair value of convertible debt instruments are recorded in Other expense, net on the Condensed Consolidated Statement of Operations. We would record approximately $575,000 of expense or income for every $1.00 increase or decrease in our stock price. Increases or decreases in the market value of our stock price could affect the fair value of these instruments and our earnings.
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Income Taxes
As a result of the merger with CoolBrands International, Inc. in November 2010, as discussed in Note 1, “Business Description” of the Notes to Consolidated Financial Statements in our 2010 Annual Report, the Company converted from a corporation taxed under the provisions of Subchapter S of the Internal Revenue Code to a tax-paying entity and accounts for income taxes under the asset and liability method. Therefore, for the three and six months ended June 30, 2011, the Company has recorded an estimate for income taxes based on the Company’s tax operating results for the year ending December 31, 2011 and an effective income tax rate of 42.3%. The amount of income tax expense or benefit to be recorded in future periods is based on the full year’s net income.
In addition, during 2011, the Company reversed the valuation allowance of $2.4 million recorded as of December 31, 2010 as a result of the Company’s net deferred tax liability balance of $9.7 million at June 30, 2011.The majority of these deferred tax liabilities were recorded as part of the acquisition of Choice on March 1, 2011 as discussed in Note 4, “Acquisitions” of the Notes to Condensed Consolidated Financial Statements.
Litigation and Other Contingencies
The Company may be involved in litigation matters from time to time in the ordinary course of its business. We do not believe at this time that other litigation matters will have a material adverse effect on our business, financial condition and results of operations. The ultimate resolution of a litigation matter cannot be predicted with certainty and, therefore, we cannot assure you that the outcome of any of our litigation matters will not have a material adverse effect on our business, financial condition and results of operations.
For a discussion of additional legal proceedings related to our restatements to which we have become a party after June 30, 2011, please read "Explanatory Note – Securities Litigation."
Off-Balance Sheet Arrangements
Other than operating leases, there are no off-balance sheet financing arrangements or relationships with unconsolidated entities or financial partnerships, which are often referred to as “special purpose entities.” Therefore, there is no exposure to any financing, liquidity, market or credit risk that could arise, had we engaged in such relationships.
In connection with a distribution agreement entered into in December 2010, we provided a guarantee that the distributor’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’s annual operating cash flow does fall below the agreed-to annual minimums, we 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 June 30, 2011 and December 31, 2010 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.
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Adjusted EBITDA
In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measure serves as an appropriate measure to be used in evaluating the performance of our business. We define Adjusted EBITDA as net loss excluding the impact of income taxes, depreciation and amortization expense, interest expense and income, gains on foreign currency, unrealized loss, net, stock based compensation, and third party costs directly related to merger and acquisitions. We present Adjusted EBITDA because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of our results. Management uses this non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods and gives a better indication of our core operating performance. We include this non-GAAP financial measure in our earnings announcement and guidance in order to provide transparency to our investors and enable investors to better compare our operating performance with the operating performance of our competitors. Adjusted EBITDA should not be considered in isolation from, and is not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Additionally, our definition of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
Under SEC rules, we are required to provide a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Accordingly, the following is a reconciliation of Adjusted EBITDA to our net losses for the three and six month periods ended June 30, 2011 and 2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 (As Restated) | 2010 | 2011 (As Restated) | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Net loss | $ | (8,093 | ) | $ | (1,770 | ) | $ | (14,089 | ) | $ | (3,365 | ) | ||||
Income tax benefit | (3,955 | ) | - | (10,354 | ) | - | ||||||||||
Depreciation and amortization expense | 5,353 | 1,084 | 8,248 | 2,127 | ||||||||||||
Interest expense, net | 334 | 355 | (662 | ) | 646 | |||||||||||
Gains on foreign currency | 128 | - | 163 | - | ||||||||||||
Unrealized loss on convertible debt | 3,625 | - | 5,586 | - | ||||||||||||
Stock based compensation | 1,044 | - | 1,846 | - | ||||||||||||
Loss on extinguishment of debt | - | - | 1,500 | - | ||||||||||||
Acquisition and merger expenses | 2,734 | - | 3,998 | - | ||||||||||||
Adjusted EBITDA | $ | 1,170 | $ | (331 | ) | $ | (2,412 | ) | $ | (592 | ) |
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FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
● | We have a history of significant operating losses and as such our future revenue and operating profitability are uncertain; |
● | Matters relating to or arising from our recent restatement could have a material adverse effect on our business, operating results and financial condition; |
● | We may fail to maintain our listing on The NASDAQ Stock Market and the Toronto Stock Exchange; |
● | We may be harmed if we do not penetrate markets and grow our current business operations; |
● | We may require additional capital in the future and no assurance can be given that such capital will be available on terms acceptable to us, or at all; |
● | Failure to attract, train, and retain personnel to manage our growth could adversely impact our operating results; |
● | We may not be able to properly integrate the operations of acquired businesses and achieve anticipated benefits of cost savings or revenue enhancements; |
● | We may incur unexpected costs, expenses, or liabilities relating to undisclosed liabilities of our acquired businesses; |
● | We may recognize impairment charges which could adversely affect our results of operations and financial condition; |
● | Goodwill resulting from acquisitions may adversely affect our results of operations; |
● | Future issuances of our common stock in connection with acquisitions could have a dilutive effect on your investment; |
● | Future sales of Swisher Hygiene shares by our stockholders could affect the market price of our shares; |
● | Our business and growth strategy depends in large part on the success of our franchisees and international licensees, and our brand reputation may be harmed by actions out of our control that are taken by franchisees and international licensees; |
● | Failure to retain our current customers and renew existing customer contracts could adversely affect our business; |
● | The pricing, terms, and length of customer service agreements may constrain our ability to recover costs and to make a profit on our contracts; |
● | Changes in economic conditions that impact the industries in which our end-users primarily operate in could adversely affect our business; |
● | Our solid waste collection operations are geographically concentrated and are therefore subject to regional economic downturns and other regional factors; |
● | If we are required to change the pricing models for our products or services to compete successfully, our margins and operating results may be adversely affected; |
● | Several members of our senior management team are critical to our business and if these individuals do not remain with us in the future, it could have a material adverse impact on our business, financial condition and results of operations; |
● | The financial condition and operating ability of third parties may adversely affect our business; |
● | The volatility of our raw material costs may adversely affect our operations; |
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● | Increases in fuel and energy costs could adversely affect our results of operations and financial condition; |
● | Our products contain hazardous materials and chemicals, which could result in claims against us; |
● | We are subject to environmental, health and safety regulations, and may be adversely affected by new and changing laws and regulations, that generate ongoing environmental costs and could subject us to liability; |
● | Future changes in laws or renewal enforcement of laws regulating the flow of solid waste in interstate commerce could adversely affect our results of operations and financial condition; |
● | If our products are improperly manufactured, packaged, or labeled or become adulterated, those items may need to be recalled; |
● | Changes in the types or variety of our service offerings could affect our financial performance; |
● | We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business; |
● | If we are unable to protect our information and telecommunication systems against disruptions or failures, our operations could be disrupted; |
● | Insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business; |
● | Our current size and growth strategy could cause our revenue and operating results to fluctuate more than some of our larger, more established competitors or other public companies; |
● | Certain stockholders may exert significant influence over corporate action requiring stockholder approval; and |
● | Provisions of Delaware law and our organizational documents may delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, including changes in interest rates and fuel prices. We do not use financial instruments for speculative trading purposes and we do not hold derivative financial instruments that could expose us to significant market risk. We do not currently have any contracts with vendors where we have exposure to the underlying commodity prices. In such event, we would consider implementing price increases and pursue cost reduction initiatives; however, we may not be able to pass on these increases in whole or in part to our customers or realize cost savings needed to offset these increases. The following discussion does not consider the effects that may have an adverse change on the overall economy, and it also does not consider actions we may take to mitigate our exposure to these changes. We cannot guarantee that the action we take to mitigate these exposures will be successful.
Interest Rate Risk
At June 30, 2011, we had variable rate debt of $24.7 million under two lines of credit with an average periodic interest rate on outstanding balances that fluctuates based on LIBOR plus 1.5% to 2.35%. At the above level of borrowings, for every 50 basis point change in LIBOR, interest expense associated with such borrowings would correspondingly increase or decrease by approximately $0.1 million annually. This analysis does not consider the effects of any other changes to our capital structure. A 10% change in interest rates would have an immaterial effect on the fair value of our final rate debt.
Fuel
Fuel costs represent a significant operating expense. To date, we have not entered into any contracts or employed any strategies to mitigate our exposure to fuel costs. Historically, we have made limited use of fuel surcharges or delivery fees to help offset rises in fuel costs. Such charges have not been in the past, and we believe will not be going forward, applicable to all customers. Consequently, an increase in fuel costs results in a decrease in our operating margin percentage. At current consumption level, a $0.50 change in the price of fuel changes our fuel costs by approximately $0.3 million on an annual basis.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and, include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including our former CEO and former CFO, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2011. Based upon that evaluation, at the time the Original 10-Q was filed on August 15, 2011, management concluded that our disclosure controls and procedures were effective as of June 30, 2011. Subsequent to that evaluation, in connection with filing this Amended 10-Q, management concluded that our disclosure controls and procedures were not effective as of June 30, 2011 because of the deficiencies in our internal control over financial reporting discussed below.
● | The effectiveness of our entity-level control environment, including placing an undue emphasis on internal anticipated financial results in communications during the financial statement close process, communication regarding the high standards for internal control over financial reporting, in maintaining effective communication within the reporting department and with our independent registered public accounting firm, and segregation of job responsibilities within the financial reporting department. |
● | The effectiveness of our control over the financial reporting close process allowing for override of entity-level controls resulting in a number of journal entries having either insufficient or no support. |
● | The effectiveness of our financial statement review process, including application of formal written policies and procedures governing our financial statement close process, and control in the preparation, documentation, review, and approval of journal entries, and in the preparation, review, and approval of account reconciliations. |
● | The effectiveness of our accounting department resulting from the insufficient number of qualified accounting personnel with the required proficiency to apply purchase accounting policies in accordance with Generally Accepted Accounting Principles ("GAAP"), including with respect to acquisitions, the significant number of acquisitions made during the six months ended June 30, 2011, and the difficulty of integrating the accounting systems of acquired entities into our internal control system. |
● | The effectiveness of transactional level controls designed to ensure the proper recording and elimination of inter-company transactions for GAAP reporting purposes, appropriate cut-off procedures, proper tracking of the physical movement of fixed assets and inventory and the maintenance of cash accounts, proper customer invoicing and payments, and accurate recording of accrued liabilities and stock based compensation expense. |
● | The effectiveness of certain information technology controls regarding inaccurate system generated reports, such as control over the input, calculation, and review of spreadsheet software, user access rights to the software, and changes in and testing to system software and infrastructure technology. |
A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiencies identified above contributed to the restatements of our condensed consolidated financial statements for the quarterly periods ended March 31, 2011, June 30, 2011, and September 30, 2011, and contributed to the delay in filing of our Annual Report on Form 10-K for the year ended December 31, 2011, and should be considered material weaknesses in our internal control over financial reporting.
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As set forth below, management has taken or will take steps to remediate each of the control deficiencies identified above. Notwithstanding the control deficiencies described above, we have performed additional analyses and other procedures to enable management to conclude that our condensed consolidated financial statements included in this Amended Form 10-Q fairly present, in all material respects, our financial condition and results of operations as of and for the period ended June 30, 2011.
Management's Remediation Plan
Following the Audit Committee's independent review, and in response to the deficiencies discussed above, we plan to continue efforts already underway to improve internal control over financial reporting, which include the following:
● | We have further enhanced open and timely communication with our independent registered public accounting firm and our Audit Committee in order to ensure the effective review and audit of our accounts. We continue to upgrade, monitor, and evaluate our compliance functions in order to improve control consciousness and minimize errors in financial reporting. We are also focused on improving the education and training of employees involved in the financial reporting process, including with respect to the appropriateness and frequency of communications. |
● | We have hired a new Chief Financial Officer, an Interim Director of SEC Reporting, a Director of Financial Planning and Analysis, and a Corporate Controller. We have also hired a Vice President of Internal Audit, a senior level position reporting to the Audit Committee to oversee a newly established Internal Audit Department. The Department has developed and is implementing an internal audit program which will provide an independent risk-based evaluation of the Company's control environment on an ongoing basis. We have also filled other key accounting positions with qualified personnel and will continue to augment our accounting staff as needed. |
● | We have restructured the accounting organization in accordance with our new policies and enhanced control environment. We have also enhanced the segregation of duties and certain operational functions within Information Technology, Human Resources, Financial Planning and Analysis, and Accounting, including payroll and treasury. The restructuring resulted in defined review and approval levels by positions. |
● | We have enhanced our journal entry policy, including a more stringent review and approval process. We have acquired and are implementing new software for recording asset acquisitions movement and disposal, and computing depreciation expense for financial and tax reporting. We have reduced the complexity of the Company's legal entities and have consolidated accounting data bases. We are implementing an automated process that uploads the trial balances of acquired entities' ERP systems into our corporate ERP system on a monthly basis with a standardized, centrally controlled chart of accounts mapping across the Company. By reducing complexity in this regard, we have also eliminated a significant portion of intercompany transactions. |
● | We have substantially completed the implementation of the use of hand-held devices by route service and customer facing team members which provides greater transaction level controls over customer invoicing and inventory. |
Management and our Audit Committee will continue to monitor these remedial measures and the effectiveness of our internal controls and procedures. Other than as described above, there were no changes in our internal controls over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 we cannot assure you 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.
For a discussion of additional legal proceedings related to our restatements to which we have become a party after June 30, 2011, please read "Explanatory Note – Securities Litigation."
ITEM 1A. RISK FACTORS.
In our report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 31, 2011, we identify under Item 1A risk factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Form 10-Q/A. See section entitled Forward-Looking Statements located in Part 1, Item 2 of this report. There have been no other material changes in our risk factors subsequent to the filing of our Form 10-K for the year ended December 31, 2010, except for the following:
Matters relating to or arising from our recent restatement could have a material adverse effect on our business, operating results and financial condition.
On March 28, 2012, we announced that the 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 our quarterly reports on Form 10-Q for the periods then ended, should no longer be relied upon and may need to be restated and that the filing of our Annual Report on Form 10-K for the year ended December 31, 2011 would be delayed due to an ongoing internal review by our Audit Committee.
These announcements and subsequent related announcements have led to litigation claims and/or potential regulatory proceedings against us. The defense of any such claims or proceedings may cause the diversion of management's attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses. We also may have difficulty raising equity capital or obtaining other financing, such as lines of credit or otherwise. Moreover, we have been and may continue to be the subject of negative publicity focusing on the financial statement adjustments and resulting restatement and negative reactions from our stockholders, creditors or others with which we do business. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our securities to decline.
In connection with the restatement of our previously issued financial statements for the periods ended March 31, 2011, June 30, 2011 and September 30, 2011 and our reassessment of our disclosure controls and procedures under Item 307 of Regulation S−K, we concluded that as of December 31, 2011, our disclosure controls and procedures were not effective as a result of deficiencies in our internal control over financial reporting. Should we identify other deficiencies and be unable to remediate any such other deficiencies promptly and effectively, such deficiencies could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. Any litigation or other proceeding or adverse publicity relating to our deficiencies or any future deficiencies could have a material adverse effect on our business and operating results.
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We may fail to maintain our listing on the NASDAQ Stock Market and the Toronto Stock Exchange.
On November 28, 2012, NASDAQ granted the Company's request to remain listed on NASDAQ, subject to meeting specific conditions for continued listing, which included the following conditions: (1) on or before February 19, 2013, the Company must file with the SEC its restated 2011 Form 10-Qs and the 2011 Annual Report on Form 10-K, and (2) on or before February 28, 2013, the Company must file all 2012 Form 10-Qs, as well as provide NASDAQ with an update with respect to its progress on its audit and filing of its Annual Report on Form 10-K for the year ended December 31, 2012. In order to fully comply with the terms of NASDAQ's extension, the Company must be able to demonstrate compliance with all requirements for continued listing on NASDAQ. If we do not regain compliance with all requirements for continued listing, NASDAQ will provide written notification to us that our common stock will be delisted. Also, on February 11, 2013, we received notice from the TSX indicating the TSX had determined to delist our common stock at the close of market on March 11, 2013, subject to us meeting TSX continued listing requirements, primarily relating to our failure to file certain of our financial statements. A delisting of our common stock could adversely affect the market liquidity of our common stock, impair the value of your investment, and harm our business. We can provide no assurance that we will satisfy the conditions required to maintain our listing on NASDAQ or the TSX and, even if we satisfy the conditions, NASDAQ or the TSX may not continue our listing.
The volatility of our raw material costs may adversely affect our operations.
We use a number of key raw materials in our business. The prices of many of these raw materials are cyclical. If we are unable to minimize the effects of increased raw material costs through sourcing or pricing actions, future increases in costs of raw materials could have a material adverse effect on our business, financial condition, results of operations and prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In addition to issuances reported on Current Reports on Form 8-K, we issued the following shares of common stock during the quarter ended June 30, 2011:
(a) | On April 8, 2011, in connection with the acquisition of certain assets of Q Linen Service Inc., the Company issued 37,479 shares of our common stock to Q Linen Service Inc.; |
(b) | On April 11, 2011, in satisfaction of a promissory note issued in connection with the acquisition of certain assets of Budgetchem.com, the Company issued 50,027 shares of our common stock to Jay Felen; |
(c) | On April 11, 2011, in connection with the acquisition of Lawson Sanitation LLC, the Company issued 909,090 shares of our common stock to John Lawson, Jr.; |
(d) | On April 12, 2011, in connection with the acquisition of Hallmark Sales and Service, Inc., the Company issued 24,437 shares of our common stock to Harry F. Noyes, Jr.; |
(e) | On April 14, 2011, in connection with the acquisition of the minority equity interests of Service Tallahassee, LLC, the Company issued 25,000 shares of our common stock to Todd Bierling; and |
(f) | On April 15, 2011, the Company entered into a series of arm’s length securities purchase agreements to sell 9,857,143 shares of our common stock at a price of $7.70 per share, for aggregate proceeds of $75.9 million to certain funds of a global financial institution. The Company completed this private placement on April 19, 2011. |
The issuance of the securities described in paragraphs (a) through (f) above were exempt from the registration requirements of the Securities Act afforded by Section 4(2) thereof and Regulation D promulgated thereunder, which exception Swisher Hygiene believes is available because the securities were not offered pursuant to a general solicitation and such issuances were otherwise made in compliance with the requirements of Regulation D and Rule 506. The securities issued in these transactions are restricted and may not be resold except pursuant to an effective registration statement filed under the Securities Act or pursuant to a valid exemption from the registration requirements of the Securities Act.
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ITEM 6. EXHIBITS.
Exhibit Number | Description | |
10.1 | Securities Purchase Agreement, dated April 15, 2011. (On April 15, 2011, Swisher Hygiene Inc. entered into an additional 16 securities purchase agreements which are substantially identical in all material respects to this exhibit expect as to the parties thereto and the number of shares of common stock of Swisher Hygiene purchased. Attached to this exhibit is a schedule identifying the parties to the additional 16 securities purchase agreements and the number of shares of common stock Swisher Hygiene purchased by such parties.) (incorporated by reference to Exhibit 10.29 of the Company’s Pre-Effective Amendment No. 3 to Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 21, 2011). | |
10.2 | Amended and Restated Swisher Hygiene Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 9, 2011).* | |
10.3 | Swisher Hygiene Inc. Senior Executive Officers Performance Incentive Bonus Plan (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2011).* | |
10.4 | Employment Agreement of Michael Kipp (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2011).* | |
Section 302 Certification of Chief Executive Officer. | ||
Section 302 Certification of Chief Financial Officer. | ||
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | ||
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | ||
101.INS | XBRL Instance Document.*** | |
101.SCH | XBRL Taxonomy Extension Schema.*** | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase.*** | |
101.LAB | XBRL Taxonomy Extension Label Linkbase.*** | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase.*** |
___________
* | Management contracts or compensatory plans, contracts, or arrangements. |
** | Furnished herewithin. |
*** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SWISHER HYGIENE INC. (Registrant) | |||
Dated: February 20, 2013 | By: | /s/ Thomas C. Byrne | |
Thomas C. Byrne | |||
President and Chief Executive Officer (Principal Executive Officer) | |||
Dated: February 20, 2013 | By: | /s/ William T. Nanovsky | |
William T. Nanovsky | |||
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
SWISHER HYGIENE INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number | Description | |
Section 302 Certification of Chief Executive Officer. | ||
Section 302 Certification of Chief Financial Officer. | ||
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||
101.INS | XBRL Instance Document.** | |
101.SCH | XBRL Taxonomy Extension Schema.** | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase.** | |
101.LAB | XBRL Taxonomy Extension Label Linkbase.** | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase.** |
___________
* | Furnished herewithin. |
** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections. |