U.S. Dry Cleaning Services 10QSB 2008 Q1 Quarterly report (small business)

PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	1

Item 2:	Management’s Discussion and Analysis	2

Item 3:	Controls and Procedures	7
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	9

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	9

Item 3:	Defaults Upon Senior Securities	9

Item 4:	Submission of Matters to a Vote of Security Holders	9

Item 5:	Other Information	9

Item 6:	Exhibits	9

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our unaudited condensed consolidated financial statements included in this Form 10-QSB are as follows:

(a)	Unaudited Condensed Consolidated Balance Sheet as of December 31, 2007	F-2

(b)	Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31, 2007 and 2006	F-3

(c)	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2007 and 2006	F-4

(d)	Notes to Unaudited Condensed Consolidated Financial Statements	F-5

F-1

US DRY CLEANING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

December 31, 2007

(Unaudited)

ASSETS

Current Assets
Cash and cash equivalents	$	1,721,811
Accounts receivable, net		495,609
Deferred acquisition costs		641,848
Prepaid expenses and other current assets		199,585
Total Current Assets		3,058,853
Property and Equipment, net		1,731,840
Non-Current Assets
Deposits		152,254
Deferred financing costs		70,000
Intangible assets, net		508,084
Goodwill		5,362,408
Total Non-Current Assets		6,092,746
Total Assets	$	10,883,439

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,856,672
Accrued liabilities		1,307,250
Capital lease obligations		185,587
Notes payable		288,980
Convertible notes payable		525,000
Line of credit		1,050,000
Total Current Liabilities		5,213,489
Long Term Liabilities
Capital lease obligations, net of current portion		245,202
Notes payable, net of current portion		342,044
Convertible notes payable, net of current portion		3,317,312
Total Long Term Liabilities		3,904,558
Total Liabilities		9,118,047

Stockholders' Equity
Convertible preferred stock; par value $0.001 per share;
20,000,000 authorized shares;
1,200,000 shares issued and none outstanding; liquidation preference of $2.40 per share		–
Common stock; par value $0.001 per share;
50,000,000 Series B authorized shares; none issued and outstanding		–
Common stock; par value $0.001 per share;
50,000,000 authorized shares; 21,968,406 shares issued and outstanding		21,968
Additional paid-in capital		23,725,809
Stockholder receivable		(766,280	)
Accumulated deficit		(21,216,105	)
Total Stockholders' Equity		1,765,392
Total Liabilities and Stockholders' Equity	$	10,883,439

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-2

US DRY CLEANING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

		2007			2006
Net Sales	$	2,370,823		$	1,601,411

Cost of Sales		(1,180,747	)		(848,543	)

Gross Profit		1,190,076			752,868

Operating Expenses
Delivery expenses		200,302			164,362
Store expenses		777,033			399,277
Selling expenses		161,321			151,474
Administrative expenses		1,510,226			1,375,880
Depreciation and amortization		96,225			77,293
Other		9,930			–
Total operating expenses		2,755,037			2,168,286

Operating Loss		(1,564,961	)		(1,415,418	)

Other income (expenses)
Gain on extinguishment of debt		423,798			–
Interest expense		(700,617	)		–
Other income (loss)		(17,953	)		(122,940	)
Total other expenses		(294,772	)		(122,940	)
Loss before provision for income taxes		(1,859,733	)		(1,538,358	)
Provision for income taxes		-			–

Net Loss	$	(1,859,733	)	$	(1,538,358	)

	$	(0.09	)	$	(0.09	)

Basic and diluted weighted average number
of common shares outstanding		21,812,252			16,468,261

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-3

US DRY CLEANING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)


	2007			2006

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,859,733	)	$	(1,538,358	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		96,225			77,293
Amortization of deferred financing costs and consulting fees		8,125			–
Bad debt expense		959			180
Equity instruments issued for compensation and services		–			416,070
Gain on debt extinguishment		(423,798	)		–
Amortization of debt discounts		308,342			38,337
Changes in operating assets and liabilities:
Accounts receivable		(16,772	)		123,449
Prepaid expenses and other current assets		(95,374	)		39,139
Deposits		(4,297	)		–
Other assets		–			(216,947	)
Accounts payable and accrued expenses		332,036			(223,105	)
Net cash used in operating activities		(1,654,287	)		(1,283,942	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(31,817	)		(40,282	)
Deferred acquisition costs		(81,402	)		(123,284	)
Net cash used in investing activities		(113,219	)		(163,566	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable		1,853,500			1,400,000
Proceeds from line of credit		550,000			–
Repayments on notes payable		(102,938	)		(76,427	)
Repayments on convertible notes payable		(100,000	)		–
Repayments on capital lease obligations		(58,784	)		(20,673	)
Deferred financing costs		(269,825	)		(70,444	)
Net cash provided by financing activities		1,871,953			1,232,456

Net increase (decrease) in cash		104,447			(215,052	)
Cash at beginning of period		1,617,364			1,414,456
Cash at end of period	$	1,721,811		$	1,199,404

Cash paid during the period for:
Interest	$	23,276		$	47,777
Income taxes	$	-		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-4

US DRY CLEANING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)

	2007		2006

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt discount on convertible notes issued with common stock	$	–	$	500,089
Conversion of debt to common stock	$	315,000	$	-
Conversion of note payable to convertible note	$	200,000	$	-

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-5

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The Company

U.S. Dry Cleaning Corporation (“USDC”, the "Company," “we”, or “us”) is a retail service provider of laundry and dry cleaning stores and operations with thirty-four retail stores and two processing plants. The Company’s operations are located in Honolulu, Hawaii (seventeen retail stores and one processing plant), Palm Springs, California (six retail stores), and Riverside, California (eleven retail stores and one processing plant).

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements and the notes hereto should be read in conjunction with the financial statements, accounting policies and notes thereto included in the Company’s audited consolidated financial statements on Form 10-KSB, for the fiscal year ended September 30, 2007 filed with the SEC. In the opinion of management, all adjustments necessary to present fairly, in accordance with GAAP, the Company’s financial position as of December 31, 2007, and the results of operations and cash flows for the interim periods presented have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has recurring losses from operations; negative cash flow from operating activities of approximately $1,654,000 for the three months ended December 31, 2007; and negative working capital of approximately $2,155,000 and an accumulated deficit of approximately $21,216,000 at December 31, 2007. The Company’s business plan calls for various business acquisitions, which will require substantial additional capital. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company intends to fund operations through debt and equity financing transactions. In connection with such efforts, the Company completed a debt financing during December 2007 (See Note 3) yielding net cash proceeds of $1,853,000. In addition, subsequent to December 31, 2007, the Company received gross proceeds of approximately $2,694,000 in various debt issuances (see Note 7). However, such financing transactions may be insufficient to fund our planned acquisitions, capital expenditures, working capital and other cash requirements for the fiscal year ending September 30, 2008. Therefore, the Company will be required to seek additional funds to finance its long-term operations. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

The condensed consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

F-6

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of USDC and its wholly-owned subsidiaries, Steam Press Holdings, Inc. (“Steam Press”), Coachella Valley Retail, LLC (“CVR”) and Cleaners Club, Inc. (“CCI”). All significant intercompany balances and transactions have been eliminated in consolidation.

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 and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include the realization of long-lived assets, the valuation allowance on deferred tax assets, and the allowance for doubtful accounts receivable. Actual results could differ from those estimates.

Business Segments

The Company currently operates in one segment; the laundry and dry cleaning business and is geographically concentrated in Hawaii and Southern California.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition. The Company faces risks and uncertainties relating to its ability to successfully implement its business strategy. Among other things, these risks include the ability to develop and sustain revenue growth; managing the expansion of its operations; competition; attracting and retaining qualified personnel; maintaining and developing new strategic relationships; and the ability to anticipate and adapt to the changing markets and any changes in government or environmental regulations. Therefore, the Company is subject to the risks of delays and potential business failure.

The dry cleaning industry has been a target for environmental regulation during the past two decades due to the use of certain solvents in the cleaning process. For example, in 2002, air quality officials in Southern California approved a gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning solvent, by 2020. Under this regulation, which went into effect January 1, 2003, any new dry cleaning business or facility that adds a machine must also add a non-Perc machine. While existing dry cleaners can continue to operate one Perc machine until 2020, by November 2007 all dry cleaners using Perc had to utilize state-of-the-art pollution controls to reduce Perc emissions. The Company believes that it is successfully integrating the new dry cleaning processes.

Management feels that domestic media have generally sensationalized the perceived hazards of Perc to operators, clients and the environment in general. Perc is a volatile, yet non-flammable, substance that requires precautions and proper handling. However, it has proven safe, effective and completely manageable for years and the Company anticipates that its centralized operations and improvements in all facets of the business will further improve the safety for employees, clients and the environment. The Company will continue to utilize Perc where permitted on a limited interim basis to assure an orderly transition. To the extent that additional investment for environmental compliance may be necessary, the Company does not anticipate any significant financial impact. The Company believes that it complies in all material respects with all relevant rules and regulations pertaining to the use of chemical agents. In the opinion of management, the Company complies in all material respects with all known federal, state, and local legislation pertaining to the use of all chemical agents and will endeavor to ensure that the entire organization proactively remains in compliance with all such statutes and regulations in the future.

Other Concentrations

The financial instrument that potentially exposes the Company to a concentration of credit risk principally consists of cash. The Company deposits its cash with high credit financial institutions, principally in the United States. At December 31, 2007, the Company’s cash balances in U.S. bank accounts totaled approximately $1,722,000 which exceeds the Federal Deposit Insurance Corporation limit of $100,000.

The Company’s credit risk with respect to the accounts receivable is limited due to the credit worthiness of our customers. The Company also performs periodic reviews of collectability and provides an allowance for doubtful accounts receivable when necessary. Management considers the allowance for doubtful accounts receivable at December 31, 2007 of approximately $23,000 to be adequate.

F-7

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) Per Shares

Under Statement of Financial Accounting Standards (“SFAS”) No. 128, “ Earnings per Share” , basic loss per common share is computed by dividing the loss applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per common share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants (using the treasury stock method) and the conversion of convertible preferred stock and convertible debt (using the if-converted method). For the three months ended December 31, 2007; 175,000 convertible securities and 3,500,836 warrants to purchase common stock, were excluded from the calculation of diluted loss per share because they were anti-dilutive.

Reclassification

Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation.

Revenue Recognition

The Company recognizes revenue on retail laundry and dry cleaning services when the services have been provided and the earnings process is complete. For “walk-in” retail customers, when an order is complete and ready for customer pick-up, the sale and related account receivable are recorded. For commercial customers, the sale is not recorded until the Company delivers the cleaned garments. Generally, the Company delivers the cleaned garments the same day they are dropped off (same-day service).

Adoption of FIN 48

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,”Accounting for Income Taxes.” FIN No. 48 prescribes a more-likely-than-not recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken (or expected to be taken) in an income tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The requirement to assess the need for a valuation allowance on net deferred tax assets is not affected by FIN No. 48. This pronouncement was effective October 1, 2007 for the Company and the adoption of FIN 48 did not have a significant impact on the Company’s consolidated financial statements.

3. NOTES PAYABLE

During December 2007, the Company completed the closing of a private placement of 10% senior secured convertible notes (the “Notes”) to accredited investors, receiving net cash of approximately $1,853,000. Each Note was issued at a price equal to 90% of its principal amount. The Notes mature two years after the date of their issuance and bear interest at 10% per year, payable quarterly in arrears in cash. Investors may convert their Notes into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $2.50 per share, subject to adjustment under customary circumstances. The Notes will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions. Approximately $1,660,000 of Series A Convertible Debt holders converted their debt to the newly issued above Notes. The Series A debt matured on December 3, 2007 and approximately $525,000 remains outstanding and in default at December 31, 2007. The debt to debt conversion resulted in debt extinguishment accounting under Accounting Principles Board ("APB") No. 26 and Emerging Issues Task Force ("EITF") Issue No. 96-19 and, accordingly, the Company recorded a gain on extinguishment of approximately $424,000 in the accompanying statement of operations for the three months ended December 31, 2007.

F-8

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

4. RELATED PARTY MATTERS

The Company rents office space located at 125 E. Tahquitz Canyon Way in Palm Springs, California on a month-to-month basis from Transactional Marketing Partners, a company owned by former director Earl Greenburg. The rent is $2,200 per month all inclusive.

5. EQUITY TRANSACTIONS

During the quarter ended December 31, 2007, the Company issued 242,308 shares of its restricted common stock for conversion of $315,000 in Series A convertible debentures. The transaction described in this paragraph constituted an exempt offering under Section 4(2) of the Securities Act.

Options and Warrants

During the quarter ended December 31, 2007, there was no significant activity in options and warrants.

6. COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time, the Company may be involved in various claims, lawsuits and disputes with third parties, actions involving allegations of discrimination or breach of contract incidental to the ordinary operations of the business. The Company is not currently involved in any litigation which management believes could have a material adverse effect on the Company's financial position or results of operations.

7. SUBSEQUENT EVENTS

During January 2008, the Company completed the closing of a private placement of 10% senior secured convertible notes (the “Notes") to accredited investors, receiving gross proceeds of approximately $694,000. Each Note was issued at a price equal to 90% of its principal amount. The Notes mature two years after the date of their issuance and bear interest at 10% per year, payable quarterly in arrears in cash. Investors may convert their Notes into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $2.50 per share, subject to adjustment under customary circumstances. The Notes will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or Nasdaq and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions.

On February 7, 2008, the Company filed a Form 8-K announcing that Earl Greenburg, a founding director, passed away on February 1, 2008, at the age of 61. No new director has been named.

On February 12, 2008, the Company completed a conventional convertible debt instrument for $2,000,000. The Note matures two years after the date of issuance and bears interest at 12% per year, payable in arrears in cash at maturity date. The Investor may convert the Note into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $2.50 per share, subject to adjustment under customary circumstances. The Note will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions.

On February 14, 2008, the Company completed the acquisition of a leading dry cleaning chain in central California previously reported on Form 8-K filed with the SEC on September 6, 2007. The August 30, 2007 original agreement was amended on February 14, 2008 and calls for approximately $1,500,000 in cash and $3,067,000 in common stock at $1.50 per share. The Company intends to file Form 8-K with more information shortly. The acquisition increases the Company’s annualized revenues by over 60%.

F-9

Item 2. Management’s Discussion and Analysis

Forward-Looking Statements

Certain statements made herein and in other public filings and releases by us contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainty. These forward-looking statements may include, but are not limited to, future capital expenditures, acquisitions (including the amount and nature thereof), future sales, earnings, margins, costs, number and costs of store openings, demand for dry cleaning clothing, market trends in the retail clothing business, inflation and various economic and business trends. Forward-looking statements may be made by management orally or in writing, including, but not limited to, Management's Discussion and Analysis or Plan of Operation section and other sections of our filings with the U.S. Securities and Exchange Commission (the “SEC”), under the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”).

Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to, domestic economic activity and inflation, our successful execution of internal operating plans and new store and new market expansion plans, performance issues with key suppliers, severe weather, and legal proceedings. Future results will also be dependent upon our ability to continue to identify and complete successful expansions and penetrations into existing and new markets and our ability to integrate such expansions with our existing operations.

Description of Business

Our Company

US Dry Cleaning Corporation (“USDC”) was formed on July 19, 2005, and on December 30, 2005, completed a “reverse merger” with a public “Shell Company.” On August 9, 2005, we purchased 100% of the outstanding common stock and membership interest of Steam Press Holdings, Inc. (“Steam Press”), and Coachella Valley Retail, LLC (“CVR”), respectively, in stock for stock type transactions. USDC, Steam Press, and CVR are hereinafter collectively referred to as the “Company.” On February 15, 2007, we acquired 100% of Cleaners Club, Inc.’s (“CCI”) authorized, issued and outstanding common stock was acquired in a merger with us.

Steam Press owns 100% of Enivel, Inc. (“Enivel”), which does business as Young Laundry & Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and operates thirteen retail laundry and dry cleaning stores, in addition to providing hotel and other commercial laundry and dry cleaning services. CVR was founded in 2004 and operates six retail laundry and dry cleaning stores under several names in the Palm Springs, California area. CCI was founded in 1998 and operates thirteen retail laundry and dry cleaning stores.

Competition

We operate in an industry that is subject to intense competition. A handful of markets are dominated by large, well-capitalized operators who have implemented a model similar to our vision: serving multiple locations with centralized, large capacity production facilities. Smaller players are finding it more difficult to retain market share due to higher overall operating costs and constraints. We believe that our strategy of centralized operations, consolidation, and public corporate structure is unique in the dry cleaning industry. However, there can be no assurance that other enterprises will not seek to acquire a significant number of dry cleaning operations in markets in which we currently operate or will prospectively operate.

Other Risks and Uncertainties

In addition to operating in an industry that is subject to intense competition, we face risks and uncertainties relating to our ability to successfully implement our business strategy. Among other things, these risks include our ability to develop and sustain revenue growth; manage the expansion of our operations; attract and retain qualified personnel; maintain and develop new strategic relationships; and anticipate and adapt to the changing markets and any changes in government or environmental regulations. Therefore, we are subject to numerous risks that could delay our expansion strategy and even potentially cause our business to fail.

The dry cleaning industry has been a target for environmental regulation during the past two decades due to the use of certain solvents in the cleaning process. For example, in 2002, air quality officials in Southern California approved a gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning solvent, by 2020. Under this regulation, which went into effect January 1, 2003, any new dry cleaning business or facility that adds a machine must also add a non-Perc machine. While existing dry cleaners can continue to operate one Perc machine until 2020, by November 2007 all dry cleaners using Perc must utilize state-of-the-art pollution controls to reduce Perc emissions. We believe that we are successfully integrating the new dry cleaning processes.

Our management believes that domestic media have generally sensationalized the perceived hazards of Perc to operators, clients and the environment in general. Perc is a volatile, yet non-flammable, substance that requires precautions and proper handling. However, it has proven safe, effective and completely manageable for years. We anticipate that our centralized operations and improvements in all facets of the business will further improve the safety for our employees, our clients and the environment. We intend to continue to utilize Perc where permitted on a limited interim basis to assure an orderly transition. To the extent that additional investment for environmental compliance may be necessary, we do does not anticipate any significant financial impact. We believe that we comply in all material respects with all relevant rules and regulations pertaining to the use of chemical agents. In the opinion of our management, we comply in all material respects with all known federal, state, and local legislation pertaining to the use of all chemical agents and will endeavor to ensure that our company proactively remains in compliance with all such statutes and regulations in the future.

Major Customers

At December 31, 2007 and 2006, one customer accounted for approximately 21% and 14% of gross accounts receivable, respectively. During the three months ended December 31, 2007 and 2006, one customer accounted for approximately 12% and 15% of net sales, respectively.

Results of Operations for the Three Months Ended December 31, 2007 and 2006

Revenues

Net sales were approximately $2,371,000 for the three months ended December 31, 2007, an increase of approximately $770,000 compared to the three months ended December 31, 2006 of approximately $1,601,000. This reflects a 30% increase in revenues. The increase consisted of approximately $730,000 from our acquisition in Feburary 2007.

Cost of Sales

Our cost of sales was approximately $1,181,000 for the three months ended December 31, 2007, an increase of approximately $332,000 compared to the three months ended December 31, 2006 of approximately $849,000. Cost of sales as a percentage to revenues is approximately 50% and 53% for the three months ended December 31, 2007 and 2006, respectively. Our cost of sales consists of supplies, labor and facilities to process laundry and dry cleaning services with the increase primarily due to our Feburary 2007 acquisition.

Gross Profit

Gross profit increased approximately $437,000 to approximately $1,190,000 for the three months ended December 31, 2007 compared to the three months ended December 31, 2006 of approximately $753,000. Gross profit as a percentage of revenue increased 4% to 51% from 47% for the three months ended December 31, 2007 and 2006, respectively, with the increase primarily due to our Feburary 2007 acquisition.

Operating Expenses

Operating expenses for the three months ended December 31, 2007 are approximately $2,755,000, an increase of approximately $664,000 compared to the three months ended December 31, 2006 of approximately $2,091,000 with the increase primarily due to our February 2007 acquisition.

Delivery, store and selling expenses for the three months ended December 31, 2007 were approximately $1,139,000, an increase of approximately $424,000 compared to the three months ended December 31, 2006 of approximately $715,000. These expenses are primarily related to store rents and delivery costs with the increase primarily due to our Feburary 2007 acquisition.

Administrative expenses and professional fees for the three months ended December 31, 2007 were approximately $1,510,000, an increase of approximately $813,000 compared to the three months ended December 31, 2006 of approximately $697,000. Our management costs are directly related to supporting a public company.

Net Results of Operations

Operating loss was approximately $1,565,000 for the three months ended December 31, 2007 and approximately $1,415,000 for the three months ended December 31, 2006.

Other Income (Expense)

Interest expense for the three months ended December 31, 2007 was approximately $701,000 compared to $0 for the three months ended December 31, 2006. The increase is due to our amortizing during the quarter ended December 31, 2007 of approximately $308,000 of debt discounts to interest expense relating to Series A Convertible Debentures (see Note 3) and financing fees of approximately $335,000.

Net Results

We are reporting a net loss of approximately $1,860,000 or $(0.09) per common share for the three months ended December 31, 2007 compared to a net loss of approximately $1,538,000 or $(0.09) per common share for the three months ended December 31, 2006. The result is due to legal, audit, consulting and administrative expenses directly related towards capitalization of our company.

Liquidity and Capital Resources

Total assets increased by approximately $1,902,000 from $8,981,000 as of December 31, 2006 to $10,883,000 as of December 31, 2007.

Total liabilities increased by approximately $5,709,000 from approximately $3,410,000 as of December 31, 2006 to approximately $9,119,000 as of December 31, 2007. This increase is primarily due to the issuance of approximately $3,200,000 of the Company’s Series A Convertible Debentures (see Note 3); an increase in trade accounts payable and accrued liability obligations of approximately $1,850,000 and other current liabilities of approximately $1,050,000.

Our operating activities used approximately $1,654,000 in cash during the three months ended December 31, 2007. Our net loss of approximately $2,284,000 was the primary component. This net loss was offset by a number of non-cash items totaling approximately $10,000. These include depreciation, amortization, bad debt expense, debt discount amortization and gain on debt extinguishment in addition to the growth in payables and accrued liabilities of approximately $332,000.

Cash used in investing activities during the three months ended December 31, 2007, consisted of approximately $113,000 used for the purchase of property and equipment and deferred acquisition costs as compared to approximately $164,000 for the three months ended December 31, 2006 for the purchase of property and equipment and deferred acquisition costs.

Cash flows from financing activities were approximately $1,872,000 for the three months ended December 31, 2007 which primarily consisted of approximately $1,853,000 in net proceeds from the issuance of convertible debentures and approximately $550,000 in proceeds from line of credit, offset by repayments on notes payable, capital leases and prepaid financing costs of approximately $262,000.

We have a negative working capital deficit of approximately $2,155,000 as of December 31, 2007. To meet our current working capital requirements, we raised approximately $1,853,000 in private funds through convertible debt in December 2006 and approximately $2,000,000 in net proceeds from additional convertible debt in February 2008. However, there can be no assurances that any debt and/or equity financing transactions now under consideration will be successful at acceptable terms.

Going Concern Considerations

The condensed consolidated financial statements included elsewhere herein have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. For the three months ended December 31, 2007, we had a net loss of approximately $1,860,000 and negative cash flow from operating activities of approximately $1,654,000. At December 31, 2007, we had an accumulated deficit of approximately $21,216,000, working capital deficit of approximately $2,155,000 and have suffered significant net losses since inception.

We will be required to seek additional funds to finance our long-term operations. The successful outcome of future activities cannot be determined at this time, and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.

Since inception, we have yet to generate any profits from operations. Accordingly, we have met our capital requirements primarily through the private sale of our convertible secured promissory notes payable, secured convertible debentures and a public offering of our common stock. We have raised approximately $10,500,000 in net cash proceeds through the private debt sales offset by related fees associated with the issuance of units through a public offering that closed on July 19, 2007. In May 2006, the majority of the holders of approximately $7,900,000 senior-secured convertible notes payable elected to convert into the our common stock. It is anticipated that the holders of the recently raised $2 million will also convert their convertible debentures to equity upon maturity.

Our capital requirements depend on numerous factors, including the rate of market acceptance of our services, the Company’s ability to service its customers, our ability to maintain and expand its customer base, the level of resources required to expand our marketing and sales organization, and other factors. We are currently revising our business plan for funding our long-term operations to include potential acquisitions which would allow us to maximize our current processing facility capacities, thereby increasing our potential profitability. We intend to fund operations through debt and/or equity financing transactions and facilitate such fund raising efforts by registering shares of its common stock with the SEC as a public company. However, such financing transactions may not be sufficient to fund its planned acquisitions, capital expenditures, working capital, and other cash requirements for the fiscal year ending September 30, 2008.

As more fully explained elsewhere herein, our management presently believes that cash generated from operations (if any), combined with our current cash positions and debt and/or equity financing proposals now under consideration may not be sufficient to meet our anticipated liquidity requirements through September 2008. There can be no assurance that any debt and/or equity financing transactions now under consideration will be successful at acceptable terms.

Off Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, do not engage in trading activities involving non-exchange traded contracts, and are not a party to any transaction with persons or entities that derive benefits, except as disclosed herein, from their non-independent relationships with us.

Inflation

We believe that inflation generally causes an increase in sales prices with an offsetting unfavourable effect on the cost of products and services sold and other operating expenses. Accordingly, with the possible exception of the impact on interest rates, we believe that inflation will have no significant effect on our results of operations or financial condition.

Critical Accounting Policies

To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, we provide for estimates regarding the collectability of accounts receivable, the recoverability of long-lived assets, as well as our deferred tax asset valuation allowance. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Future financial results could differ materially from current financial results.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, “ Revenue Recognition ” (“SAB 104”). SAB 104 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. The Company recognizes revenue on retail laundry and dry cleaning services when the services are deemed to have been provided and the earnings process is complete. For “walk-in and pickup-and-delivery” type retail customers, the order is deemed to have been completed when the work-order ticket is created and the sale and related account receivable are recorded. For commercial customers, the sale is not recorded until the Company delivers the cleaned garments to the commercial customer. Generally, the Company delivers the cleaned garments to commercial customers the same day they are dropped off (same-day service).

Returns and Allowances

We experience claims for items damaged during processing, adjustments in resolution of customer disputes, and promotional discounts, all of which are recorded as incurred. Such charges average about one percent of gross revenue. Sales are reported in the accompanying consolidated financial statements net of “Returns and Allowances”, which are reflected as a reduction of gross sales.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customers’ current buying habits. We monitor collections and payments from our customers and maintain a provision for estimated credit losses based on specific customer collection issues that have been identified.

Long-lived Assets

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 144, “ Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. See below for additional information regarding the identification and measurement of impairment of certain long-lived assets governed by SFAS No. 144.

We assess the impairment of long-lived assets, including goodwill, annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held for use is based on expectations of the estimated fair value of the asset, and when circumstances dictate, we adjust the asset to the extent that the carrying value exceeds the estimated fair value of the asset. Our judgments related to the expected useful lives of long-lived assets and our ability to estimate fair value in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As we assess the ongoing estimated fair value and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge, which would result in decreased net income (or increased net loss) and reduce the carrying value of these assets.

Deferred Tax Assets

Deferred tax assets are recorded net of a valuation allowance. The valuation allowance reduces the carrying amount of deferred tax assets to an amount the Company’s management believes is more likely than not realizable. In making the determination, projections of taxable income (if any), past operating results, and tax planning strategies are considered.

Purchase Price Allocations for Acquisitions

The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values. We reached our conclusions regarding the estimated fair values assigned to such assets based upon the following factors:

Goodwill

SFAS No. 142 establishes a two-step process that governs the review of goodwill for possible impairment at the reporting unit level. A reporting unit is either an operating segment (as defined in SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information"), or a component of an operating segment. A component must meet the definition of a "business" under the criteria established by GAAP. When applicable, other assets and asset groups are tested for impairment and any adjustment of the carrying values is reflected before the goodwill impairment test is performed.

The first phase, which is only designed to identify potential impairment, requires a comparison of a reporting unit's carrying amount (including goodwill) with its estimated fair value. For this purpose, the traditional marketplace definition of fair value applies. If the reporting unit's estimated fair value exceeds its carrying amount, the related goodwill is considered not impaired; under these circumstances, the second step of the impairment test described in the following paragraph is unnecessary.

The second phase, to measure an impairment loss, the carrying amount of the reporting unit's goodwill is compared to its "implied fair value." An entity is required to estimate the implied fair value of its goodwill by allocating the reporting unit's total fair value to all of its assets (including unrecognized intangible assets) and liabilities as if (1) the reporting unit had been acquired in a business combination and (2) the reporting unit's fair value was the purchase price. The excess of the reporting unit's fair value over the amounts assigned to its assets and liabilities represents the implied fair value of goodwill.

For goodwill-impairment testing the Company engaged an independent third party expert to conduct an impairment review at September 30, 2007 and make impairment recommendations to management. No such review was conducted for the quarter ended December 31, 2007.

Subsequent Events

Departure of Director or certain officers:

On February 7, 2008, the Company filed a Form 8-K announcing that Earl Greenburg, a founding director passed away on February 1, 2008, at the age of 61. No new director has been named.

Item 3. Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2007. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures are not effective.

The ineffective disclosure controls and procedures the Company intends to address include establishing effective controls over the period-end closing and financial reporting processes. This will require the addition of personnel and the creation of closing protocols for both the Company and its subsidiaries as well as the consolidation of all subsidiaries.

We plan on remediating the material weaknesses by implementation of new financial reporting systems throughout our operations; adoption of uniform internal controls; and the addition of management personnel to monitor daily organizational activities which will ensure that information is being gathered, reviewed and disclosed at all levels of our company and reported timely in various reports filed or submitted under the Exchange Act.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of internal control also is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, internal control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various claims, lawsuits, or disputes with third-parties incidental to the normal operations of the business. We are not currently involved in any such litigation. Furthermore, we are not aware of any proceeding that a governmental authority is contemplating.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

Our Series A convertible debt matured on December 3, 2007. Approximately $1,660,000 of such debt converted to our December 2007 convertible debt offering, however, approximately $525,000 of the Series A is still outstanding and in default.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	US DRY CLEANING CORPORATION


Date: February 19, 2008	By:	/s/ ROBERT Y. LEE
	Robert Y. Lee
	Chief Executive Officer


	By:	/s/ F. KIM COX
	F. Kim Cox
	Chief Financial Officer

EXHIBIT INDEX

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

Exhibit 32.1	Certification of Chief Executive Office pursuant to Section 906 of the Sarbanes-Oxley Act.

Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

U.S. Dry Cleaning Services (FVCCQ) Inactive 10QSB2008 Q1 Quarterly report (small business)