Registration No. 333-170633

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-effective
Amendment No. 1 to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SWISHER HYGIENE INC.

(Exact Name of registrant as specified in its charter)

 

 

4725 Piedmont Row Drive, Suite 400, Charlotte, North Carolina 28210, (704) 364-7707

 

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  þ

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  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):

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED DECEMBER 14, 2010.

 

PROSPECTUS

 

 

75,429,597 Shares

 

SWISHER HYGIENE INC.

 

The selling stockholders may offer and sell from time to time up to an aggregate of 75,429,597 shares of Swisher Hygiene Inc. common stock that they own. These shares include 55,789,632 shares of common stock, subject to lock-up agreements, including 50,010,670 shares held by H. Wayne Huizenga and Steven R. Berrard. These shares also include up to 5,500,000 shares of common stock underlying warrants held by Michael Serruya and up to 2,339,986 shares issuable upon the conversion of outstanding promissory notes. For information concerning the selling stockholders and the manner in which they may offer and sell shares of our common stock, see “Selling Stockholders” and “Plan of Distribution” in this prospectus.

 

We are not selling any securities under this prospectus and we will not receive any proceeds from the sale by the selling stockholders of their shares of common stock.

 

Our common stock trades on the Toronto Stock Exchange (“TSX”). On December 13, 2010, the last reported sale price for our common stock on the TSX was $4.50 per share (in U.S. dollars).

 

Investing in shares of our common stock involves a high degree of risk. See the section titled “Risk Factors,” which begins on page 3.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

You should rely only on the information contained in this prospectus. We have not authorized any dealer, salesperson or other person to provide you with information concerning us, except for the information contained in this prospectus. The information contained in this prospectus is complete and accurate only as of the date on the front cover page of this prospectus, regardless of the time of delivery of this prospectus or the sale of any common stock. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

The date of this prospectus is                 , 2010.

 

TABLE OF CONTENTS

 

 

PROSPECTUS SUMMARY

 

THE OFFERING

Common Stock Offered:		The selling stockholders are offering a total of 75,429,597 shares of common stock, these shares include 55,789,632 shares of common stock, currently subject to lock-up agreements, which were issued to former shareholders of Swisher International, Inc. in the Merger including shares held by H. Wayne Huizenga and Steven R. Berrard. Pursuant to the lock-up agreements, the locked-up stockholders will not, subject to certain exceptions, offer, sell, contract to sell or enter into any other agreement to transfer the economic consequences of any Swisher Hygiene shares for a period ending the earlier of (i) the public release of Swisher Hygiene’s earnings for the 2011 financial year or (ii) March 31, 2012.

Outstanding Shares of Common Stock:		As of December 10, 2010, 114,015,063 shares, of our common stock were issued and outstanding.

Use of Proceeds:		We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of shares by the selling stockholders. To the extent any of the 5,500,000 warrants to purchase shares of our common stock held by Mr. Serruya are exercised, we will receive the $0.50 per share exercise price. If Mr. Serruya exercises the warrants in full, we estimate that our net proceeds will be approximately $2,750,000. We intend to use any proceeds from warrant exercises for working capital and other general corporate purposes. We cannot estimate how many, if any, warrants Mr. Serruya will exercise.

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this registration statement, before you decide to invest in our common stock. If any of the following risks, or other risks not presently known to us, develop into actual events, then our business, financial condition, results of operations, or prospects could be materially adversely affected. As a result, the market price of our common stock could decline, and you could lose all or part of your investment.

 

We have a history of significant operating losses and as such our future revenue and operating profitability are uncertain.

 

Our future revenue and operating profitability are difficult to predict and are uncertain. Swisher International recorded an operating loss of $6.8 million for the year ended December 31, 2009 and ended the year with an accumulated deficit of $47.0 million. In addition, Swisher International recorded operating losses of approximately $10.5 million and $9.3 million for the years ended December 31, 2008 and 2007, respectively. We may continue to incur operating losses for the foreseeable future, and such losses may be substantial. We will need to increase revenues in order to generate sustainable operating profit. Given Swisher International’s history of operating losses, we cannot assure you that we will be able to achieve or maintain operating profitability on an annual or quarterly basis or at all.

 

We may be harmed if we do not penetrate markets and grow our current business operations.

 

If we fail to further penetrate our core and existing geographic markets, or to successfully expand our business into new markets or through the right sales channels, the growth in sales of our products and services, along with our operating results, could be materially adversely impacted. One of our key business strategies is to grow our business through acquisitions. Acquisitions involve many different risks, including (1) the ability to finance acquisitions, either with cash, debt, or equity issuances; (2) the ability to integrate acquisitions; (3) the ability to realize anticipated benefits of the acquisitions; (4) the potential to incur unexpected costs, expenses, or liabilities; and (5) the diversion of management attention and company resources. Many of our competitors may also compete with us for acquisition candidates, which can increase the price of acquisitions and reduce the number of available acquisition candidates. We cannot assure you that efforts to increase market penetration in our core markets and existing geographic markets will be successful. Further, we cannot ensure that we will be able to acquire businesses at the same rate that we have in the past. Failure to do so could have an adverse effect on our business, financial condition and results of 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.

 

We will require substantial capital or available debt or equity financing to execute on acquisition and expansion opportunities that may come available. We cannot assure you that we will be able to obtain additional financial resources on terms acceptable to us, or at all. Failure to obtain such financial resources could adversely affect our plans for growth, or result in our being unable to satisfy financial or other obligations as they come due, either of which could have a material adverse effect on our business and financial condition. Until a reliable market providing for sufficient liquidity of our common stock develops, sellers of acquisition candidates may be unwilling to accept our common stock as consideration in a transaction, which could adversely impact our ability to execute our acquisition strategy.

 

Although the current credit environment has not had a significant adverse impact on our liquidity or cost of borrowing, the availability of funds has tightened and credit spreads on corporate debt have increased. Therefore, obtaining additional or replacement financing may be more difficult and the cost of issuing new debt or replacing a credit facility will likely be at a higher cost than under our current credit facilities, which mature in February 2011. In addition, the current credit and capital markets could adversely impact the liquidity or financial conditions of suppliers or customers, which could, in turn, impact our business and financial results.

To date, a significant amount of our cash requirements have been met through loans or advances from the former Swisher International stockholders. In addition, Mr. Huizenga has provided guarantees with respect to $20 million of our credit facility. Neither Messrs. Huizenga or Berrard have agreed to provide the company additional loans, advances, or guarantees in the future. We cannot assure you that sufficient financing will be available in the future on a timely basis, on terms that are acceptable to us or at all. In the event that financing is not available or is not available in the amounts or on terms acceptable to us, the implementation of our acquisition strategy could be impeded, which could have a material adverse effect on our business, financial condition and future prospects.

 

Failure to attract, train, and retain personnel to manage our growth could adversely impact our operating results.

 

Our strategy to grow our operations may place a greater strain on our managerial, financial and human resources than that experienced by our larger competitors, as they have a larger employee base and administrative support group. As we grow we will need to:

 

 

 

 

Competition for such personnel can be intense, and we cannot assure you that we will be able to attract or retain highly qualified marketing, sales and managerial personnel in the future. Our inability to attract and retain the necessary management, technical, sales and marketing personnel may adversely affect our future growth and profitability. It may be necessary for us to increase the level of compensation paid to existing or new employees to a degree that our operating expenses could be materially increased.

 

We may not be able to properly integrate the operations of acquired businesses and achieve anticipated benefits of cost savings or revenue enhancements.

 

Our business strategy includes growing our business through acquisitions. The success of any business combination depends on management’s ability following the transaction to consolidate operations and integrate departments, systems and procedures, and thereby create business efficiencies, economies of scale, and related cost savings. In addition, the acquired customer base must be integrated into the existing service route structure to improve absorption of fixed costs and create operational efficiencies. The retention and integration of the acquired customer base will be a key factor in realizing the revenue enhancements that should accompany each acquired business. We cannot assure you that future results will improve as a result of cost savings and efficiencies or revenue enhancements from any future acquisitions or proposed acquisitions, and we cannot predict the timing or extent to which cost savings and efficiencies or revenue enhancements will be achieved, if at all.

 

We may incur unexpected costs, expenses, or liabilities relating to undisclosed liabilities of acquired businesses.

 

In the course of performing due diligence investigations on the companies or businesses we may seek to acquire, we may fail or be unable to discover liabilities of the acquisition candidate that have not otherwise been disclosed. These may include liabilities arising from non-compliance with federal, state or local environmental laws by prior owners, pending or threatened litigation, and undisclosed contractual obligations, for each of which we, as a successor owner, may be responsible. Although we will generally seek to minimize exposure to such liabilities by obtaining indemnification from the sellers of the acquired companies, we cannot

assure you that such indemnifications, even if obtainable, will be enforceable, collectible, or sufficient in amount, scope, or duration to fully offset the potential liabilities arising from the acquisitions.

 

We may recognize impairment charges which could adversely affect our results of operations and financial condition.

 

We assess our goodwill and other intangible assets and long-lived assets for impairment when required by generally accepted accounting principles (“GAAP”) in the U.S. These accounting principles require that we record an impairment charge if circumstances indicate that the asset carrying values exceed their fair values. If our assessment of goodwill, other intangible assets, or long-lived assets indicates an impairment of the carrying value for which we recognize an impairment charge, it may adversely affect our results of operations.

 

Goodwill resulting from acquisitions may adversely affect our results of operations.

 

Goodwill and other intangible assets are expected to increase principally as a result of future acquisitions, and potential impairment of goodwill and amortization of other intangible assets could adversely affect our financial condition and results of operations. We consider various factors in determining the purchase prices of acquired businesses, and it is not anticipated that any material portion of the goodwill related to any of these acquisitions will become impaired or that other intangible assets will be required to be amortized over a period shorter than their expected useful lives. However, future earnings could be materially adversely affected if management later determines either that the remaining balance of goodwill is impaired or that shorter amortization periods for other intangible assets are required.

 

Future issuances of shares of our common stock could have a dilutive effect on your investment.

 

We could issue additional shares of our common stock in connection with future acquisitions or for other business purposes, or under the Swisher Hygiene Inc. 2010 Stock Incentive Plan (the “Plan”). Future acquisitions may involve the issuance of our common stock as payment, in part or in full, for the businesses or assets acquired. The benefits derived by us from an acquisition might not exceed the dilutive effect of the acquisition. Pursuant to the Plan, our board of directors may grant stock options, restricted stock units, or other equity awards to our directors and employees. When these awards vest or are exercised, the issuance of shares of our common stock underlying these awards may have a dilutive effect on our common stock. The Plan and the grants thereunder are subject to stockholder and TSX approval.

 

Implementing and maintaining effective internal control over financial reporting could disrupt management’s focus on the business and adversely affect our business and stock price.

 

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, require that our Annual Report on Form 10-K for the year ending December 31, 2011, report on the effectiveness of our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to our internal control over financial reporting to conclude such controls are effective and such delays may require significant management time and attention. If we or our independent registered public accounting firm conclude that our internal control over financial reporting is not effective, investors could lose confidence in our financial reporting and our stock price could decline.

 

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.

 

A portion of our earnings are expected to come from royalties and other amounts paid to us by our franchisees and international licensees. Franchisees and licensees are independent operators and have a significant amount of flexibility in running their operations, and their employees are not our employees. We provide training and support to, and monitor the operations of, franchisees, but the quality of their operations may be diminished by any number of factors beyond our control. Despite the operating obligations the

franchisees and licensees are subject to pursuant to our operations manual or the franchise or licensee agreements, franchisees may not successfully operate their business in a manner consistent with our standards and requirements and may not hire and train qualified managers and other personnel. While we may ultimately take action to terminate franchisees and licensees that do not comply with the standards contained in the franchise or licensee agreements and our operations manual, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, potentially causing revenue to decline. Any operational shortcoming of a franchisee is likely to be attributed by the public to our entire system, thus damaging our brand reputation and potentially affecting revenues and operating results. Furthermore, if a significant number of the franchisees were to become insolvent or otherwise were unwilling or unable to pay for products and supplies purchased from us or pay royalties, rent or other fees, our revenues and operating results would decrease.

 

Failure to retain our current clients and renew existing client contracts could adversely affect our business.

 

Our success depends in part on our ability to retain current customers and renew existing customer service agreements. Our ability to retain current clients depends on a variety of factors, including the quality, price, and responsiveness of the services we offer, as well as our ability to market these services effectively and differentiate our offerings from those of our competitors. We cannot assure you that we will be able to renew existing customer contracts at the same or higher rates or that our current customers will not turn to competitors, cease operations, elect to bring the services we provide in-house, or terminate existing service agreements. The failure to renew existing service agreements or the loss of a significant number of existing service agreements would have a material adverse effect on our business, financial condition, and results of operations.

 

The pricing, terms, and length of customer service agreements may constrain our ability to recover costs and to make a profit on our contracts.

 

The amount of risk we bear and our profit potential will vary depending on the type of service agreements under which products and services are provided. We may be unable to fully recover costs on service agreements that limit our ability to increase prices, particularly on multi-year service agreements. In addition, we may provide services under multi-year service agreements that guarantee maximum costs for the customer based on a specific criteria, for example, cost per diner, or cost per passenger day, putting us at risk if we do not effectively manage customer consumption. Our ability to manage our business under the constraints of these service agreements may have a material adverse effect on our financial condition.

 

Changes in economic conditions that impact the industries in which our end-users primarily operate in could adversely affect our business.

 

During the last few years, conditions throughout the U.S. and worldwide have been extremely weak and those conditions may not improve in the foreseeable future. As a result, our customers or vendors may have financial challenges, unrelated to us that could impact their ability to continue doing business with us. Economic downturns, and in particular downturns in the foodservice, hospitality, travel, and food processing industries, can adversely impact our end-users, who are sensitive to changes in travel and dining activities. The recent decline in economic activity is adversely affecting these markets. During such downturns, these end-users typically reduce their volume of purchases of cleaning and sanitizing products, which may have an adverse impact on our business. We cannot assure you that current or future economic conditions, and the impact of those conditions on our customer base, will not have a material adverse effect on our business, financial condition and results of operations.

 

If we are required to change our pricing models to compete successfully, our margins and operating results may be adversely affected.

 

The cleaning and maintenance solutions industry is highly competitive. We will compete with national, regional, and local providers, many of whom have greater financial resources, less leverage or lower costs. We

will compete in the same market primarily on the basis of brand name recognition, price, product quality, and customer service. Competitive markets may require us to reduce our prices for products and services. If our competitors offer discounts on certain products or services in an effort to recapture or gain market share, we may be required to lower prices or offer other favorable terms to compete successfully. Any such change would likely reduce margins and could adversely affect operating results. Some of our competitors may bundle products and services that compete with our products and services for promotional purposes as a long-term pricing strategy or may provide guarantees of prices and product implementations. Also, competitors may develop new or enhanced products and services more successfully and sell existing or new products and services better than we do. In addition, new competitors may emerge. These practices could, over time, limit the prices that we can charge for our products and services. If we cannot offset price reductions or other pricing strategies with a corresponding increase in sales or decrease in spending, then the reduced revenue resulting from lower prices would adversely affect our margins and operating costs.

 

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 may have an adverse impact on our financial condition and results of operations.

 

Our future success depends, in part, on the continued efforts and abilities of our senior management team. Their skills, experience and industry contacts are expected to significantly benefit our business. The loss of any member of our senior management team would disrupt our operations and divert the time and attention of the remaining members of the senior management team, which could have a material adverse effect on our business, operating results, and financial condition. Because the market for qualified management is highly competitive, we may not be able to retain our leadership team or fill new management positions or vacancies created by expansion or turnover at existing compensation levels. We do not carry “key-person” insurance on the lives of our senior management team or management personnel to mitigate the impact that the loss of a key member of our management team would cause. If we lose the services of one or more of these individuals, or if one or more of them decide to join a competitor or otherwise compete directly with us, our business, operating results, and financial condition could be materially and adversely affected.

 

The financial condition and operating ability of third parties may adversely affect our business.

 

We will initially conduct limited manufacturing operations and will primarily depend, and for the foreseeable future will continue to depend, on third parties for the manufacture of the products we sell. We will rely on third party suppliers to provide us with components and services necessary for the completion and delivery of our products and services. We expect to significantly expand our customer base and product offerings, but our expansion may be limited by the manufacturing capacity of third party manufacturers. Such manufacturers may not be able to meet our needs in a satisfactory and timely manner, particularly if there are raw material shortages.

 

We purchase the majority of our chemicals from a single manufacturer and our dispensing equipment and dish machines are also primarily supplied by single suppliers. Should any of these third party suppliers experience production delays, we may need to identify additional suppliers, which may not be possible on a timely basis or on favorable terms, if at all. A delay in the supply of our chemicals or equipment could adversely effect relationships with our customer base and could cause potential customers to delay their decision to purchase services or cause them not to purchase our services at all. Further, our primary chemical manufacturer operates from a single location. We cannot assure you that our primary manufacturer will be able to meet our needs in a timely enough manner to avoid a material disruption of our business, which in turn could have an adverse effect on our ability to maintain desired levels of profitability and volume, and could adversely affect relationships with our customers.

 

In the event that any of the third parties with whom we have significant relationships files a petition in or is assigned into bankruptcy or becomes insolvent, or makes an assignment for the benefit of creditors or makes any arrangements or otherwise becomes subject to any proceedings under bankruptcy or insolvency laws with a trustee, or a receiver is appointed in respect of a substantial portion of its property, or such third party

liquidates or winds up its daily operations for any reason whatsoever, then our business, financial position and results of operations may be materially and adversely affected.

 

We rely on a multi-national re-distributor to manage our logistics operations.

 

We contract with a re-distributor to manage the delivery of our products from manufacturing facilities to our local branches. The re-distributor may be subject to risk, including the costs and difficulties of managing international operations, maintaining product quality and enforcing intellectual property rights. Additionally, the re-distributor may be adversely affected by local laws and customs, legal and regulatory constraints, including compliance with the Foreign Corrupt Practices Act. The re-distributor may be subject to risk that may impact the re-distributor’s costs and the re-distributor may attempt to pass those costs on to us which could adversely impact our results of operations and financial condition.

 

Increases in fuel and energy costs could adversely affect our results of operations and financial condition.

 

The price of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries (OPEC) and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on refining capacities, natural disasters and environmental concerns. In recent years, fuel prices have fluctuated widely and have generally increased. Fuel price increases raise the costs of operating vehicles and equipment. We cannot predict the extent to which we may experience future increases in fuel costs or whether we will be able to pass these increased costs through to our customers. If fuel costs rise, the operating costs of our distribution operations would increase, resulting in a decrease in margins and profitability. A fuel shortage, higher transportation costs or the curtailment of scheduled service could result, any of which could adversely impact our relationship with franchisees and reduce our profitability. If we experience delays in the delivery of products to our customers, or if the products are not delivered to the customers at all, relationships with our customers could be adversely impacted, which could have a material adverse effect on our business and prospects. As a result, future increases in fuel costs could have a material adverse effect on our results of operations and financial condition.

 

We may be subject to legal proceedings and disputes.

 

We may be involved in litigation from time to time in the ordinary course of business. We may also be subject to legal proceedings and disputes with current or former joint venture partners, franchisees, licensees and others. We cannot assure you that the ultimate resolution of any legal proceedings will not have a material adverse effect on our business and results of operations.

 

Our products contain hazardous materials and chemicals, which could result in claims against us.

 

We use and sell a variety of products that contain hazardous materials and chemicals. There are hazardous chemicals in some of our products but in all cases these materials have short term hazardous actions that can easily be neutralized or disposed of with minimal effect on the environment or situations that would require long term remediation treatments due to environmental contamination. Like all products of this nature, misuse of the hazardous material based products can lead to injuries and damages but in all cases if these products are used at the prescribed usage levels with the proper PPEs (Personal Protection Equipment) and procedures the chances of injuries and accidents are extremely rare. Nevertheless, because of the nature of these substances or related residues, we may be liable for certain costs, including, among others, costs for health-related claims, or removal or remediation of such substances. We may be involved in claims and litigation filed on behalf of persons alleging injury as a result of exposure to such substances or by governmental or regulatory bodies related to our handling and disposing of these substances. Because of the unpredictable nature of personal injury and property damage litigation and governmental enforcement, it is not possible to predict the ultimate outcome of any such claims or lawsuits that may arise. If any such claims and lawsuits, individually or in the aggregate, were resolved against us, our results of operations and cash flows could be adversely affected.

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.

 

We are subject to laws and regulations relating to the protection of the environment and natural resources, and workplace health and safety. These include, among other things, reporting on chemical inventories and risk management plans, and the management of hazardous substances. Violations of existing laws and enactment of future legislation and regulations could result in substantial penalties, temporary or permanent facility closures, and legal consequences. Moreover, the nature of our existing and historical operations exposes us to the risk of liability to third parties. The potential costs relating to environmental and product registration laws and regulations are uncertain due to factors such as the unknown magnitude and type of possible contamination and clean-up costs, the complexity and evolving nature of laws and regulations, and the timing and expense of compliance. Changes to current laws, regulations or policies could impose new restrictions, costs, or prohibitions on our current practices and could have a material adverse effect on our business or results of operations.

 

If our products are improperly manufactured, packaged, or labelled or become adulterated, those items may need to be recalled.

 

We may need to recall the products we sell if products are improperly manufactured, packaged, or labelled or if they become adulterated. Widespread product recalls could result in significant losses due to the costs of a recall and lost sales due to the unavailability of product for a period of time. A significant product recall could also result in adverse publicity, damage to our reputation, and loss of customer confidence in our products, which could have a material adverse effect on our business, financial condition, or results of operations.

 

Changes in the types or variety of our service offerings could affect our financial performance.

 

Our financial performance is affected by changes in the types or variety of products and services offered to our customers. For example, as we begin to evolve our business to include a greater combination of products with our services, the amount of money required for the purchase of additional equipment and training for associates may increase. Additionally, the gross margin on product sales is often less than gross margin on service revenue. These changes in variety or adjustment to product and service offerings could have a material adverse effect on our financial performance.

 

We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.

 

Our ability to compete effectively depends in part on our rights to service marks, trademarks, trade names and other intellectual property rights we own or license, particularly our registered brand names, including “Swisher” and “Sani-Service.” We may not seek to register every one of our marks either in the U.S. or in every country in which it is used. As a result, we may not be able to adequately protect those unregistered marks. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive the same protection in other countries as we would in the U.S. and Canada. Failure to protect such proprietary information and brand names could impact our ability to compete effectively and could adversely affect our business, financial condition, or results of operations.

 

Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products or services infringe on their intellectual property rights. Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources. A successful claim of trademark, patent or other intellectual property infringement against us, or any other successful challenge to the use of our intellectual property, could subject us to damages or prevent us from providing certain services under our recognized brand names, which could have a material adverse effect on our business, financial condition, or results of operations.

If we are unable to protect our information and telecommunication systems against disruptions or failures, our operations could be disrupted.

 

We are dependent on internal and third party information technology networks and systems, including the Internet, to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for fulfilling and invoicing customer orders, applying cash receipts, determining reorder points and placing purchase orders with suppliers, making cash disbursements, and conducting digital marketing activities, data processing, and electronic communications among business locations. We also depend on telecommunication systems for communications between company personnel and our customers and suppliers. Future system disruptions, security breaches, or shutdowns could significantly disrupt our operations or may result in financial damage or loss due to lost or misappropriated information.

 

Our business could suffer in the event of a work stoppage or increased organized labor activity.

 

Presently, no Swisher employees are members of any union or organized labor group. While we consider our relations with employees to be generally good, we cannot assure you that we will not experience work stoppages, strikes, or slowdowns in the future. In addition, for the foreseeable future we will primarily outsource to third parties the manufacturing of the products we sell, and we cannot assure you that these third parties will not experience work stoppages, strikes or slowdowns in the future. A prolonged work stoppage, strike, or slowdown at any of these facilities could have a material adverse effect on our results of operations. Moreover, we cannot assure you that we will not become subject to labor union organizing efforts. If any of our operations unionize, we could incur increased risk of work stoppages and possibly higher labor costs.

 

Insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business.

 

Our business is subject to all of the operating hazards and risks normally incidental to handling, storing, and transporting the products we sell. We maintain insurance policies in such amounts and with such coverage and deductibles that we believe are reasonable and prudent. Nevertheless, our insurance coverage may not be adequate to protect us from all liabilities and expenses that may arise from claims for personal injury or death or property damage arising in the ordinary course of business, and our current levels of insurance may not be able to be maintained or available at economical prices. If a significant liability claim is brought against us that is not covered by insurance, we may have to pay the claim with our own funds, which could have a material adverse effect on our business, financial condition, and results of operations.

 

Our current size and growth strategy could cause our revenues and operating results to fluctuate more than some of our larger, more established competitors or other public companies.

 

Our revenue is difficult to forecast and we believe it is likely to fluctuate significantly from quarter to quarter as we continue to grow. Some of the factors affecting our future revenue and results, many of which will be outside of our control and are discussed elsewhere in the Risk Factors, include:

 

 

 

 

 

 

 

 

 

Given our current amount of revenue, particularly as compared with some of our competitors, even minor variations in the rate and timing of conversion of our sales prospects into revenue could cause us to plan or budget inaccurately, and have a greater percentage impact on our results than the same variations would have on our larger competitors.

 

In light of the foregoing, quarter-to-quarter comparisons of our operating results are not necessarily representative of future results and should not be relied upon as indications of likely future performance or annual operating results. Any failure to achieve expected quarterly earnings per share or other operating results could cause the market price of our common shares to decline or have a material adverse effect on our business, financial condition and results of operations.

performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

 

The former stockholders of Swisher International will be able to exert control over the corporate actions of Swisher Hygiene.

 

The former Swisher International stockholders, including Messrs. Huizenga and Berrard, own 48% of Swisher Hygiene common stock on a fully diluted basis. As a result, these stockholders may be in a position to exert control over all matters requiring stockholder approval, including the election of directors, determination of significant corporate actions, amendments to Swisher’s certificate of incorporation and by-laws, and the approval of any business transaction, such as mergers or takeover attempts, in a manner that could conflict with the interests of other stockholders. Although there are no agreements or understandings between the former Swisher International stockholders as to voting, if they voted in concert, they would exert control over Swisher Hygiene.

 

Future sales of Swisher Hygiene shares by former Swisher International or CoolBrands stockholders could affect the market price of our shares.

 

Of the Swisher Hygiene shares issued in the Merger, 55,789,632 shares issued to the former Swisher International shareholders, including shares held by H. Wayne Huizenga and Steven R. Berrard, are subject to lock-up agreements. Pursuant to the lock-up agreements, the locked-up shareholders will not, subject to certain exceptions, offer, sell, contract to sell or enter into any other agreement to transfer the economic consequences of any Swisher Hygiene shares for a period ending the earlier of (i) the public release of Swisher Hygiene’s earnings for the 2011 financial year or (ii) March 31, 2012. After the lock-up agreements relating to the Swisher Hygiene shares issued in the Merger to the former Swisher International stockholders terminate, the market price of Swisher Hygiene shares could decline as a result of sales of our shares by former Swisher International or CoolBrands stockholders, or the perception that such sales could occur. These sales, or the perception that such sales could occur, might also make it more difficult for Swisher Hygiene to sell equity securities at a time and price that is deemed appropriate. In addition, Swisher Hygiene may issue additional shares of common stock as part of the purchase price of future acquisitions or in connection with future financings. Any actual sales, or any perception that sales of a substantial number of shares may occur, could adversely affect the market price of Swisher Hygiene common stock.

 

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.

 

Provisions of Delaware law and our certificate of incorporation and bylaws may discourage, delay or prevent a change of control that our stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay

attempts by stockholders to replace or remove management or members of our board of directors. These provisions include:

 

 

We are not selling any securities under this prospectus and we will not receive any proceeds from the sale of shares by the selling stockholders. To the extent any of the 5,500,000 warrants to purchase shares of our common stock held by Mr. Serruya are exercised, we will receive the $0.50 per share exercise price. If Mr. Serruya exercises the warrants in full, we estimate that our net proceeds will be approximately $2,750,000. We intend to use any proceeds from warrant exercises for working capital and other general corporate purposes. We cannot estimate how many, if any, warrants Mr. Serruya will exercise.

 

Other then the shares underlying the warrants held by Mr. Serruya, the shares of common stock to be sold by the selling stockholders are currently issued and outstanding. Accordingly, there will be no dilution to our existing stockholders in connection with the offer and sale by the selling stockholders of such shares of common stock under this prospectus. If any of the warrants to purchase 5,500,000 shares of common stock are exercised, our stockholders may experience a reduction in their ownership interest in our Company, however such reduction would not be material.

 

The selling stockholders may offer and sell from time to time up to an aggregate of 75,429,597 shares of Swisher Hygiene common stock that they own. These shares include 55,789,632 shares of common stock, currently subject to lock-up agreements, which were issued to former shareholders of Swisher International in the Merger, including shares held by H. Wayne Huizenga and Steven R. Berrard.

 

Except as otherwise indicated, the following table sets forth certain information with respect to the beneficial ownership of our common stock including the names of the selling stockholders, the number of shares of common stock known by the company to be owned beneficially by the selling stockholders as of December 10, 2010, the number of shares of our common stock that may be offered by the selling stockholders pursuant to this prospectus, the number of shares owned by the selling stockholders after completion of the offering and the percentage of shares to be owned by the selling stockholders after completion of the offering. The table has been prepared based upon a review of information furnished to us by or on behalf of the selling stockholders.

 

 

 

 

 

 

 

 

 

None of the selling stockholders has, or within the past three years has had, any position, office or material relationship with us or any of our predecessors or affiliates except as follows:

 

 

 

 

 

 

Overview

 

Swisher Hygiene Inc., through its consolidated subsidiaries, franchisees, and international licensees, provides hygiene solutions to more than 35,000 customers throughout North America and internationally through its network of company owned operations, franchises, and master licenses. Our solutions include products and services designed to promote superior cleanliness and sanitation in commercial environments,

while enhancing the safety, satisfaction, and well-being of employees and patrons. Our solutions are typically delivered on a regularly scheduled basis and involve providing our customers with: (i) the sale of 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, and bar towels; and (iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.

 

Going forward, we intend to increase the sale of our products and services to customers in existing geographic markets as well as expand our reach into additional markets through a combination of organic growth and the acquisition of Swisher franchises, independent chemical service providers, and related businesses.

 

We are a Delaware corporation, originally organized in Canada in 1994. Our principal executive offices are located at 4725 Piedmont Row Drive, Suite 400, Charlotte, North Carolina, 28210. The financial information about operating segments appearing in Note 10 to the consolidated financial statements in this registration statement is incorporated herein by this reference.

 

Our History

 

We were originally founded in 1986 as Swisher International, Inc., a Nevada corporation. From our founding through 2004, we operated primarily as a franchisor and licensor of restroom hygiene services offering: (i) weekly cleaning and sanitizing services of our customers’ restroom fixtures, along with the restocking of soap and air freshener dispensers and (ii) the sale of restroom paper products, such as toilet paper and hand towels. We provided these services to a customer base largely comprised of small, locally owned bars, restaurants, and retail locations. Franchisees had exclusive rights to use the Swisher name and business processes in designated United States and Canadian geographic markets typically ranging in size from 500,000 to 3,000,000 persons, while licensees had substantially similar rights in the respective countries in which they operated. Although franchisees licensed the same business model, the manner in which they executed and adopted Swisher programs varied greatly, resulting in historically inconsistent levels of service and differing product offerings across geographic markets.

 

In November 2004, H. Wayne Huizenga and Steve Berrard acquired a majority interest in Swisher, which at the time was a publicly traded company. Subsequently, in May 2006, Messrs. Huizenga and Berrard acquired the remaining outstanding shares of Swisher and began operating Swisher as a private company.

 

The primary goal of acquiring ownership of Swisher was to transition the business to take greater advantage of the Swisher brand and nationwide service and distribution network, and to better leverage the under-utilized platform to expand both product and service offerings. Specifically, Messrs. Huizenga and Berrard planned to transition the company’s focus from generating revenue almost exclusively from restroom cleaning services to building a full-service hygiene solutions provider that offers a broad complement of products and services, addressing the complete hygiene and cleaning needs of our customers throughout their facilities. We believed that such a transition would provide Swisher with a competitive advantage, allowing us to retain existing customers over time and provide them with additional products and services that were essential to the operations of their businesses. Moreover, we sought to leverage Swisher’s national infrastructure with product offerings and service expertise in core lines of products, including cleaning chemicals, required by larger corporate customers nationwide.

 

An important component of this business strategy was the acquisition of a sufficient number of franchise locations or other similar businesses, providing us direct control over the implementation of changes to a consistent business model. To address this component of the business strategy, Messrs. Huizenga and Berrard formed HB Service, LLC to acquire franchises and related businesses under the Swisher name. Through September 2010, HB Service acquired and operated 68 former franchises of the company and purchased nine other related businesses. Effective July 13, 2010, HB Service entered into a Contribution Agreement with the company pursuant to which Messrs. Huizenga and Berrard contributed their membership interests in HB

Service to the company, at which time HB Service became a wholly-owned subsidiary of Swisher International.

 

By the end of 2005, through HB Service, we had acquired 26 franchisees and other related businesses and implemented a long-range plan to increase the number and types of products we offer. In addition, we discontinued the sale of new franchises, replaced information systems, established a fleet of company-owned vehicles, upgraded our facilities, hired experienced route-based operations managers to develop consistency in our operating model, expanded the geographic area covered by our locations, and eliminated low volume customers that were unprofitable or marginally profitable under our new business model. During this time, acquisitions continued but at a less aggressive pace, as we focused on executing the aforementioned business strategies. By mid-2007, we had purchased and converted to company-owned locations a total of 50 businesses, including 44 franchisees that represented 49.4% of our U.S.-based franchises.

 

In the latter half of 2007 and first half of 2008, we focused almost exclusively on rolling-out new information systems to company-owned operations and franchisees alike, integrating the disparate acquired business models into a centrally-managed operation, which integration continued to include the elimination of low volume customers that were not candidates to purchase our increased suite of products and services. During the period from mid-2007 through the end of 2008, we acquired two franchises. It was during this period that we also first began to experience the impact of the economic downturn, which continues to impact our business and the businesses of our customers. Our customers, many of whom operate in the foodservice market, were particularly affected by the contracting economy through reduced customer traffic and spending. To address in part the financial difficulties experienced by their businesses, these customers reduced their discretionary spending on items such as our legacy restroom cleaning business and delayed decisions to institute new programs or add new products and services. As a result of these economic conditions, coupled with our continual elimination of small unprofitable and marginally profitable customers, our operations, before giving effect to acquisitions, experienced a 1.9% decline in revenue in 2008 as compared to 2007, while franchise fees and other revenue, before giving effect to acquisitions, declined 6.5% in 2008 as compared to 2007.

 

Poor economic conditions continued during the first quarter of 2009; prompting us to aggressively accelerate a number of steps we had taken to combat the decline in business. Specifically, we: (i) reduced our field sales force, which primarily called on smaller, single-unit customers; (ii) continued elimination of certain unprofitable or marginally profitable customers by, in many instances, introducing minimum stop charges or price increases; (iii) eliminated certain customers that were payment or credit risks; (iv) realigned our branch and corporate workforce; and (v) reduced other costs. As a result, company operations, before giving effect to acquisitions, experienced a 13.6% decline in revenue in 2009 as compared to 2008, while franchise fees and other revenue, before giving effect to acquisitions, declined 15.8% in 2009 as compared to 2008.

 

In the second half of 2009, we refocused our efforts on positioning the company for future growth by: (i) investing in our corporate account and distributor sales programs; (ii) acquiring franchises to help leverage our field cost structure and fill remaining geographic gaps in our service delivery markets; and (iii) accelerating the development of our chemical program to provide a comprehensive offering focused on detergents, cleaners, and sanitizers used regularly by most of our customers in their warewashing, laundry, and general cleaning applications. We believe that our chemical program is a key component of our future growth as these products are necessary to maintain proper sanitation and cleanliness and require dispensing equipment that we sell or rent, install, and service on a regular basis to ensure proper dilution and delivery of the chemicals. In addition, the purchase of chemical products by our regional and national chain customers is directed by corporate headquarters of those chains. As a result of this and the fact that we have the ability to provide chemical services throughout the continental U.S., the majority of our new business now comes from larger regional or corporate accounts as well as regional distributor partners.

 

In summary, our transition from a restroom cleaning services business to a full service hygiene solutions provider offering a complete chemical and facility service program has required significant investments. These investments included:

 

 

 

As a result of these investments, from January 1, 2005, through September 30, 2010, Swisher has incurred cumulative losses of $54,508,159. To help finance these losses and make the investment necessary to create the platform we have today, which we believe will enable us to experience significant growth and profitability, Messrs. Huizenga and Berrard have contributed and advanced the company $64,405,152 and the company has incurred indebtedness of: (i) $24,946,932 under bank lines of credit (ii) $12,981,798 in notes issued by Swisher to sellers in connection with acquisitions made by Swisher (the “Seller Notes”); and (iii) $4,122,915 of third party financing for software development and capital leases for equipment. Mr. Huizenga has guaranteed $20,000,000 of the bank line of credit, and $3,050,000 of the Seller Notes are secured by letters of credit. The letters of credit are secured by certain assets of Messrs. Huizenga and Berrard.

 

As of the date of this registration statement, we have 68 company-owned locations and 11 franchises located throughout the U.S. and Canada and we have entered into ten master license agreements covering the United Kingdom (“U.K.”), Ireland, Portugal, the Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.

 

The number of company-owned locations, franchises, and international master licenses since the end of 2006 through the date of this registration statement is as follows:

 

 

 

 

Going forward, we will continue to expand our reach into additional U.S. and Canadian geographic markets through acquisitions of independent chemical distributors, franchise repurchases, execution of agreements with distributor partners, and organic growth. Additionally, we will be opportunistic as it relates to acquiring or partnering with complementary businesses that (i) can provide us a competitive advantage; (ii) leverage, expand, or benefit from our distribution network; or (iii) provide us economies of scale or cost advantages over our existing supply chain. Collectively, these efforts are centered on making us an attractive alternative for larger customers in foodservice, hospitality, healthcare, retail, and industrial markets. In addition, we will seek to aggressively license our business model internationally. Our success largely depends on our ability to execute on these strategies and increase the sales of our products and services to corporate accounts and distribution partners.

 

The Merger

 

On November 1, 2010, Swisher Hygiene redomiciled to Delaware from Canada, where it had been a publicly-traded corporation, listed on the Toronto Stock Exchange (the “TSX”) under the name CoolBrands International Inc. (“CoolBrands”), and trading under the symbol “COB.” We refer to this event as the Redomestication.

 

CoolBrands was a Canadian company that historically focused on marketing and selling a broad range of ice creams and frozen snacks. Since the end of the 2005 financial year, subsidiaries of CoolBrands disposed of a majority of CoolBrands’ business operations. Since that time, CoolBrands’ principal operations consisted of

the management of its cash resources, reviewing and considering potential opportunities to invest such cash resources. CoolBrands held Cdn$63,034,359 in cash, cash equivalents and short term investments at the effective time of the Merger.

 

One day after completion of the Redomestication, CoolBrands Nevada, Inc. (“CoolBrands Nevada”), a wholly-owned subsidiary of Swisher Hygiene, merged with and into Swisher International, with Swisher International continuing as the surviving corporation. We refer to this event as the Merger. Pursuant to the Merger Agreement, at the effective time of the Merger, the following steps took place, giving effect to the Merger:

 

(a) the articles of incorporation and by-laws of Swisher International that were in effect immediately before the Merger became the articles of incorporation and by-laws of the surviving entity, and the directors and officers of Swisher International immediately before the Merger became the initial directors and officers of the surviving entity;

 

(b) all shares of common stock of Swisher International issued and outstanding immediately before the Merger were cancelled and converted into 57,789,630 shares of common stock of Swisher Hygiene; and

 

(c) each share of common stock of CoolBrands Nevada issued and outstanding immediately before the Merger converted into one share of common stock of the surviving entity, which is the only outstanding share of common stock of Swisher International following the Merger.

 

As a result of the Merger, Swisher International became a wholly-owned subsidiary of Swisher Hygiene. Upon completion of the Merger and the Redomestication, Swisher Hygiene inherited the reporting issuer status of CoolBrands. Swisher Hygiene’s shares of common stock began trading on the TSX under the symbol “SWI” on November 4, 2010. As CoolBrands was a reporting issuer (or equivalent) in each of the provinces of Canada, Swisher Hygiene became a reporting issuer in each of the provinces in Canada.

 

In the Merger, the former stockholders of Swisher International received 57,789,630 shares of Swisher Hygiene common stock, representing, on a fully diluted basis, a 48% ownership interest in Swisher Hygiene. The stockholders of CoolBrands retained 56,225,433 shares of Swisher Hygiene common stock, representing, on a fully diluted basis, a 52% ownership interest in Swisher Hygiene. 55,789,632 of the shares issued to former shareholders of Swisher International are subject to lock-up agreements. Pursuant to the lock-up agreements, the locked-up shareholders may not offer, sell, contract to sell or enter into any other agreement to transfer the economic consequences of any Swisher Hygiene shares for a period ending the earlier of (i) the public release of Swisher Hygiene’s earnings for the 2011 financial year or (ii) March 31, 2012. Under the lock-up agreements, transfers may be made to family members, trusts and similar entities for estate planning purposes, and to affiliated entities that are wholly-owned by the transferring shareholder. In each of these situations, the recipient of the shares must execute an agreement stating that the recipient is receiving and holding the shares subject to the provisions of the lock-up agreement. Shareholders subject to the lock-up agreement may also pledge the subject shares as collateral for debt.

 

In accordance with the Merger Agreement, the Swisher Hygiene Board of Directors consists of eight members, five of whom were appointed by the former shareholders of Swisher International, and three of whom were appointed by CoolBrands. Further, following the merger, our executive officers consist entirely of former officers and executive officers of Swisher International. Accordingly, the former owners and management of Swisher International have effective operating control of the combined company.

 

The following chart shows the corporate structure of Swisher Hygiene Inc. after the Merger, including its key shareholders and its material subsidiaries and their respective jurisdictions of incorporation. Percentage ownership of Swisher Hygiene is based on 114,015,063 shares of common stock outstanding at December 10, 2010.

 

 

Swisher Hygiene Inc. Corporate Structure

 

 

 

 

Our Market

 

We compete in many markets, including institutional and industrial cleaning chemicals, foodservice chemicals, restroom supply service, paper, and other facility products, including floor mats and other facility service rental items. In each of these markets, there are numerous participants ranging from large multi-national companies to local and regional competitors. The focus of our company-owned operations remains the U.S. and Canada, however we may pursue new international opportunities in the future through additional licensing, joint ventures, or other forms of company expansion.

 

Based on our analysis of publicly available industry research and trade reports, as well as our competitors’ public filings, we estimate that the combined addressable market in the U.S. and Canada for the products and services we currently offer exceeds $37 billion, in aggregate, as the pie chart and corresponding table below highlights.

 

 

 

 

 

We believe our primary competitors in our legacy hygiene services, paper, and facilities service rental market are large facility service providers, as well as numerous small local and regional providers, many of whom may focus on one particular product offering, such as floor mat rental. The paper distribution market for the customers we target not only has competition among the providers listed above, but also from the foodservice, broad-line and janitorial-sanitation distributors.

 

We believe the chemical, institutional, and industrial cleaning chemical market is addressed both by large manufacturers as well as a number of local and regional competitors. However, we believe that we are one of the only competitors to maintain the service employees necessary to effectively service national and regional restaurant and other chains.

Our Strategy

 

We believe we are well positioned to take advantage of the markets we serve. Our ability to service customers throughout the U.S. and parts of Canada, our broad customer base and our strategy of combining a service-based platform with opportunities to leverage internal and external distribution capabilities, provide multiple avenues for organic revenue growth. We believe our recently introduced service and product offerings, including our warewash, laundry, and cleaning chemical initiative will allow us to increase revenue through existing customers, who will be able to benefit from the breadth and depth of our current product and service offerings. We expect to generate additional revenue with minimal incremental fixed cost by adding new product and service customers within our current route structure, providing the potential for significant and profitable acquisition growth.

 

Organic Growth

 

Government regulations focusing on hygiene, food safety, and cleanliness have increased significantly locally, nationally and worldwide. Climate change, water scarcity, and environmental concerns have combined to create further demand for products, services, and solutions designed to minimize waste and support broader sustainability. In addition, many of our customers require tailored cleaning solutions that can assist in reducing labor, energy, and water use, and the costs related to cleaning, sanitation and hygiene activities.

 

We intend to capitalize on these industry dynamics by offering customers a “one-stop shopping” partner focused on commercial hygiene. This entails leveraging our route-based weekly cleaning service and restroom product platform with additional complementary chemical and facility service products and other services, particularly warewashing and laundry detergents, and related products, cleaning chemicals, and various cleaners, disinfectants and sanitizers regularly used by our end customers. We believe our suite of products and services is a customer-facing portfolio none of our competitors offer in full and as a result the customer need not shop for its commercial hygiene needs on a piece-meal basis. In addition, our management believes that we provide our customers with more frequent service, better results, and lower pricing than our competitors. As a result, we believe we can increase our total revenue per customer stop for such items and that we are well positioned to secure new accounts.

 

Our national footprint and existing route structure provides us with a highly scalable service infrastructure, which we believe gives us a lower relative cost of service compared to local and regional competitors, and an attractive margin on incremental revenue from existing customers as well as revenue from new customers. We also believe the current density of our routes coupled with our go-to-market strategy of utilizing both third-party distributors and company personnel to deliver products, provides us sufficient capacity in our current route structure to efficiently service additional customer locations with minimal, if any, incremental infrastructure or personnel costs, while also reducing average driver time, mileage and fuel costs incurred between customer stops.

 

We believe that substantially all of the target accounts not currently served by us are in markets currently served by our route network. We also believe that at current capacity levels, new customers acquired in our current service network would be accretive to our earnings, with minimal need for network expansion. Accordingly, as we grow our network, we expect our scale and route density to further drive operating performance.

 

Acquisition Growth

 

We believe the market for chemical service providers is highly fragmented, with numerous local and regional competitors accounting for a majority of the total market. As such, these market participants do not benefit from economies of scale when purchasing chemicals, offer a limited suite of products or services and are unable to provide the necessary level of support and customer service to larger regional and national accounts.

 

We believe that with our differentiated service capabilities, and national service infrastructure we can become the “acquiror of choice” for these companies. Further, given our nationwide footprint, and the minimal

incremental fixed cost and low integration complexity typically associated with acquired revenue, we are able to acquire incremental revenue at potentially attractive margins and accretive multiples. We believe the margins realized on the acquired revenues will allow us to enhance our overall operating margins and generate increased equity returns for our stockholders.

 

Our Products and Services

 

We provide products and services to end-customers, through our company-owned locations, and to our franchisees and licensees. While we report sales to and royalty revenue from franchisees and licensees separately, we utilize the same administrative and management personnel to oversee the daily operations of our franchisees and licensees.

 

Company-Owned Operations

 

Our full-service hygiene solutions typically involve providing our customers with: (i) the sale of consumable products such as chemicals, soap and paper, 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, and bar towels; and (iii) the performance of manual cleaning processes. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries. Many of our products are consumable and require the use of a dispensing system installed by us. Our services on those systems are typically preventative in nature and are required on a regularly scheduled basis. We strive to position ourselves to customers as the “one-stop-shop” for the full breadth of products and services we offer. We believe this comprehensive approach to providing complete hygiene solutions to our customers, coupled with the rental, installation, and service of dish machines and dispensing equipment that provide rental income and require the use of our products helps provide stability in our business and discourages customers from switching vendors.

 

We typically enter into service agreements with customers ranging from one to five years which outline the scope and frequency of services we will provide, as well as the pricing of any consumables or rental equipment or products the customer requires. Given that we typically install, at no charge, dispensers for many of the consumable products we sell to customers, our service agreements usually provide for an early termination fee.

 

Hygiene and Facility Service.  Our legacy business was restroom hygiene, offering a regularly scheduled service that typically included cleaning the bowls, urinals, and sinks in a restroom, the application of a germicide to such surfaces to inhibit bacteria growth, and the restocking of air-fresheners and soap dispensers, all for a fixed weekly fee. Additionally, we managed the customer’s restroom paper needs by providing and installing the tissue and hand towel dispensers, and selling and re-stocking the paper in such dispensers on an as-needed basis. This entire offering was intended to supplement the daily janitorial or custodial requirements of our customers and free customers from purchasing and securing an inventory of paper products.

 

After the acquisition of Swisher by Messrs. Huizenga and Berrard, we greatly modified and expanded our hygiene and facility service business by un-bundling, where appropriate, the air-freshener and soap sales from the overall service price in order to economically provide more hygienic and sanitary single use products. We also introduced a more complete line of specialized soaps as well as various grades of paper and associated dispensing options, including hands-free soap dispensers. Additionally, we introduced a number of new complementary products and solutions required by our customers both inside and outside of restrooms, including power washing of restrooms and other areas, and the rental and cleaning of floor mats, mops, and linens.

 

These products and services are delivered to customers by our employees in company vehicles. We utilize GPS technology to monitor various driving habits, mileage, and vehicle diagnostic information. In several markets, we operate our own laundry processing facilities to maintain and clean rental items such as floor mats, mops, and linens, while, in other markets where we offer dust control, we outsource the processing to third parties.

Chemicals.  Since early 2009, we have placed particular emphasis on the development of our chemical offering, particularly as it relates to warewashing and laundry solutions. Warewashing products consist of cleaners and sanitizers for washing glassware, flatware, dishes, foodservice utensils, and kitchen equipment, while laundry products include detergents, stain removers, fabric conditioners, softeners, and bleaches in liquid, powder, and concentrated forms to clean items such as bed linen, clothing, and table linen. Our warewashing and laundry solutions are designed to address the needs of small and large customers alike, ranging from single store operators to multi-unit chains and large resorts. We often consult with customers that may have specialized needs or require custom programs to address different fabric or soil types. For warewashing customers, we sell, rent, lease, or make available, as well as install and service, dishwashing machines, pre-rinse units, chemical dispensing units, dish tables and racks, food handling and storage products, and parts, while for customers using our laundry services we offer various dispensing systems. We enter into service agreements with customers using our chemical services to whom we rent or lease equipment, provide 24 hour, seven days-a-week customer service, and perform regularly scheduled preventative maintenance. Typically, these agreements require customers to purchase from us all of the products used in the rented equipment. The chemicals themselves may be delivered to the customer by a Swisher technician or one of our distributor partners; however, the service and maintenance is always provided by a Swisher technician. We also provide a full line of concentrated and ready-to-use chemicals and cleaning products. This product line includes general purpose cleaners, disinfectants, detergents, oven and grill cleaners, general surface degreasers, floor cleaners, and specialty cleaning products, which when in concentrated form, benefit from the use of a dilution system to ensure the proper mix of chemicals for safe and effective use.

 

Chemical sales, which include our laundry, warewashing, and concentrated and ready-to-use chemical products and cleaners, and soap, accounted for 18.2%, 10.8%, and 8.9% of consolidated net sales in 2009, 2008, and 2007, respectively. The sale of paper items, including hand towels and tissue paper accounted for 20.3%, 19.9%, and 20.2% of consolidated net sales in 2009, 2008, and 2007, respectively. The service component of our hygiene and facility service offering, which includes both the manual cleaning services as well as service delivery fees, represented 29.2%, 31.0%, and 33.7% of consolidated net sales in 2009, 2008, and 2007, respectively. The rental and other component of our business consists of rental fees and ancillary other product sales and represented 9.6%, 9.8%, and 6.3% of consolidated net sales in the 2009, 2008, and 2007, respectively. We anticipate that over time, our revenue from chemical sales will grow at a faster rate than any of our other product lines.

 

Franchise Operations

 

We currently have 11 franchisees located throughout the U.S. and Canada as well as 10 master licensees operating in the U.K., Ireland, Portugal, the Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.

 

We collect royalty, marketing, and/or business service fees from our franchisees and licensees in exchange for maintaining and promoting the Swisher marks, continuing to develop the Swisher offering, managing vendors and sourcing new products, marketing and selling Swisher services to prospective customers that may have locations in franchise territories, and providing various ancillary services, including billing and collections on their behalf. Franchisees are obligated to buy most of the products used in their business from us. Further discussion of revenue received from our franchisees and licensees, including royalties, revenue from product sales, and business service fees, is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this registration statement.

 

Sales and Distribution

 

We market and sell our products and services primarily through: (i) our field sales group, including the service technicians, which pursues new customers and offers existing customers who typically operate single or several smaller locations additional products and service; (ii) our corporate account sales team, which focuses on larger regional or national customers in the markets previously identified; and (iii) independent third-party distributor partners.

Selling to a new corporate account is an involved and lengthy process that includes either displacing an existing supplier of the products and services or working with the customer to centralize and consolidate disparate purchasing decisions. These prospective customers often go through a vendor qualification process that may involve multiple criteria, and we often work with them in various test locations to validate both product efficacy and our ability to deliver the services on a national level. Additionally, large corporate accounts may operate via a franchise network of their own; the selection process with such corporate accounts may only result in a vendor qualification allowing us the right to sell our products and services to their franchisees. We believe that as we continue to grow, the time to close such sales or qualify as a provider to franchisees of corporate account prospects will shorten. To date, we have been in vendor qualification processes with larger accounts that have ranged from less than three months to over 12 months. Contract terms on corporate account customers typically range from three to five years and we generally provide all services to these accounts, although our larger corporate accounts may request that we deliver the consumable products through specific distribution partners with whom they coordinate the delivery and procurement of other products.

 

We believe expanding our distributor program provides up to an additional $6 billion opportunity for organic growth. Sales to and through distributors are targeted toward regional and local foodservice and other distributors that are seeking not only to leverage the revenue and margin they can drive by increasing the number of products they deliver to each customer, but also to provide such distributors a “hook” into customers that reduces their customer attrition. Foodservice distribution is a highly competitive business operating on low margins and with minimal switching costs for their customers, who generally only purchase commodities and widely manufactured consumables. We work with distributors as their chemical supplier, dispensing product, and dish machine provider, including the service arm required for such equipment. As such, the distributor can typically earn a higher profit margin on the chemicals it sells to end customers as compared to its food items. Moreover, a distributor partner is then able to market to its end customers the “service” required to maintain their dish machines and chemical dispensing equipment. This service is provided by Swisher and documented under a separate contract between Swisher and the end customer. In effect, by Swisher partnering to be the service arm for the distributor, we help to generate demand for our rental equipment and our consumable products, while providing the distributor a competitive advantage. We contract with distributors on an exclusive or non-exclusive basis, depending on the markets they serve and the size of their customer base.

 

With the exception of product sales delivered via distributors, and select remote markets in the northern plains states, including North and South Dakota, Idaho, and Montana, all of our services and products in the U.S. are delivered through delivery vehicles operated by company-owned branches and franchisees. Our field-based sales force focuses its efforts on increasing route density and lowering the average time and distance traveled between stops, thereby reducing the average cost per delivery and optimizing fixed cost absorption.

 

Customer Dependence

 

Our business is not materially dependent upon a single customer, and no one customer accounts for 10% or more of our consolidated revenue. Our customer base ranges from large multi-national companies to entrepreneurs who operate a single location. We believe more than 50% of our revenue is attributable to customers we consider as foodservice and hospitality related customers, including quick-service and full-service restaurants.

 

Sources and Availability of Raw Materials

 

We currently conduct limited manufacturing operations and primarily purchase the products we sell from third-party manufacturers and suppliers with whom we believe we have good relations. Most of the items we sell are readily available from multiple suppliers in the quantities and quality acceptable to both us and our customers. We do not have any minimum annual or other periodic purchase requirements with any vendors for any of the finished goods products we use or sell. We are not currently party to any agreement, including with our chemical manufacturer, where we bear the commodity risk of the raw materials used in manufacturing; however, nothing prevents (i) the vendor trying to pass through the incremental costs of raw materials or (ii) us

from considering alternative suppliers or vendors. We believe the raw materials used by the manufacturers of the products we currently sell, including petroleum-based surfactants, detergents, solvents, chlorine, caustic soda, and paper, are readily available; however, pricing pressure or temporary shortages may from time to time arise, resulting in increased costs and, we believe, under extreme conditions only, a loss in revenue from our inability to sell certain products.

 

We purchased 43.4% and 58.1% of the chemicals required for operations in 2009 and through the first ten months of 2010, respectively, from one supplier that operates from a single manufacturing location. We have contingency plans to outsource production to other parties in the event that we need to, which we believe could mitigate any disruptions in the supply of chemicals from this supplier.

 

We recently acquired the assets of a small chemical manufacturer, which will provide us limited production capacity representing less than 5% of our current needs in certain foodservice and laundry chemicals.

 

Patents, Trademarks, Licenses and Franchises

 

We maintain a number of trademarks in the U.S., Canada and in certain other countries. We believe that many of these trademarks, including “Swisher,” the “Swisher” design, the “Swisher Hygiene” design, and the “S” design are important to our business. Our trademark registrations in the U.S. are renewable for ten-year successive terms and maintenance filings must be made as follows: (i) for “Swisher” by January 2014, (ii) for the “Swisher” design by January 2013, (iii) for “the Swisher Hygiene” design by April 2015, and (iv) for the “S” design by February 2012. In Canada, we have agreed not to: (i) use the word SWISHER in association with any wares/services relating to or used in association with residential maid services other than as depicted in our trademark application and (ii) use the word SWISHER with our “S” design mark or by itself as a trade mark at any time in association with wares/services relating to or used in association with cleaning and sanitation of restrooms in commercial buildings. Thus, our franchisees operate as SaniService^® in Canada. We own, have registered, or have applied to register the Swisher trademark in every other country in which our franchisees or licensees operate.

 

While most of the chemical products we sell have Swisher-branded labeling and product names, we do not currently own or have exclusive rights to their formulae. We believe the chemical manufacturing industry has a sufficient number of both contract and tolling manufacturers, many of whom have their own formulas or chemists on staff, to provide us sufficient access to products to support our business.

 

Seasonality

 

In the aggregate, our business is typically not seasonal in nature, with revenue occurring relatively evenly throughout the year. However, our operating results may fluctuate from quarter to quarter or year to year due to factors beyond our control, including unusual weather patterns or other events that negatively impact the foodservice and hospitality industries. The majority of our customers are in the restaurant or hospitality industries, and the revenue we earn from these customers is directly related to the number of patrons they service. As such, events adversely affecting the business of the customer may have an adverse impact on our business.

 

Regulatory and Environmental

 

We are subject to numerous U.S. federal, state, local, and foreign laws that regulate the manufacture, storage, distribution, transportation, and labeling of many of our products, including all of our disinfecting, sanitizing, and antimicrobial products. Some of these laws require us to have operating permits for our production facilities, warehouse facilities, and operations. In the event of a violation of these laws, we may be liable for damages and the costs of remedial actions, and may also be subject to revocation, non-renewal, or modification of our operating and discharge permits and revocation of product registrations. While we have not yet been subject to any such action, any revocation, non-renewal, or modification may require us to cease or limit the sale of products from one or more of our facilities and may have a material adverse effect on our

business, financial condition, results of operations, and cash flows. The environmental regulatory matters most significant to us are discussed below.

 

Product Registration and Compliance

 

Various U.S. federal, state, local, and foreign laws and regulations govern some of our products and require us to register our products and to comply with specified requirements. In the U.S., we must register our sanitizing and disinfecting products with the U.S. Environmental Protection Agency (the “EPA”). When we register these products, or our registered supplier if we are subregistering, we must also submit to the EPA information regarding the chemistry, toxicology, and antimicrobial efficacy for the agency’s review. Data must be identical to the claims stated on the product label. In addition, each state where these products are sold requires registration and payment of a fee.

 

Numerous U.S. federal, state, local, and foreign laws and regulations relate to the sale of products containing ingredients such as phosphorous, volatile organic compounds, or other ingredients that may impact human health and the environment. Specifically, the State of California has enacted Proposition 65, which requires us to disclose specified ingredient chemicals on the labels of our products. To date, compliance with these laws and regulations has not had a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

Occupational Safety and Health

 

The Occupational Safety and Health Act of 1970, as amended (“OSHA”), establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA, and various record keeping, disclosure, and procedural requirements. Various OSHA standards may apply to our operations. To date, compliance with OSHA, and its regulations and standards, has not had a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

Other Environmental Regulation

 

We recently purchased a small manufacturing operation and we may buy additional manufacturing capacity in the future. Many such facilities are subject to various U.S. federal, state, local, or foreign laws and regulations governing the discharge, transportation, use, handling, storage, and disposal of hazardous substances. In the U.S., these statutes include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), as well their similar state, local, and foreign laws. Because we may potentially be a generator of hazardous wastes in the future, we, along with any other person who disposes or arranges for the disposal of our wastes, may be subject to financial exposure for costs associated with an investigation and any remediation of sites. Specifically, we would likely have exposure if we have disposed or arranged for the disposal of hazardous wastes at sites that become contaminated, even if we fully complied with applicable environmental laws at the time of disposal. We currently are unaware of any past action which may lead to any liability, but, in the event we do ultimately have liability at some point in the future for past or future actions, the costs of compliance and remediation would likely have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

We believe that it is possible that, in the future, we will be subject to more stringent environmental laws or regulations, including those related to the reduction of greenhouse gas emissions, which may result in new or additional restrictions being imposed on our processing and distribution activities, which may result in possible violations, substantial fines, penalties, damages, or other significant costs. Notwithstanding the fact that our recently-acquired manufacturing operations are relatively small and currently provide us less than 5% of the chemicals we use in our business, the potential cost to us relating to environmental matters, including the cost of complying with the foregoing potential laws or regulations and remediation of contamination, is uncertain due to such factors as the unknown magnitude and type of possible pollution and clean-up costs, the

complexity and evolving nature of laws and regulations, including those outside the U.S., and the timing, variable costs, and effectiveness of clean-up methods.

 

Employees

 

As of December 10, 2010, we had 706 employees. We are not a party to any collective bargaining agreement and have never experienced a work stoppage. We consider our employee relations to be good.

 

Properties

 

We lease our current corporate headquarters facility in Charlotte, North Carolina, pursuant to a lease expiring in February 2017. As of November 12, 2010, we also lease numerous facilities relating to our operations. These facilities are located in the following 31 states: Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Kansas, Kentucky, Massachusetts, Maryland, Michigan, Minnesota, Missouri, North Carolina, New Jersey, New Mexico, Nevada, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, and Wisconsin. We also lease facilities related to our Canadian operations in Vancouver, British Columbia, Edmonton and Calgary, Alberta, and Toronto, Ontario. These facilities consist primarily of warehouses. We believe that our facilities are sufficient for our current needs and are in good condition in all material respects.

 

Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

 

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

 

We are a reporting issuer in Canada and our common stock is listed and posted for trading on the TSX under the trading symbol “SWI.” Before the Merger was complete, we traded on the TSX under the trading symbol “COB.” When our Registration Statement on Form 10 becomes effective on the day that is 60 days from the date of its filing, we will become a public U.S. reporting company under the Exchange Act. The

following table sets out the reported high and low sale prices on the TSX for the periods indicated as reported by the exchange:

 

 

On October 29, 2010, the last trading day before the Redomestication, the last reported sale price of CoolBrands’ common stock on the TSX was Cdn$4.09 ($4.01). As of December 10, 2010, there were 114,015,063 shares of common stock issued and outstanding. As of December 10, 2010 we had 1,014 registered stockholders of record.

 

We have not paid any cash dividends on our common stock and do not plan to pay any cash dividends in the foreseeable future. Our board of directors will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions.

 

Auditors

 

The consolidated financial statements of Swisher Hygiene Inc. at and for the three years ended December 31, 2009 included in this registration statement, to the extent and for the periods indicated in their report, have been audited by Scharf Pera & Co., PLLC (“Scharf”), independent registered public accountants, and are included herein in reliance upon the authority of such firm as experts in accounting and auditing in giving such report. The offices of Scharf are located at 4600 Park Road, Suite 112, Charlotte, North Carolina 28209.

 

The consolidated financial statements of CoolBrands International, Inc. as of August 31, 2010 and 2009 and for each of the three years in the period ended August 31, 2010, included in this registration statement have been so included in reliance on the report of PricewaterhouseCoopers LLP (“PWC”), an independent registered public accounting firm, given on the authority of such firm as experts in auditing and accounting.

 

On November 2, 2010, we terminated the engagement of Scharf as our independent registered public accounting firm. Our Audit Committee recommended and approved the decision to terminate Scharf. Scharf’s reports on the financial statements of Swisher International for the fiscal years ended December 31, 2009 and December 31, 2008 did not contain an adverse opinion nor a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

In connection with its audits of Swisher International financial statements for the fiscal years ended December 31, 2009 and December 31, 2008, and through the interim period ended November 2, 2010, we have had no disagreements with Scharf on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Scharf,

would have caused Scharf to make a reference to the subject matter of the disagreements in connection with its reports on the consolidated financial statements for the fiscal years ended December 31, 2009 and December 31, 2008.

 

A letter from Scharf dated November 16, 2010 is attached as Exhibit 16.1 to this registration statement.

 

On November 1, 2010, we terminated the engagement of PWC as our independent registered public accounting firm. Our Board of Directors recommended and approved the decision to terminate PWC. PWC’s reports on the financial statements of CoolBrands for the fiscal year ended August 31, 2010 and August 31, 2009 did not contain an adverse opinion nor a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

In connection with CoolBrands’ audits of its financial statements for the fiscal years ended August 31, 2010 and August 31, 2009, and through the interim period ended November 1, 2010, we have had no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of PWC, would have caused PWC to make a reference to the subject matter of the disagreements in connection with it reports on the consolidated financial statements for the fiscal years ended August 31, 2010 and August 31, 2009.

 

Effective November 2, 2010, our Audit Committee engaged BDO USA, LLP (“BDO”) as the Company’s independent registered public accountant for the fiscal year ended December 31, 2010. Before engaging BDO, neither Swisher Hygiene nor anyone acting on Swisher Hygiene’s behalf, consulted BDO regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on Swisher Hygiene’s financial statements, and no written or oral advice was provided that was an important factor considered by Swisher Hygiene in reaching a decision as to any accounting, auditing, or financial reporting issues.

 

SELECTED FINANCIAL DATA

 

Selected condensed consolidated financial data for the nine-months ended September 30, 2010 and 2009 and the years ended December 31, 2009, 2008, 2007, 2006, and 2005 is as follows:

 

 

You should read the following discussion and analysis in conjunction with the “Selected Financial Data” above and our consolidated financial statements and the related notes thereto included in this registration statement beginning on page F-1. In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Actual results could differ from these expectations as a result of factors including those described under the heading “Risk Factors” in this registration statement.

 

Executive Overview

 

Swisher Hygiene Inc. provides hygiene solutions to more than 35,000 customers throughout North America and internationally through its network of company-owned operations, franchises, and master licenses. Our solutions include products and services designed to promote superior cleanliness and sanitation in commercial environments, while enhancing the safety, satisfaction, and well-being of employees and patrons. Our solutions are typically delivered on a regularly scheduled basis and involve providing our customers with: (i) the sale of 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, and bar towels; and (iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.

 

Going forward, we intend to increase the sale of our products and services to customers in existing geographic markets as well as expand our reach into additional markets through a combination of organic growth and the acquisition of Swisher franchises, independent chemical service providers, and related businesses.

 

History of Swisher

 

We were originally founded in 1986 as Swisher International, Inc., a Nevada corporation. From our founding through 2004, we operated primarily as a franchisor and licensor of restroom hygiene services offering: (i) weekly cleaning and sanitizing services of our customers’ restroom fixtures, along with the restocking of soap and air freshener dispensers and (ii) the sale of restroom paper products, such as toilet paper and hand towels. We provided these services to a customer base largely comprised of small, locally owned bars, restaurants and retail locations. Franchisees had exclusive rights to use the Swisher name and business processes in designated United States and Canadian geographic markets typically ranging in size from 500,000 to 3,000,000 persons, while licensees had substantially similar rights in the respective countries in which they operated. Although franchisees licensed the same business model, the manner in which they executed and adopted Swisher programs varied greatly, resulting in historically inconsistent levels of service and differing product offerings across geographic markets.

 

In November 2004, H. Wayne Huizenga and Steve Berrard acquired a majority interest in the company, which at the time was a publicly traded company. Subsequently, in May 2006, Messrs. Huizenga and Berrard acquired the remaining outstanding shares of the company and began operating it as a private company.

 

The primary goal of acquiring ownership of the company was to transition the business to take greater advantage of the Swisher brand and nationwide service and distribution network, and to better leverage the under-utilized platform to expand both product and service offerings. Specifically, Messrs. Huizenga and Berrard planned to transition the company’s focus from generating revenue almost exclusively from restroom cleaning services to building a full-service hygiene solutions provider that offers a broad complement of products and services, addressing the complete hygiene and cleaning needs of our customers throughout their facilities. We believed that such a transition would provide the company with a competitive advantage, allowing us to retain existing customers over time and provide them with additional products and services that were essential to the operations of their businesses. Moreover, we sought to leverage Swisher’s national

infrastructure with product offerings and service expertise in core lines of products, including cleaning chemicals, required by larger corporate customers nationwide.

 

An important component of this business strategy was the acquisition of a sufficient number of franchise locations or other similar businesses, providing us direct control over the implementation of changes to a consistent business model. To address this component of the business strategy, Messrs. Huizenga and Berrard formed HB Service, LLC to acquire franchises and related businesses under the Swisher name. Through September 2010, HB Service acquired and operated 68 former franchises of the company and purchased nine other related businesses. Effective July 13, 2010, HB Service entered into a Contribution Agreement with the company pursuant to which Messrs. Huizenga and Berrard contributed their membership interests in HB Service to the company, at which time HB Service became a wholly-owned subsidiary of the company.

 

By the end of 2005, through HB Service, we had acquired 26 franchisees and other related businesses and implemented a long-range plan to increase the number and types of products we offer. In addition, we discontinued the sale of new franchises, replaced information systems, established a fleet of company-owned vehicles, upgraded our facilities, hired experienced route-based operations managers to develop consistency in our operating model, expanded the geographic area covered by our locations, and eliminated low volume customers that were unprofitable or marginally profitable under our new business model. During this time, acquisitions continued but at a less aggressive pace, as we focused on executing the aforementioned business strategies. By mid-2007, we had purchased and converted to company-owned locations a total of 50 businesses, including 44 franchisees that represented 49.4% of our U.S.-based franchises.

 

In the latter half of 2007 and first half of 2008, we focused almost exclusively on rolling-out new information systems to company-owned operations and franchisees alike, integrating the disparate acquired business models into a centrally-managed operation, which integration continued to include the elimination of low volume customers that were not candidates to purchase our increased suite of products and services. During the period from mid-2007 through the end of 2008, we acquired two franchises. It was during this period that we also first began to experience the impact of the economic downturn, which continues to impact our business and the businesses of our customers. Our customers, many of whom operate in the foodservice market, were particularly affected by the contracting economy through reduced customer traffic and spending. To address in part the financial difficulties experienced by their businesses, these customers reduced their discretionary spending on items such as our legacy restroom cleaning business and delayed decisions to institute new programs or add new products and services. As a result of these economic conditions, coupled with our continual elimination of small unprofitable and marginally profitable customers, our operations, before giving effect to acquisitions, experienced a 1.9% decline in revenue in 2008 as compared to 2007, while franchise fees and other revenue, before giving effect to acquisitions, declined 6.5% in 2008 as compared to 2007.

 

Poor economic conditions continued during the first quarter of 2009; prompting us to aggressively accelerate a number of steps we had taken to combat the decline in business. Specifically, we: (i) reduced our field sales force, which primarily called on smaller, single-unit customers; (ii) continued elimination of certain unprofitable or marginally profitable customers by, in many instances, introducing minimum stop charges or price increases; (iii) eliminated certain customers that were payment or credit risks; (iv) realigned our branch and corporate workforce; and (v) reduced other costs. As a result, company operations, before giving effect to acquisitions, experienced a 13.6% decline in revenue in 2009 as compared to 2008, while franchise fees and other revenue, before giving effect to acquisitions, declined 15.8% in 2009 as compared to 2008.

 

In the second half of 2009, we refocused our efforts on positioning the company for future growth by: (i) investing in our corporate account and distributor sales programs; (ii) acquiring franchises to help leverage our field cost structure and fill remaining geographic gaps in our service delivery markets; and (iii) accelerating the development of our chemical program to provide a comprehensive offering focused on detergents, cleaners, and sanitizers used regularly by most of our customers in their warewashing, laundry, and general cleaning applications. We believe that our chemical program is a key component of our future growth as these products are necessary to maintain proper sanitation and cleanliness and require dispensing equipment that we sell or rent, install, and service on a regular basis to ensure proper dilution and delivery of the chemicals. In addition,

the purchase of chemical products by our regional and national chain customers is directed by corporate headquarters of those chains. As a result of this and the fact that we have the ability to provide chemical services throughout the continental U.S., the majority of our new business now comes from larger regional or corporate accounts as well as regional distributor partners.

 

In summary, our transition from a restroom cleaning services business to a full service hygiene solutions provider offering a complete chemical and facility service program has required significant investments. These investments included:

 

 

 

As a result of these investments, from January 1, 2005, through September 30, 2010, the company has incurred cumulative losses of $54,508,159. To help finance these losses and make the investment necessary to create the platform we have today, which we believe will enable us to experience significant growth and profitability, Messrs. Huizenga and Berrard have contributed and advanced the company $64,405,152 and the company has incurred indebtedness of: (i) $24,946,932 under bank lines of credit; (ii) $12,981,798 in notes issued by Swisher to sellers in connection with acquisitions made by the company (the “Seller Notes”); and (iii) $4,122,915 of third party financing for software development and capital leases for equipment. Mr. Huizenga has guaranteed $20,000,000 of the bank line of credit, and $3,050,000 of the Seller Notes are secured by letters of credit. The letters of credit are secured by certain assets of Messrs. Huizenga and Berrard.

 

On November 2, 2010, Swisher International completed the Merger with Swisher Hygiene, through a merger with a wholly-owned subsidiary of Swisher Hygiene. Immediately before the Merger, Swisher Hygiene completed its Redomestication to Delaware from Ontario, Canada, where it had been a publicly-traded corporation, listed on the TSX under the name CoolBrands International Inc., and trading under the symbol “COB.” In the Merger, the former stockholders of Swisher International received 57,789,630 shares of Swisher Hygiene common stock, representing, on a fully diluted basis, a 48% ownership interest in Swisher Hygiene. The stockholders of CoolBrands retained 52% of the company. As a result of the Merger, Swisher International is a wholly-owned subsidiary of Swisher Hygiene. Swisher Hygiene will continue to trade on the TSX under the symbol “SWI.”

 

In accordance with the Merger Agreement, the board of directors consists of eight members, five of whom were appointed by the former shareholders of Swisher International, and three of whom were appointed by CoolBrands. Further, following the merger, the executive officers of the Company consist entirely of former officers and executive officers of Swisher International. Accordingly, the former owners and management of Swisher International have effective operating control of the combined company.

 

The Merger is accounted for as a reverse recapitalization with a non-operating company, which essentially accounts for the issuance of stock by a private company in consideration of the net monetary assets of the non-operating company, with the balance sheet recapitalized to reflect the stock issuance. The transaction is recorded at book value and no goodwill or intangible assets are recognized.

 

As of the date of this registration statement, we have 68 company-owned locations and 11 franchises located throughout the United States and Canada and we have entered into 10 master license agreements

covering the United Kingdom, Ireland, Portugal, the Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.

 

The number of company-owned locations, franchises, and international master licenses since the end of 2006 through the date of this registration statement is as follows:

 

 

 

 

Going forward, we will continue to expand our reach into additional U.S. and Canadian geographic markets through acquisitions of independent chemical distributors, franchise repurchases, execution of agreements with distributor partners, and organic growth. Additionally, we will be opportunistic as it relates to acquiring or partnering with complementary businesses that (i) can provide us a competitive advantage; (ii) leverage, expand or benefit from our distribution network; or (iii) provide us economies of scale or cost advantages over our existing supply chain. Collectively, these efforts are centered on making us an attractive alternative to larger customers in foodservice, hospitality, healthcare, retail, and industrial markets. In addition, we will seek to aggressively license our business model internationally. Our success largely depends on our ability to execute on these strategies and the successful penetration of our products and services to corporate accounts and distribution partners.

 

Recent Developments

 

On November 2, 2010, our board of directors approved the Swisher Hygiene Inc. 2010 Stock Incentive Plan (the “Plan”) to attract, retain, motivate and reward key officers and employees. The Plan, which is subject to stockholder and TSX approval, allows for grant of stock options, restricted stock units and other equity instruments up to a total of 6,000,000 shares of our common stock. Under the Plan, the board approved awards of options to purchase 1,001,137 shares of our common stock. The options vest in four equal annual installments beginning on the first anniversary of the grant date and are exercisable at $4.18 per share. The options expire in 2020. The board also approved the award of 2,507,449 restricted stock units at $4.18 per share. The restricted stock units vest in four equal annual installments beginning on the first anniversary of the grant date.

 

On November 8, 2010, we acquired the business operations and selected net assets of Gateway ProClean, Inc. (“Gateway”), a St. Louis-based hygiene and chemicals company for $7,536,000 including $2,000,000 in cash, $5,000,000 in a secured, convertible promissory note and the assumption of $536,000 of bank and other trade debt. The promissory note matures on June 30, 2011 and has a fixed interest rate of 4%. During the term of the note, at the option of the holder and subject to the effectiveness of a registration statement providing for the resale of the shares of common stock issuable upon conversion of the note, the promissory note may be converted into common stock based on a fixed conversion price of $3.81 per share. The maximum number of shares issuable upon conversion is 1,312,864 shares of our common stock.

 

On December 7, 2010, the company acquired the business operations and selected net assets of Lasfam Investments, Inc. (“Lasfam”) for $5,566,400, including $1,669,920 in cash and a $3,896,480 convertible promissory note that matures on June 30, 2011 and has a fixed interest rate of 4%. During the term of the note, at the option of the holder and subject to the effectiveness of a registration statement providing for the resale of the shares of common stock issuable upon conversion of the note, the promissory note may be converted into common stock based on a fixed conversion price of $3.88 per share. After April 7, 2011, the note may be converted into shares of common stock at a fixed conversion price of $3.88 per share, if a resale registration statement relating to the shares of Swisher Hygiene of common stock issuable upon conversion of the note is effective and our common stock trades on the Toronto Stock Exchange or any other North American stock exchange for ten consecutive trading days at a combined total volume weighted average price equal to or exceeding 105% of the fixed conversion price. If the note is not converted, the Company may

settle the fixed obligation (principal value of the note and accrued but unpaid interest) in cash, shares or a combination thereof, provided that at least 50% of the balance owed is paid in cash, based on the stock’s trading price on the day before maturity. The maximum number of shares issuable in repayment of the note is 1,027,122 shares.

 

Gateway and Lasfam are two of eight acquisitions we have made since announcing our business transaction with Coolbrands on August 18, 2010. The other acquisitions include three independent chemical service companies, Total Cost Systems in Florida, ChemWest in Northern California, and SunState Chemical in Florida, as well as three franchisees of Swisher located in Toronto, Calgary and Edmonton, each of which operate under the Sani-Service brand.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The discussion of the financial condition and the results of operations are based on the consolidated financial statements, which have been prepared in conformity with United States generally accepted accounting principles. 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 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 to the Consolidated Financial Statements for additional discussion of the application of these and other accounting policies.

 

Accounts Receivable

 

Accounts receivable consist of amounts due from customers for product sales and services as well as from franchisees and master licensees for product sales, royalties and fees for marketing and administrative services. Accounts receivable are reported net of an allowance for doubtful accounts. The allowance is management’s best estimate of uncollectible amounts and is based on a number of factors, including overall credit quality, age of outstanding balances, historical write-off experience and specific account analysis that projects the ultimate collectability of the outstanding balances. The Company does not accrue interest on past due accounts and records an adjustment to write-off balances once all reasonable efforts to collect have been exhausted. As of December 31, 2009 and 2008, and the nine-months ended September 30, 2010, the allowance for doubtful accounts was $334,156, $564,635 and $385,630, respectively. We believe that our allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change and dependence upon events that may or may not occur. The impact of recognizing additional allowances for doubtful accounts may be material to the assets reported on our balance sheet and in our results of operations.

 

Inventory

 

Inventories are stated at the lower of cost or market determined using the first in-first out (FIFO) cost method. We routinely review inventory for excess and slow moving items as well as for damaged or otherwise obsolete items and for items selling at negative margins. When such items are identified, a reserve is recorded to adjust their carrying value to their estimated net realizable value. We believe that the development of such inventory reserves is a critical accounting estimate because they are susceptible to change and dependence upon events that may or may not occur. The impact of recognizing additional inventory reserves may be material to the assets reported on our balance sheet and in our results of operations.

 

Notes Receivable

 

Notes receivable consist of amounts due from franchisees and master licensees. Notes receivable are reported net of an allowance for doubtful accounts. The allowance is management’s best estimate of uncollectible amounts and is based on a number of factors including overall franchisee or master licensee credit quality, historical write-off experience and specific account analysis that projects the ultimate

collectability of the outstanding balances. As of December 31, 2009 and 2008, and the nine-months ended September 30, 2010, the allowance was $357,261. We believe that the recovery of the reported value of our notes receivable is a critical accounting estimate because it is susceptible to the future operating performance of master licensee and other events.

 

Goodwill and Other Intangible Assets

 

The cost of acquisitions in excess of the fair value of the identifiable net assets acquired is recorded as goodwill and allocated to the respective branch locations, which represent the company’s defined reporting units (there were in excess of 50 defined reporting units as of September 30, 2010) in accordance with Accounting Standards Codification (“ASC”) 350, Goodwill and Other Intangible Assets. Other intangible assets include acquired customer relationships and non-compete agreements. The fair value of these intangible assets at the time of acquisition is estimated based upon discounted future cash flow projections. The customer relationships are amortized on a straight-line basis over the expected average life of the acquired accounts, which is five years. The non-compete agreements are amortized on a straight-line basis over the term of the agreements, which are between two to five years.

 

Pursuant to the requirements of ASC 350, we are required to perform a valuation of each of our reporting units annually, or upon significant changes in our business environment. We conducted our annual impairment analysis in the fourth quarter of 2009. To determine the fair value of each reporting unit we utilized discounted cash flows using five years of projected unleveraged free cash flows and a terminal value. The discount rates used for the analysis reflected a weighted average cost of capital based on industry and capital structure adjusted for equity and size risk premiums. Expected cash flows are based on historical customer growth, including attrition, and continued long term growth of the business. These estimates can be affected by factors such as customer growth, pricing, and economic conditions that can be difficult to predict. The fair value of each reporting unit exceeded its carrying value as of the fourth quarter of 2009.

 

As of the fourth quarter of 2009 less than 7% of the reporting units had fair values that exceeded the carrying value by less than 100% of the carrying value. Those reporting units with fair values in excess of carrying values, but by less than 100% have a combined recorded goodwill value of $5,749,811 and average fair value in excess of 65% over carrying value as of December 31, 2009. Management does not believe this presents a material risk for impairment.

 

The company also performs tests of other intangible assets for impairment on an annual basis or when circumstances change that would more likely than not reduce the fair value of the intangible assets to an amount that is less than its carrying amount. As part of this impairment testing, management also assesses the useful lives assigned to the customer relationships and non-compete agreements considering actual historical customer attrition rates.

 

For the years ended December 31, 2009, 2008, 2007, impairment losses on goodwill and other intangible assets was $30,000, $223,000, and $131,000 respectively. There were no impairment losses on goodwill and other intangible assets for the nine-months ended September 30, 2010. We believe that the assessment for such potential impairment losses is a critical accounting estimate as it is dependent upon future events and requires substantial judgment. Any resulting impairment loss could have a material impact on our financial condition and the results of operations.

 

Long-lived Assets

 

In accordance with Financial Accounting Standards Board (“FASB”) ASC 360-10-35 “Impairment or Disposal of Long-lived Assets,” losses related to the impairment of long-lived assets are recognized when the carrying amount is not recoverable and exceeds its fair value. When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, management of the company evaluates recoverability by comparing the carrying value of the assets to projected future cash flows, in addition to other qualitative and quantitative analyses. The company also performs a periodic assessment of the useful lives assigned to the intangible assets. We believe that this impairment assessment represents a critical accounting policy as it is

dependent on future events and may require substantial judgement. Any resulting impairment loss could have a material impact on our financial condition and the results of operations.

 

Non-controlling Interest

 

In the majority of its acquisitions, the company acquires 100% of the business being acquired. However, in a few instances, the former owner retains a non-controlling interest in the acquired business. Profit and loss are allocated to the non-controlling interest based on its pro-rata share.

 

Revenue Recognition

 

Revenue from product sales and services is recognized when the services are performed or the products are delivered to the customer, provided that persuasive evidence of a sales arrangement exists, both title and risk of loss have passed to the customer, and collection is reasonably assured. For arrangements with multiple deliverables, revenues are recognized based on the fair value for each unit of accounting, as determined by the price charged for each element when sold separately. Franchise and other revenue include product sales, royalties and other fees charged to franchisees in accordance with the terms of their franchise agreements. Royalties and fees are recognized when earned.

 

The company has entered into franchise and license agreements, which grant the exclusive right to develop and operate within specified geographic territories for a fee. The initial franchise or license fee is deferred and recognized as revenue when substantially all significant services to be provided by the company are performed. Direct incremental costs related to franchise or license sales for which revenue has not been recognized is deferred until the related revenue is recognized.

 

Income Taxes

 

Effective on January 1, 2007, the company’s shareholders elected that the corporation be taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986, as amended (the “Code”). Under this provision, the shareholders were taxed on their proportionate share of the company’s taxable income. As a Subchapter S corporation, the company bore no liability or expense for income taxes. As a result of the Merger, the company’s Subchapter S election terminated, and the company became a C corporation. For state income tax purposes, the company has net operating losses of approximately $2,247,000, which begin to expire in 2017. It is expected that these net operating losses will be available for use after the Merger. HB Service, LLC is a limited liability company that reported as a partnership under the Code from January 1, 2007 until Messrs. Huizenga and Berrard contributed 100% of their equity interests of the company in July 2010. Under these provisions, the members are taxed on the limited liability company’s taxable income.

 

As a result of becoming a C corporation, the cumulative timing differences between book income and taxable income will be recorded as of November 2, 2010, the closing date of the Merger. Thereafter, the company will provide for the tax effects of transactions reported in the statements of operations, which will include taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting purposes. Deferred tax assets that arise from net operating loses will receive a full valuation allowance until such time as the company considers it likely that such assets will be utilized.

 

FASB ASC 740-10, “Income Taxes,” clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the balance sheet. It also provides guidance on derecognition, measurement and classification of amounts related to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim period disclosures and transition relating to the adoption of new accounting standards. Under FASB ASC 740-10, the recognition for uncertain tax positions should be based on a more likely than not threshold that the tax position will be sustained upon audit. The tax position is measured as the largest amount of benefit that has a greater than fifty percent probability of being realized upon settlement.

Foreign Currency Translation

 

Foreign currency denominated assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. The effect of exchange rate fluctuations on translation of assets and liabilities at the balance sheet date are recorded as a component of stockholders’ equity as other comprehensive income or loss. Amounts transferred from cumulative comprehensive income or loss upon the sale or liquidation of an investment in a foreign entity is reported as part of the gain or loss on sale or liquidation. Results of operations for foreign operations are translated using the average exchange rates throughout the period.

 

Fair Value of Financial Instruments

 

At December 31, 2009 and 2008, and the nine-months ended September 30, 2010, the company did not have any outstanding financial derivative instruments. The carrying amounts of cash and the current portion of accounts and notes receivable approximate fair value due to the short maturity of these instruments. The non-current notes receivable are presented at fair value due to rates generally being at current market rates. The fair value of the company’s long-term debt, estimated based on the current borrowing rates available to the company for bank loans with similar terms and maturities, approximates the carrying value of these liabilities.

 

Loss per Share

 

Basic and diluted loss per share was computed by dividing net loss less non-controlling interest by the weighted average number of common shares and common share equivalents (when the inclusion of such shares is not anti-dilutive) outstanding during the year.

SWISHER HYGIENE INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2009

 

 

 

 

Revenue

 

Total revenue and the revenue derived from each revenue type for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

Total revenue for the three-months ended September 30, 2010 increased $1,629,813 or 11.3% to $16,061,079 as compared to the same period of 2009. The $1,629,813 increase includes an increase of $2,012,930 in revenue from the acquisition of three franchisees and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the effect of these acquisitions, revenue for the three-months ended September 30, 2010 as compared to the same period of 2009 decreased $383,117 or 2.7% primarily from decreases of: (i) $657,669 or 15.5% in hygiene services and (ii) $128,300 or 4.5% in paper; and (iii) 915,348 or 30.0% in product sales and fees earned from the company’s remaining franchises, which were partly offset by increases of (x) $1,240,429 or 44.1% in chemical; and (y) $77,771 or 5.3% in rental and other.

 

The increase in chemical, rental, and other revenue is attributable to the success of the company’s corporate account and distributor sales programs that were launched during 2008, as well as sales by the company’s field employees. The decrease in hygiene services and paper revenue was primarily a result of the prolonged effect of the challenging economic conditions we have experienced. These economic conditions resulted in customer attrition, lower consumption levels of products and services, and a reduction or elimination in spending for hygiene-related products and services by customers of the company.

 

The decrease of $915,348 in product sales and fees earned from the company’s franchisees in the three months ended September 30, 2010 compared to the same period of 2009 includes a decline of $377,731 or 35.0% in fees and $537,617 or 27.2% in product sales, in part due to our acquiring three franchises in 2010 and 18 franchisees in 2009. Excluding the effect of the acquisitions, product sales and fees declined $107,180 or 3.5% for the three months ended September 30, 2010 compared to the same period of 2009. This decline of $107,180 includes increased product sales of $24,424 or 1.2% offset by lower fees of $131,604 or 12.2%. This decline is attributed to the prolonged effect of the challenging economic conditions being experienced by our franchisees. These economic conditions resulted in customer attrition, lower consumption levels of products and services and a reduction or elimination in spending for hygiene related products and services by franchise customers.

Cost of Sales

 

Cost of sales for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

 

 

Cost of sales consists primarily of paper, air freshener, chemical and other consumable products sold to our customers, franchisees and international licensees. Total cost of sales for the three-months ended September 30, 2010 increased $297,410 or 5.1% to $6,107,686 as compared to the same period of 2009. The $297,410 increase included an increase of $532,941 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the effect of the acquisitions, total cost of sales for the three-months ended September 30, 2010 as compared to the same period of 2009 decreased $235,531 or 4.1%.

 

The cost of sales for company-owned operations for the three-months ended September 30, 2010 increased $777,722 or 19.5% to $4,772,207 as compared to the same period of 2009. The $777,722 increase included an increase of $532,941 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Cost of sales for company-owned operations, excluding the impact of acquisitions, was 37.7% of related revenue for the three-months ended September 30, 2010 as compared to 37.3% for the same period of 2009. Excluding the impact of the acquisitions, cost of sales for company-owned operations increased $244,781 or 6.1% to $4,239,266 as compared to the same period of 2009. The $244,781 increase consisted primarily of $196,917 due to the current period’s increased product sales volume, $100,000 of allowances made for customer volume incentives achieved in the current period and partly offset by $52,136 of other changes in mix and improved product costs.

 

The cost of sales to franchisees for the three-months ended September 30, 2010 decreased $480,312 or 26.5% to $1,335,479 as compared to the same period of 2009 in part due to the acquisition of three franchises in 2010 and 18 franchises in 2009. Cost of sales to franchisees was 93.0% of franchisee product revenue for the three-months ended September 30, 2010 as compared to 92.0% for the same period of 2009. Excluding the effect of acquisitions, cost of goods sold increased $25,525 or 1.4% in the three months ended September 30, 2010 compared to the same period of 2009. The $25,525 increase was primarily a result of the period’s higher product sales to its remaining franchisees.

 

Route Expenses

 

Route expenses for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

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 September 30, 2010 and 2009 are as follows:

 

 

Route expenses for the three-months ended September 30, 2010 increased $336,503 or 10.6% to $3,511,409 as compared to the same period of 2009. The $336,503 increase included an increase of $680,877 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, route expenses for the three-months ended September 30, 2010 as compared to the same period of 2009 decreased $344,374 or 10.8% to $2,830,532. The decrease consisted of $282,915 in compensation, $50,100 in vehicle expenses and $11,359 in other route-related expenses. These decreases are a result of route consolidation and optimization initiatives made in response to the prolonged effect of the challenging economic conditions we have experienced. These economic conditions resulted in customer attrition, lower consumption levels of products and services and a reduction or elimination in spending for hygiene-related products and services by customers of the company. During the three month period ended September 30, 2010, compared to the same period in 2009, excluding the effect of acquisitions, the average number of route technicians decreased by 15.9%.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

Selling, general and administrative expenses consist primarily of the costs incurred by the company for:

 

 

Selling, general and administrative expenses for the three-months ended September 30, 2010 increased $1,152,497 or 18.1% to $7,521,046 as compared to the same period of 2009. The $1,152,497 increase included an increase of $642,181 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, selling, general and administrative expenses for the three-months ended September 30, 2010 as compared to the same period of 2009 increased $510,316 or 8.0% to $6,878,865.

The details of selling, general and administrative expenses for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

Compensation for the three-months ended September 30, 2010 increased $731,924 or 16.5% to $5,164,960 as compared to the same period of 2009. The $731,924 increase included an increase of $494,318 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, compensation expense for the three-months ended September 30, 2010 as compared to the same period of 2009 increased $237,606 or 5.4% to $4,670,642. This increase was primarily the result of an increase in costs and expenses related to the company expansion of its corporate, field and distribution sales organizations that began in 2009 and continued into 2010 to accelerate the growth in the company’s chemical program.

 

Occupancy expenses for the three-months ended September 30, 2010 increased $86,456 or 11.7% to $825,666 as compared to the same period of 2009. The $86,456 increase included an increase of $81,698 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, occupancy expenses for the three-months ended September 30, 2010, as compared to the same period of 2009, increased $4,758 or 0.6% to $743,968. This increase was primarily a result of rent modifications on a number of leases for company branch locations.

 

Other expenses for the three-months ended September 30, 2010 increased $334,117 or 27.9% to $1,530,420 as compared to the same period of 2009. The $334,117 increase included an increase of $66,165 related to the acquisition of three franchises and two independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, other expenses for the three-months ended September 30, 2010 as compared to the same period of 2009, increased $267,952 or 22.4% to $1,464,255. This increase was primarily a result of: $87,139 of office expenses, $34,156 of additional courier charges related to the increased number of locations, $21,181 of higher travel costs, increased insurance of $38,120 and the recovery of previously written off accounts in the amount of $21,484.

 

Merger-related Costs

 

As discussed more fully in Notes to the Consolidated Financial Statements Note 5 Subsequent Events, on November 2, 2010 the Company entered into a merger agreement under which all of the outstanding common shares of the Company were to be exchanged for 57,789,630 common shares of CoolBrands International Inc. (“CoolBrands”), such that the Company would become a wholly-owned subsidiary of CoolBrands. In connection with this transaction, the Company incurred certain directly-related legal, accounting and other professional expenses. These non-recurring expenses totaled $1,425,855 and were incurred entirely in the three month period ended September 30, 2010.

 

Depreciation and Amortization

 

Depreciation and amortization for the three-months ended September 30, 2010 and 2009 are as follows:

 

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization for the three-months ended September 30, 2010 increased $91,918 or 7.8% to $1,272,266 as compared to the same period of 2009. The increase of $91,918 reflects the higher level of capital spending in 2010 versus 2009 as well as higher amortization expense in connection with the acquisition of 18 franchises and an independent chemical company in 2009.

 

Other Income (Expense)

 

Other income (expense) for the three-months ended September 30, 2010 and 2009 are as follows:

 

 

Interest income primarily relates to a note receivable from our master licensee in the UK. The agreement with the master licensee was executed in January 2009, but transitional issues were not settled until the third quarter of 2009. Interest income was determined and recorded at that time, resulting in significantly greater interest income compared to the comparable period of 2010. Through the nine months ended September 30, 2010, the total interest earned was $42,712, which is comparable to the interest earned in the corresponding period in 2009.

 

Interest expense represents interest on borrowings under the company’s credit facilities, notes incurred in connection with acquisitions, advances from shareholders and the purchase of equipment and software. Interest expenses for the three-months ended September 30, 2010 increased $113,453 or 44.0% to $371,093 as compared to the same period of 2009. The $113,453 increase is primarily a result of a $6,973,553 year-to-year increase in notes and shareholder advances.

 

The gain from bargain purchases recognized in 2009 was related to our acquisition of one franchisee where the fair value of the assets acquired exceeded the purchase price.

SWISHER HYGIENE INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2009

 

 

 

 

Revenue

 

Total revenue and the revenue derived from each revenue type for the nine-months ended September 30, 2010 and 2009 are as follows:

 

 

Total revenue for the nine-months ended September 30, 2010 increased $4,280,350 or 10.3% to $45,953,570 as compared to the same period of 2009. The $4,280,350 increase includes an increase of $7,306,842 in revenue from the acquisitions of three franchises and three independent chemical companies in 2010 and 18 franchises and an independent chemical company in 2009. Excluding the impact of acquisitions, product and service revenue increased $583,913 which was offset by a $3,610,405 loss in franchise products sales and fees earned in 2009 in part from the loss of sales to the acquired franchises. Excluding the effect of these acquisitions, revenue for the nine-months ended September 30, 2010 as compared to the same period of 2009 decreased $3,026,492 or 7.3% primarily from decreases of: (i) $2,439,523 or 20.5% in hygiene services; (ii) $694,537 or 8.5% in paper; (iii) $323,999 or 7.4% in rental and other; and (iv) $3,610,405 or 35.8% in product sales and fees earned from the company’s remaining franchises. These decreases were partially offset by a $4,041,972 or 56.8% increase in chemical revenue.

 

The increase in chemical revenue is attributable to the success of the company’s corporate account and distributor sales programs that were launched during 2008, as well as sales by the company’s field employees. The decrease in hygiene services, paper and rental and other revenue was primarily a result of the prolonged effect of the challenging economic conditions we have experienced. These economic conditions resulted in customer attrition, lower consumption levels of products and services, and a reduction or elimination in spending for hygiene-related products and services by customers of the company.

 

The decrease of $3,610,405 or 35.8% in product sales and fees earned from the company’s franchisees in the nine months ended September 30, 2010 compared to the same period of 2009 includes a decline of $1,320,510 or 37.2% in fees and $2,289,895 or 35.1% in product sales, in part due to our acquiring three franchises in 2010 and 18 franchisees in 2009 . Excluding the effect of the acquisitions, product sales and fees declined $456,799 or 4.5% for the nine months ended September 30, 2010 compared to the same period of 2009. This decline of $456,799 includes decreased product sales of $138,170 or 2.1% and lower fees of 318,629 or 9.0%. This decline is attributed to the prolonged effect of the challenging economic conditions being experienced by our franchisees. These economic conditions resulted in customer attrition, lower consumption levels of products and services and a reduction or elimination in spending for hygiene related products and services by franchise customers.

Cost of Sales

 

Cost of sales for the nine-months ended September 30, 2010 and 2009 are as follows: