Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - Swisher Hygiene Inc. | Financial_Report.xls |
EX-32.2 - EX-32.2 - Swisher Hygiene Inc. | g27336exv32w2.htm |
EX-31.2 - EX-31.2 - Swisher Hygiene Inc. | g27336exv31w2.htm |
EX-31.1 - EX-31.1 - Swisher Hygiene Inc. | g27336exv31w1.htm |
EX-32.1 - EX-32.1 - Swisher Hygiene Inc. | g27336exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35067
SWISHER HYGIENE INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 27-3819646 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
Incorporation or Organization) | ||
4725 Piedmont Row Drive, Suite 400 | ||
Charlotte, North Carolina | 28210 | |
(Address of Principal Executive Offices) | (Zip Code) |
(704) 364-7707
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. Check one:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act). Yes o No þ
Number of shares outstanding of each of the registrants classes of Common Stock at August 12,
2011: 173,473,566 shares of Common Stock, $0.001 par value per share.
SWISHER HYGIENE INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
TABLE OF CONTENTS
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
TABLE OF CONTENTS
3 | ||||||||
20 | ||||||||
35 | ||||||||
35 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
EX-31.1 |
||||||||
EX-31.2 |
||||||||
EX-32.1 |
||||||||
EX-32.2 |
||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
Balance at | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 112,434,487 | $ | 38,931,738 | ||||
Restricted cash |
| 5,193,333 | ||||||
Accounts receivable (net of allowance for doubtful accounts of $544,505
at June 30, 2011 and $334,156 at December 31, 2010) |
23,985,659 | 7,068,629 | ||||||
Inventory |
10,848,743 | 2,968,076 | ||||||
Other assets |
2,327,617 | 894,719 | ||||||
Total current assets |
149,596,506 | 55,056,495 | ||||||
Property and equipment, net |
58,516,544 | 11,324,055 | ||||||
Goodwill |
139,637,334 | 29,660,309 | ||||||
Other intangibles, net |
74,377,697 | 7,668,805 | ||||||
Other noncurrent assets |
4,709,763 | 2,524,598 | ||||||
$ | 426,837,844 | $ | 106,234,262 | |||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable, accrued expenses, and other current liabilities |
$ | 26,798,352 | $ | 9,335,932 | ||||
Short term obligations |
9,349,722 | 13,378,710 | ||||||
Advances from shareholder |
2,000,000 | 2,000,000 | ||||||
Total current liabilities |
38,148,074 | 24,714,642 | ||||||
Long term obligations |
31,171,918 | 31,028,992 | ||||||
Deferred income tax liabilities |
6,273,702 | 1,700,000 | ||||||
Other long term liabilities |
4,020,508 | 2,763,051 | ||||||
Total noncurrent liabilities |
41,466,128 | 35,492,043 | ||||||
Commitments and contingencies |
||||||||
Equity |
||||||||
Swisher Hygiene Inc. stockholders equity |
||||||||
Common stock, par value $0.001, authorized 400,000,000 shares;
172,559,865 and 114,015,063 shares issued and outstanding at
June 30, 2011 and December 31, 2010, respectively |
172,559 | 114,015 | ||||||
Additional paid-in capital |
366,360,979 | 54,725,897 | ||||||
Accumulated deficit |
(19,338,496 | ) | (8,996,759 | ) | ||||
Accumulated other comprehensive income |
28,600 | 73,985 | ||||||
Total Swisher Hygiene Inc. stockholders equity |
347,223,642 | 45,917,138 | ||||||
Non-controlling interest |
| 110,439 | ||||||
Total equity |
347,223,642 | 46,027,577 | ||||||
$ | 426,837,844 | $ | 106,234,262 | |||||
See Notes to the Condensed Consolidated Financial Statements
3
Table of Contents
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
||||||||||||||||
Product |
$ | 27,976,912 | $ | 8,546,972 | $ | 43,403,734 | $ | 16,711,000 | ||||||||
Service |
22,662,566 | 4,478,028 | 33,121,018 | 8,856,573 | ||||||||||||
Franchise |
1,036,597 | 2,138,556 | 2,547,626 | 4,324,918 | ||||||||||||
Total revenue |
51,676,075 | 15,163,556 | 79,072,378 | 29,892,491 | ||||||||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
17,714,630 | 5,453,562 | 27,298,315 | 10,762,510 | ||||||||||||
Route expenses |
13,158,313 | 3,174,055 | 20,273,384 | 6,348,231 | ||||||||||||
Selling, general, and administrative |
18,891,070 | 6,867,195 | 31,215,939 | 13,374,350 | ||||||||||||
Acquisition and merger expenses |
2,775,258 | | 4,091,236 | | ||||||||||||
Depreciation and amortization |
6,084,424 | 1,083,908 | 8,792,376 | 2,126,739 | ||||||||||||
Total costs and expenses |
58,623,695 | 16,578,720 | 91,671,250 | 32,611,830 | ||||||||||||
Loss from operations |
(6,947,620 | ) | (1,415,164 | ) | (12,598,872 | ) | (2,719,339 | ) | ||||||||
Other expense, net |
(3,692,610 | ) | (354,474 | ) | (5,965,729 | ) | (645,738 | ) | ||||||||
Net loss before income taxes |
(10,640,230 | ) | (1,769,638 | ) | (18,564,601 | ) | (3,365,077 | ) | ||||||||
Income tax benefit |
3,513,071 | | 8,222,864 | | ||||||||||||
Net loss |
$ | (7,127,159 | ) | $ | (1,769,638 | ) | $ | (10,341,737 | ) | $ | (3,365,077 | ) | ||||
Loss per share |
||||||||||||||||
Basic and diluted |
$ | (0.04 | ) | $ | (0.03 | ) | $ | (0.07 | ) | $ | (0.06 | ) | ||||
Weighted-average common shares used in
the computation of loss per share |
||||||||||||||||
Basic and diluted |
164,972,640 | 57,894,852 | 144,097,478 | 57,862,241 | ||||||||||||
See Notes to the Condensed Consolidated Financial Statements
4
Table of Contents
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2011
FOR THE SIX MONTHS ENDED JUNE 30, 2011
Accumulated | Swisher | |||||||||||||||||||||||||||||||
Additional | Other | Hygiene Inc. | Non- | |||||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Shareholders | controlling | Total | ||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income | Equity | Interest | Equity | |||||||||||||||||||||||||
Balance as of December 31, 2010 |
114,015,063 | $ | 114,015 | $ | 54,725,897 | $ | (8,996,759 | ) | $ | 73,985 | $ | 45,917,138 | $ | 110,439 | $ | 46,027,577 | ||||||||||||||||
Shares issued in connection with private placements |
34,119,643 | 34,119 | 191,202,396 | 191,236,515 | 191,236,515 | |||||||||||||||||||||||||||
Shares issued in connection with the acquisition of Choice |
8,281,920 | 8,282 | 48,772,244 | 48,780,526 | 48,780,526 | |||||||||||||||||||||||||||
Shares issued in connection with acquisitions |
6,310,789 | 6,311 | 44,060,550 | 44,066,861 | 44,066,861 | |||||||||||||||||||||||||||
Shares issued in connection with and purchases of
property and equipment and to settle liabilities |
394,991 | 395 | 1,182,167 | 1,182,562 | 1,182,562 | |||||||||||||||||||||||||||
Shares issued for non-controlling interest |
25,000 | 25 | 103,679 | 6,735 | 110,439 | (110,439 | ) | | ||||||||||||||||||||||||
Conversion of promissory note payable |
3,207,459 | 3,207 | 21,191,096 | 21,194,303 | 21,194,303 | |||||||||||||||||||||||||||
Stock based compensation |
1,762,439 | 1,762,439 | 1,762,439 | |||||||||||||||||||||||||||||
Exercise of stock options and warrants |
6,205,000 | 6,205 | 3,360,511 | 3,366,716 | 3,366,716 | |||||||||||||||||||||||||||
Foreign currency translation adjustment |
(45,385 | ) | (45,385 | ) | (45,385 | ) | ||||||||||||||||||||||||||
Net loss before purchase of non-controlling interest |
(10,348,472 | ) | (10,348,472 | ) | (10,348,472 | ) | ||||||||||||||||||||||||||
Balance as of June 30, 2011 |
172,559,865 | $ | 172,559 | $ | 366,360,979 | $ | (19,338,496 | ) | $ | 28,600 | $ | 347,223,642 | $ | | $ | 347,223,642 | ||||||||||||||||
See Notes to the Condensed Consolidated Financial Statements
5
Table of Contents
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash used in operating activities |
||||||||
Net loss |
$ | (10,341,737 | ) | $ | (3,365,077 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities: |
||||||||
Depreciation and amortization |
8,792,376 | 2,126,738 | ||||||
Stock based compensation |
1,762,439 | | ||||||
Unrealized loss, net |
5,586,000 | | ||||||
Deferred income tax liabilities |
(7,427,804 | ) | | |||||
Changes in working capital components: |
||||||||
Accounts receivable |
(4,989,429 | ) | (46,519 | ) | ||||
Inventory |
(2,998,400 | ) | (337,253 | ) | ||||
Other assets and noncurrent assets |
(1,056,325 | ) | (330,096 | ) | ||||
Accounts payable, accrued expenses, and other liabilities |
468,680 | 1,691,905 | ||||||
Cash used in operating activities |
(10,204,200 | ) | (260,302 | ) | ||||
Cash used in investing activities |
||||||||
Purchases of property and equipment |
(7,453,258 | ) | (2,765,510 | ) | ||||
Acquisitions, net of cash acquired and share issuance costs |
(67,717,485 | ) | (50,000 | ) | ||||
Restricted cash |
5,193,333 | | ||||||
Cash used in investing activities |
(69,977,410 | ) | (2,815,510 | ) | ||||
Cash provided by financing activities |
||||||||
Proceeds from private placements, net of issuance costs |
191,236,515 | | ||||||
Principal payments on acquired Choice debt |
(39,219,160 | ) | | |||||
Proceeds from line of credit, net of issuance costs |
27,496,355 | | ||||||
Payoff of lines of credit |
(27,779,355 | ) | | |||||
Principal payments on debt |
(1,416,712 | ) | (1,371,605 | ) | ||||
Proceeds from exercise of stock options and warrants |
3,366,716 | | ||||||
Payment of shareholder advance |
| (800,000 | ) | |||||
Proceeds from advances from shareholders |
| 4,600,000 | ||||||
Cash provided by financing activities |
153,684,359 | 2,428,395 | ||||||
Net increase (decrease) in cash and cash equivalents |
73,502,749 | (647,417 | ) | |||||
Cash and cash equivalents at the beginning of the period |
38,931,738 | 1,270,327 | ||||||
Cash and cash equivalents at the end of the period |
$ | 112,434,487 | $ | 622,910 | ||||
See Notes to the Condensed Consolidated Financial Statements
6
Table of Contents
SWISHER HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS DESCRIPTION
Principal Operations
Swisher Hygiene Inc. and its wholly-owned subsidiaries (the Company or we or our)
provide essential hygiene and sanitation solutions to customers throughout much of North America
and internationally through its global network of company owned operations, franchises and master
licensees. These solutions include essential products and services that are designed to promote
superior cleanliness and sanitation in commercial environments, while enhancing the safety,
satisfaction and well-being of employees and patrons. These solutions are typically delivered by
employees on a regularly scheduled basis and involve providing our customers with: (i) consumable
products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the
rental and servicing of dish machines and other equipment for the dispensing of those products;
(ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor
mats, mops, bar towels and linens; (iii) manual cleaning of their facilities; and (iv) solid waste
collection services. We serve customers in a wide range of end-markets, with a particular emphasis
on the foodservice, hospitality, retail, industrial, and healthcare industries. In addition, our
solid waste collection services provide services primarily to commercial and residential customers
through contracts with municipalities or other agencies.
The Company has company owned operations and franchise operations located throughout the
United States and Canada and has 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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance
with United States generally accepted accounting principles (GAAP) for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission (SEC) and therefore do not contain all of
the information and footnotes required by GAAP and the SEC for annual financial statements. The
Companys Condensed Consolidated Financial Statements reflect all adjustments (consisting only of
normal recurring adjustments) that management believes are necessary for the fair presentation of
their financial condition, results of operations, and cash flows for the periods presented. The
information at December 31, 2010 in the Companys Condensed Consolidated Balance Sheets included in
this quarterly report was derived from the audited Consolidated Balance Sheets included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on
March 31, 2011. The Companys 2010 Annual Report on Form 10-K, together with the information
included in such report, is referred to in this quarterly report as the 2010 Annual Report. This
quarterly report should be read in conjunction with the 2010 Annual Report.
All material intercompany balances and transactions have been eliminated in consolidation.
Certain adjustments have been made to conform prior periods to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses and disclosure of contingent assets and liabilities at the date of the Condensed
Consolidated Financial Statements. Actual results could differ from those estimates and such
differences could affect the results of operations reported in future periods.
The Companys significant accounting policies are discussed in Note 2 of the Notes to
Consolidated Financial Statements in the 2010 Annual Report. Any significant changes to those
policies or new significant policies are described below.
7
Table of Contents
Acquisition and merger expenses
Acquisition and merger expenses include costs directly related to the acquisition of three of
our franchises and fifteen independent businesses during the three months ended June 30, 2011 and
the acquisition of seven of our franchises and twenty-five independent businesses during the six
months ended June 30, 2011. Acquisition and merger expenses also include costs directly-related to
the merger with CoolBrands International, Inc. as discussed in Note 1 of our 2010 Annual Report.
These costs include third party due diligence, legal, accounting and professional service expenses.
Segments
On March 1, 2011, the Company completed its acquisition of Choice Environmental Services, Inc.
(Choice), a Florida based company that provides a complete range of solid waste and recycling
collection, transportation, processing and disposal services. As a result of the acquisition of
Choice, the Company now has two segments: (1) Hygiene and (2) Waste. The Companys hygiene segment
primarily provides commercial hygiene services and products throughout much of the United States,
and additionally operates a worldwide franchise and license system to provide the same products and
services in markets where Company owned operations do not exist. The Companys waste segment
primarily consists of the operations of Choice and acquisitions of solid waste
collection businesses. Prior to the acquisition of Choice, the Company managed, allocated
resources, and reported in one segment, Hygiene. See Note 14 for segment disclosures.
Adoption of Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the FASB issued new standards for multiple-deliverable
revenue arrangements. These new standards affect the determination of when individual deliverables
included in a multiple-element arrangement may be treated as separate units of accounting. In
addition, these new standards modify the manner in which the transaction consideration is allocated
across separately identified deliverables, eliminate the use of the residual value method of
allocating arrangement consideration and require expanded disclosure. These new standards became
effective for multiple-element arrangements entered into or materially modified on or after January
1, 2011. Earlier application was permitted with required transition disclosures based on the period
of adoption. We adopted these standards for multiple-element arrangements entered into or
materially modified on or after January 1, 2011. The adoption of this accounting standard did not
have a material impact on the Companys Condensed Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued new standards defining when step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts should be performed and
modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For reporting units with zero or negative carrying amounts an entity is required to
perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that
an impairment may exist. The standards are effective for fiscal years and interim periods within
those years, beginning after December 15, 2010 and were effective for the Company on January 1,
2011. The adoption of this accounting standard did not have a material impact on the Companys
Condensed Consolidated Financial Statements.
Business Combinations: In December 2010, the FASB issued new standards that clarify that if
comparative financial statements are presented the entity should disclose revenue and earnings of
the combined entity as though the business combination(s) that occurred during the current year had
occurred as of the beginning of the comparable prior annual reporting period only. The update also
expands the supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The standards are effective prospectively
for material (either on an individual or aggregate basis) business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2010, with early adoption permitted. The Company has included the required
disclosures in Note 3.
Newly Issued Accounting Pronouncements
Comprehensive Income: In June 2011, the FASB issued new standards to improve
the comparability, consistency, and transparency of financial reporting and to increase
the prominence of items reported in other comprehensive income. This standard eliminates
the option to present components of other
8
Table of Contents
comprehensive income as part of the statement of
changes in stockholders equity. These standards are to be applied retrospectively and are
effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. Early application is permitted. We are currently evaluating the effect
of these standards on our Consolidated Financial Statements.
Fair Value Measurements: In May 2011, the FASB issued new standards clarifying
the wording used to describe the requirements for measuring fair value and for disclosing
information about fair value measurements and expands fair value disclosures. These
standards are to be applied prospectively and are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011. Early application is not
permitted. We are currently evaluating the effect of these standards on our Consolidated
Financial Statements.
NOTE 3 ACQUISITIONS
Choice Acquisition
On February 13, 2011, we entered into an Agreement and Plan of Merger (the Choice Agreement)
with Swsh Merger Sub, Inc., a Florida corporation and wholly-owned subsidiary of the Company,
Choice, and other parties, as set forth in the Choice Agreement. The Choice Agreement provided for
the acquisition of Choice by the Company by way of merger.
In connection with the merger with Choice, on February 23, 2011, we entered into an agency
agreement, which the agents agreed to market, on a best efforts basis 12,262,500 subscription
receipts (Subscription Receipts) at a price of $4.80 per Subscription Receipt for gross proceeds
of up to $58,859,594. Each Subscription Receipt entitled the holder to acquire one share of our
common stock, without payment of any additional consideration, upon completion of our acquisition
of Choice.
On March 1, 2011, we closed the acquisition of Choice and issued 8,281,920 shares of our
common stock to the former shareholders of Choice and assumed $40,941,484 of debt, which
$39,219,160 was paid down with proceeds from the private placement of the Subscription Receipts. In
addition, certain shareholders of Choice received $5,700,000 in cash and warrants to purchase an
additional 918,076 shares at an exercise price of $6.21, which expired on March 31, 2011 and were
not exercised.
On March 1, 2011, in connection with the closing of the acquisition of Choice, the 12,262,500
Subscription Receipts were exchanged for 12,262,500 shares of our common stock. We agreed to use
commercially reasonable efforts to file a resale registration statement with the SEC relating to
the shares of common stock underlying the Subscription Receipts. If the registration statement was
not filed or declared effective within specified time periods, or if it ceased to be effective for
a period of time exceeding certain grace periods, the initial subscribers of Subscription Receipts
would be entitled to receive an additional 0.1 share of common stock for each share of common stock
underlying Subscription Receipts held by any such initial subscriber at that time. The Company filed a
resale registration statement with the SEC relating to the 8,291,920
shares issued to the former shareholders of Choice and the 12,262,500
shares issued in connection with the private placement. The
registration statement was effective as of the date of this filing.
Choice has been in business since 2004 and serves more than 150,000 residential and 7,500
commercial customers in the Southern and Central Florida regions through its 320 employees and over
150 collection vehicles by offering a complete range of solid waste and recycling collection,
transportation, processing and disposal services. Choice operates six hauling operations and three
transfer and material recovery facilities.
The following table presents the purchase price consideration as of March 1, 2011:
Consideration: |
||||
Issuance of shares at stock price of $5.89 |
$ | 48,780,526 | ||
Debt |
40,941,484 | |||
Cash paid |
7,553,784 | |||
$ | 97,275,794 | |||
The preliminary allocation of the purchase price is based on the best information
available to management. This allocation is provisional, as the Company is required to recognize
additional assets or liabilities if new information is obtained about facts and circumstances that
existed as of March 1, 2011 that, if known, would have resulted in the
9
Table of Contents
recognition of those assets
or liabilities as of that date. The Company may adjust the preliminary purchase price allocation
after obtaining additional information regarding asset valuation, liabilities assumed and revisions
of previous estimates. The following table summarizes the preliminary allocation of the purchase
price based on the estimated fair value of the acquired assets and assumed liabilities of Choice as
of March 1, 2011 as follows:
Net tangible assets acquired: |
||||
Cash and cash equivalents |
$ | 340,870 | ||
Receivables |
6,095,801 | |||
Inventory |
150,833 | |||
Property and equipment |
29,618,377 | |||
Customer contracts |
27,840,000 | |||
Non-compete agreements |
2,880,000 | |||
Deferred income tax assets and other assets |
2,234,452 | |||
Accounts payable and accrued expenses |
(7,960,210 | ) | ||
Capital lease obligations |
(3,523,615 | ) | ||
Deferred income tax liabilities |
(12,001,506 | ) | ||
Total tangible assets acquired |
45,675,002 | |||
Goodwill |
51,600,792 | |||
Total purchase price |
97,275,794 | |||
Less: Debt assumed |
(40,941,484 | ) | ||
Less: Issuance of shares |
(48,780,526 | ) | ||
Cash paid (including prepayment penalty of $1,853,784) |
$ | 7,553,784 | ||
Other assets include approximately $721,000 of notes receivable from prior Choice
shareholders. In addition, the Companys Condensed Consolidated Financial Statements for the three
months ended June 30, 2011 includes $15,629,158 of revenue and $108,019 of net loss before income
taxes related to Choice and for the six months ended June 30, 2011 includes $21,874,676 of revenue
and $233,015 of net loss before income taxes related to Choice.
Other Acquisitions
During the three months ended June 30, 2011, the Company acquired three of its franchisees and
fifteen independent businesses. During the six months ended June 30, 2011, the Company acquired
seven of its franchisees and twenty-four independent businesses, excluding Choice. The Companys
Condensed Consolidated Financial Statements include the results of operations of these acquisitions
since their respective acquisition dates, which include $16,371,792 of revenue and $1,082,706 of
net loss before income taxes for the three months ended June 30, 2011 and $21,683,094 of revenue
and $773,153 of net loss before income taxes for the six months ended June 30, 2011.
The following table summarizes the current estimated aggregate fair values of the assets
acquired and liabilities assumed at the date of acquisition for these acquisitions made during the
three and six months ended June 30, 2011, excluding Choice:
10
Table of Contents
Three Months Ended | Six Months Ended | |||||||
June 30, 2011 | June 30, 2011 | |||||||
Number of businesses acquired |
18 | 31 | ||||||
Net tangible assets acquired |
||||||||
Accounts receivable and other assets |
$ | 5,518,953 | $ | 6,172,803 | ||||
Inventory |
4,268,047 | 4,725,137 | ||||||
Property and equipment |
13,211,839 | 14,073,659 | ||||||
Accounts payable and accrued expenses |
(6,612,002 | ) | (7,138,972 | ) | ||||
Total |
16,386,837 | 17,832,627 | ||||||
Identifiable intangible assets: |
||||||||
Customer relationships |
30,146,200 | 35,592,600 | ||||||
Non-compete agreements |
3,609,300 | 4,941,200 | ||||||
Total |
33,755,500 | 40,533,800 | ||||||
Goodwill |
50,040,953 | 58,314,053 | ||||||
Aggregate purchase price |
100,183,290 | 116,680,480 | ||||||
Less: Stock issued |
42,183,050 | 44,126,550 | ||||||
Less: Contingent consideration |
1,827,734 | 3,017,734 | ||||||
Less: Cash held back |
500,000 | 500,000 | ||||||
Less: Notes issued or assumed |
| 8,598,700 | ||||||
Cash paid on acquisitions |
$ | 55,672,506 | $ | 60,437,496 | ||||
Contingent consideration includes (1) earn outs, which are based on the achievement
of contractually negotiated levels of performance by certain of our acquired businesses and are
payable at defined intervals through March 31, 2014 and (2) the performance of the Companys stock
price over a limited period from the date of the acquisition, typically less than 30 days.
See Note 16 for additional acquisitions subsequent to June 30, 2011.
Supplemental pro forma information
The following supplemental pro forma information presents the financial results as if all the
acquisitions, including Choice, made during the six months ended June 30, 2011 had occurred as of
January 1, 2011 for the three and six months ended June 30, 2011 and on January 1, 2010 for the
three and six months ended June 30, 2010. The supplemental pro forma information does not include
those acquisitions made during the year ended December 31, 2010.
Pro forma adjustments for the three months ended June 30, 2011 and 2010 primarily include
adjustments to reflect additional depreciation and amortization of $425,569 and $2,308,850,
respectively, related to the identifiable intangible assets recorded as part of the acquisition.
Pro forma adjustments for the six months ended June 30, 2011 and 2010 primarily include
adjustments to reflect additional depreciation and amortization of $2,212,292 and $4,617,700,
respectively, related to the identifiable intangible assets recorded as part of the acquisition.
In addition, an adjustment was made for acquisition and merger expenses of $2,775,258 and
$4,091,236 for the three and six months ended June 30, 2011 and 2010, respectively.
11
Table of Contents
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pro forma revenue |
$ | 58,069,287 | $ | 46,368,282 | $ | 115,108,695 | $ | 92,606,701 | ||||||||
Pro forma net loss |
$ | (3,170,758 | ) | $ | (1,538,560 | ) | $ | (7,633,654 | ) | $ | (2,077,152 | ) | ||||
The above supplemental pro forma information has been prepared from the unaudited results
of the acquired businesses for comparative purposes and does not purport to be indicative of what
would have occurred had these acquisitions been completed on January 1, 2011 or January 1, 2010.
Pro forma information does not include certain going-forward cost savings and synergies, which may
be realized by the combined operations. Accordingly, they may not be indicative of any future
results of the Company.
NOTE 4 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets have been recognized in connection with the acquisitions
described in Note 3 and substantially all of the balance is expected to be fully deductible for
income tax purposes, except for goodwill related to the acquisition of Choice, which was a stock
acquisition. Changes in the carrying amount of goodwill and other intangibles for each of the
Companys segments during the six months ended June 30, 2011 were as follows:
Hygiene | Waste | |||||||
Goodwill |
||||||||
Balance December 31 |
||||||||
Gross goodwill |
$ | 30,530,309 | $ | | ||||
Accumulated impairment losses |
(870,000 | ) | | |||||
$ | 29,660,309 | $ | | |||||
Goodwill acquired |
44,455,785 | 65,459,060 | ||||||
Foreign exchange translation |
62,180 | | ||||||
Balance June 30 |
||||||||
Gross goodwill |
75,048,274 | 65,459,060 | ||||||
Accumulated impairment losses |
(870,000 | ) | | |||||
$ | 74,178,274 | $ | 65,459,060 | |||||
Customer Relationships and Contracts |
||||||||
Balance December 31 |
$ | 5,779,980 | $ | | ||||
Customers acquired |
28,612,600 | 34,820,000 | ||||||
Amortization |
(2,044,871 | ) | (1,448,990 | ) | ||||
Foreign exchange translation |
67,057 | | ||||||
Balance June 30 |
$ | 32,414,766 | $ | 33,371,010 | ||||
Non-compete Agreements |
||||||||
Balance December 31 |
$ | 1,888,825 | $ | | ||||
Agreements |
4,461,200 | 3,360,000 | ||||||
Amortization |
(731,702 | ) | (408,959 | ) | ||||
Foreign exchange translation |
22,557 | | ||||||
Balance June 30 |
$ | 5,640,880 | $ | 2,951,041 | ||||
12
Table of Contents
Hygiene Segment
The fair value of the customer relationships and contracts acquired is based on future
discounted cash flows expected to be generated from those customers. These customer relationships
and contracts will be amortized on a straight-line basis over five to ten years, which is primarily
based on historical customer attrition rates. The fair value of the non-compete agreements will be
amortized on a straight-line basis over the length of the agreements, typically not exceeding five
years.
Waste Segment
The fair value of the customer relationships and contracts acquired is based on future
discounted cash flows expected to be generated from contracts with municipalities and customers.
These customer relationships and contracts will be amortized on a straight-line basis over seven
years, which is the weighted average of the estimated life of the contracts acquired. The fair
value of the non-compete agreements will be amortized on a straight-line basis over the length of
the agreements, typically not exceeding five years.
NOTE 5 EQUITY
Choice
As part of the purchase price of Choice we issued 8,281,920 shares of our common stock to the
previous shareholders of Choice. See Note 3.
Private placements
As discussed in Note 3, on March 1, 2011, in connection with the closing of the Choice
acquisition, the 12,262,500 Subscription Receipts were exchanged for 12,262,500 shares of our
common stock. As part of this transaction, we received cash of $56,253,791, net of issuance costs.
In addition, on March 22, 2011, we entered into a series of arms length securities purchase
agreements to sell 12,000,000 shares of our common stock at a price of $5.00 per share, for
aggregate proceeds of $60,000,000 to certain funds of a global financial institution (the Private
Placement). We intend to use the proceeds from the Private Placement to further our organic and
acquisition growth strategy, as well as for working capital purposes. On March 23, 2011, we closed
the Private Placement and issued 12,000,000 shares of our common stock. Pursuant to the securities
purchase agreements, the shares of common stock issued in the Private Placement may not be
transferred on or before June 24, 2011 without our consent. We agreed to use commercially
reasonable efforts to file a resale registration statement with the SEC relating to the shares of
common stock sold in the Private Placement. If the registration statement was not filed or declared
effective within specified time periods, the investors would be entitled to receive liquidated
damages in cash equal to one percent of the original offering price for each share that at such
time remains subject to resale restrictions. The Company filed a
resale registration statement with the SEC relating to the 12,000,000
shares issued in the Private Placement. The registration statement
was effective as of the date of this filing.
On April 15, 2011, we entered into a series of arms length securities purchase agreements to
sell 9,857,143 shares of our common stock at a price of $7.70 per share, for aggregate proceeds of
$75,900,000 to certain funds of a global financial institution. We completed this transaction on
April 19, 2011 and intend to use the proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital purposes.
Pursuant to the securities purchase agreements, following July 24, 2011 the Company agreed to
use commercially reasonable efforts to file a resale registration statement with the SEC relating
to the shares of common stock sold in the private placement. If the registration statement was not
filed or declared effective within the specified time periods, the investors would be entitled to
receive liquidated damages in cash equal to one percent of the original offering price for each
share that at such time remains subject to resale restrictions. The
Company filed a resale registration statement with the SEC relating
to the 9,857,143 shares. The registration statement was effective as
of the date of this filing.
13
Table of Contents
Acquisitions and asset purchases
We issued a total of 6,310,789 shares of our common stock in connection with certain
acquisitions of franchisees and businesses during the six months ended June 30, 2011. In addition
during the six months ended June 30, 2011, we issued 394,991 shares for purchases of property and
equipment of $194,683and to settle $987,879 of liabilities.
Stock based compensation and warrants
Stock based compensation is the result of the recognition of the fair value of share based
compensation on the date of grant over the service period for which the awards are expected to
vest. Options to purchase 705,000 shares were exercised at a weighted average exercise price of
$0.88 during 2011.
In May 2011, warrants to purchase 5,500,000 shares with an exercise price of $0.50 in Canadian
dollars per warrant issued to a director of CoolBrands and the Company, and certain parties related
to the director, were exercised and as a result, we received cash of $2,750,000 in Canadian
dollars.
Convertible promissory note
During 2011, convertible promissory notes with an aggregate principal amount of $13,621,480
were converted into 3,207,459 shares of the Companys common stock.
NOTE 6 LONG TERM OBLIGATIONS
Debt consisted of the following as of June 30, 2011 and December 31, 2010:
December 31, | ||||||||
June 30, 2011 | 2010 | |||||||
Line of credit agreement dated March 2008.
Interest is payable monthly at one month LIBOR plus
2.85% at December 31, 2010. Interest rate of 3.11% at
December 31, 2010 |
$ | | $ | 9,946,932 | ||||
Line of credit agreement dated June 2008. Interest is
payable monthly at one month LIBOR plus 1.50% at
December 31, 2010. Interest rate of 1.76% at December
31, 2010 |
| 15,000,000 | ||||||
Line of credit agreement dated March 2011 and matures
in July 2013. Interest rate of 1.25% at June 30, 2011 |
24,632,050 | | ||||||
Acquisition notes payables |
7,823,048 | 7,891,209 | ||||||
Capitalized lease obligations with related parties |
3,459,264 | | ||||||
Capitalized lease obligations |
804,767 | 549,504 | ||||||
Notes payable under Master Loan and Security
Agreement, due in monthly installments and maturing in
2012. Interest is payable monthly at a weighted
average interest rate of 8% at June 30, 2011 and
December 31, 2010 |
54,811 | 248,577 | ||||||
Convertible promissory notes: |
||||||||
6% Note due June 30, 2011 |
| 5,000,000 | ||||||
4% Notes at various dates through December 15, 2011 |
3,747,700 | 5,771,480 | ||||||
40,521,640 | 44,407,702 | |||||||
Short term obligations |
(9,349,722 | ) | (13,378,710 | ) | ||||
Long term obligations |
$ | 31,171,918 | $ | 31,028,992 | ||||
Revolving Credit Facilities
In March 2011, we entered into a $100 million senior secured revolving credit facility (the
credit facility). Borrowings under the credit facility are secured by a first priority lien on
substantially all of our existing and hereafter acquired assets, including $25 million of cash on
borrowings in excess of $75 million. Furthermore, borrowings under the facility are guaranteed by
all of our domestic subsidiaries and secured by substantially all the assets and stock of our
domestic subsidiaries and substantially all of the stock of our foreign subsidiaries. Interest on
14
Table of Contents
borrowings under the credit facility will typically accrue at London Interbank Offered Rate
(LIBOR) plus 2.5% to 4.0%, depending on the ratio of senior debt to consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) (as such term is defined in the new
credit facility, which includes specified adjustments and allowances authorized by the lender, as
provided for in such definition). We also have the option to request swingline loans and borrowings
using a base rate. Interest is payable monthly or quarterly on all outstanding borrowings. The
credit facility matures in July, 2013.
Borrowings and availability under the credit facility are subject to compliance with financial
covenants, including achieving specified consolidated EBITDA levels, which will depend on the
success of our acquisition strategy, and maintaining leverage and coverage ratios and a minimum
liquidity requirement. The consolidated EBITDA covenant, the leverage and coverage ratios, and the
minimum liquidity requirements should not be considered indicative of the Companys expectations
regarding future performance. The credit facility also places restrictions on our ability to incur
additional indebtedness, make certain acquisitions, create liens or other encumbrances, sell or
otherwise dispose of assets, and merge or consolidate with other entities or enter into a change of
control transaction. Failure to achieve or maintain the financial covenants in the credit facility
or failure to comply with one or more of the operational covenants could adversely affect our
ability to borrow monies and could result in a default under the credit facility. The credit
facility is subject to other standard default provisions. We have met all the required covenants
under the credit facility as of June 30, 2011.
The credit facility replaces our prior $25 million aggregated credit facilities, which are
discussed in the 2010 Annual Report.
Choice debt assumed and capital lease obligations with related parties
In connection with the acquisition of Choice, we assumed $40,941,484 of debt of which
$39,219,160 was paid off at the time of the acquisition. The remaining debt was recorded at fair
value on the date of the acquisition and included in acquisition notes payable above. Payments are made monthly and mature at various dates
through August 2018.
In addition, in connection with the acquisition of Choice we entered into capital leases that
have initial terms of five or ten years with companies owned by shareholders of Choice to finance
the cost of leasing office buildings and properties, including warehouses. Minimum payments under
these capital leases for the next five years are $534,000 each year and $1,920,000 thereafter. We
also recorded the fair value of $3,074,000 for these properties leased in property and equipment,
which will be depreciated over the term of the respective lease.
Convertible notes
In February 2011, a 6% convertible promissory note of $5,000,000 due on June 30, 2011 issued
as part of total consideration paid for an acquisition was converted into 1,312,864 of the
Companys common shares. Since the convertible note was issued as part of a business combination,
the note was recorded at fair value of $6,429,720 on the date of issuance including $5,182,500
recorded as a current liability and $1,247,220 recorded as Additional paid-in capital reflecting
the promissory notes beneficial conversion feature. As of December 31, 2010, the net carrying
amount of this promissory note was $6,385,720 ($6,247,220 principal and conversion feature and
$138,500 unamortized premium). At December 31, 2010 the fair value of this financial instrument was
$6,371,400. This note was fully converted during 2011.
In addition during 2010, the Company issued convertible promissory notes, which the principal
and interest are convertible into a variable number of the Companys common stock following both
(i) conditional approval by the Toronto Stock Exchange (TSX) of the listing of the shares of
Companys common shares issuable upon conversion of each note and (ii) the date that the Companys
Registration Statement on Form S-1 for the resale of the Companys common stock is declared
effective by the SEC but not later than the maturity date of each note. The convertible notes had
an aggregate principal value of $4,746,480 with interest rates of 4%, mature at various times up to
September 30, 2011, and are convertible at conversion rates of between $3.88 and $4.18.
During the six months ended June 30, 2011 and in connection with certain acquisitions, the
Company issued convertible promissory notes with an aggregate principal value of $7,125,000. The
notes have a 4% interest rate and are convertible into a maximum aggregate of 3,666,204 shares of
our common stock from $4.82 to $5.68. The holder may convert the principal and interest into a
variable number of the Companys common stock at any time following both (i) conditional approval
by the TSX of the listing of the shares of Companys common shares
15
Table of Contents
issuable upon conversion of each
note and (ii) the date that the Companys Registration Statement on Form S-1 for the resale of the
Companys common stock is declared effective by the SEC but not later than the maturity date of
each note.
During 2011, convertible promissory notes with an aggregate principal value of $13,621,480 and
a fair value of $21,194,303 were converted into 3,207,459 shares of our common stock. The
remaining notes have an aggregate principal amount $3,250,000 and are convertible into a maximum
aggregate of 1,078,635 shares of our common stock from $4.18 to $5.58.
NOTE 7 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The Company determines the fair value of certain assets and liabilities based on assumptions
that market participants would use in pricing the assets or liabilities. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, or the exit price. The Company
utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value and gives precedence to observable inputs in determining fair value. The following
levels were established for each input:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2: Include other inputs that are observable for the asset or liability either directly or
indirectly in the marketplace.
Level 3: Unobservable inputs for the asset or liability.
The above convertible promissory notes that are convertible into a variable number of shares
of the Companys common stock are recorded at fair value on the date of issuance and each
subsequent reporting period. The fair
values of these convertible promissory notes are based primarily on a Black-Scholes pricing model.
The significant management assumptions and estimates used in determining the fair value include the
expected term and volatility of our common stock. The expected volatility was based on an analysis
of industry peers historical stock price over the term of the notes as we currently do not have
sufficient history of our own stock volatility, which was estimated at approximately 25%.
Subsequent changes in the fair value of these instruments are recorded in Other expense, net on the
Condensed Consolidated Statements of Operations. Future movement in the market price of our stock
could significantly change the fair value of these instruments and impact our earnings.
The convertible promissory notes that are convertible into a variable number of the Companys
shares issued during 2010 and 2011 are Level 3 financial instruments since they are not traded on
an active market and there are unobservable inputs, such as expected volatility used to determine
the fair value of these instruments.
In addition during 2011, we issued an earn out that is to be settled in shares within one year
from the date of acquisition or once the acquired businesss revenue achieves an agreed upon level.
The number of shares that could be issued varies based on the achievement of agreed upon revenue
metrics.
The following table is a reconciliation of changes in fair value of these liabilities that have
been classified as Level 3 in the fair value hierarchy:
Balance as of December 31, 2010 |
$ | 5,771,480 | ||
Issuance of convertible promissory notes |
8,323,700 | |||
Unrealized losses included in earnings |
1,961,100 | |||
Balance as of March 31, 2011 |
16,056,280 | |||
Issuance of earn out to be settled in shares |
574,000 | |||
Settlement/conversion of convertible promissory notes |
(15,933,480 | ) | ||
Unrealized losses included in earnings |
3,554,900 | |||
Balance as of June 30, 2011 |
$ | 4,251,700 | ||
The amount of gains for the three and six months
ended June 30, 2011 included in earnings
attributable to the change in unrealized gains or
losses relating to liabilities still held as of June
30, 2011 |
$ | 364,500 | ||
16
Table of Contents
Financial Instruments
The Companys financial instruments, which may expose the Company to concentrations of credit
risk, include cash and cash equivalents, account receivables, accounts payable, and debt. Cash and
cash equivalents are maintained at financial institutions and, at times, balances may exceed
federally insured limits. We have never experienced any losses related to these balances. The
carrying amounts of cash and the current portion of accounts receivable and accounts payable
approximate fair value due to the short maturity of these instruments. The fair value of the
Companys debt is estimated based on the current borrowing rates available to the Company for bank
loans with similar terms and maturities, and approximates the carrying value of these liabilities.
In addition the convertible promissory notes are recorded at fair value at each reporting period
date.
NOTE 8 INVENTORY
Inventory is comprised of the following components at June 30, 2011 and December 30, 2010:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 9,767,714 | $ | 2,968,076 | ||||
Raw materials |
1,081,029 | | ||||||
$ | 10,848,743 | $ | 2,968,076 | |||||
NOTE 9 OTHER EXPENSE, NET
Other expense, net consists of the following for the three and six months ended June, 2011 and
2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest expense |
$ | (347,052 | ) | $ | (376,149 | ) | $ | (710,220 | ) | $ | (682,420 | ) | ||||
Unrealized loss, net (see Note 6 and 7) |
(3,554,900 | ) | | (5,516,000 | ) | | ||||||||||
Interest income |
81,278 | 21,675 | 97,024 | 36,682 | ||||||||||||
Foreign currency gain |
128,064 | | 163,467 | | ||||||||||||
$ | (3,692,610 | ) | $ | (354,474 | ) | $ | (5,965,729 | ) | $ | (645,738 | ) | |||||
NOTE 10 COMPREHENSIVE LOSS
Comprehensive loss consists of the following for the three and six months ended June, 2011 and
2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (7,127,159 | ) | $ | (1,769,638 | ) | $ | (10,341,737 | ) | $ | (3,365,077 | ) | ||||
Foreign currency translation |
(187,408 | ) | | (45,385 | ) | | ||||||||||
Comprehensive loss |
$ | (7,314,567 | ) | $ | (1,769,638 | ) | $ | (10,387,122 | ) | $ | (3,365,077 | ) | ||||
17
Table of Contents
NOTE 11 SUPPLEMENTAL CASH FLOW INFORMATION
The following table includes supplemental cash flow information, including noncash investing
and financing activity for the six months ended June 30, 2011 and 2010.
2011 | 2010 | |||||||
Cash received for interest |
$ | 97,024 | $ | 6,194 | ||||
Cash paid for interest |
$ | 450,310 | $ | 446,654 | ||||
NOTE 12 LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average number of common
shares outstanding during the period. The following were not included in the computation of diluted
net loss per share for the three months ended June 30, 2011 and 2010 as their inclusion would be
antidilutive:
| Stock options and restricted units to purchase 5,729,682 shares of common stock. | ||
| Convertible promissory notes that if-converted would result in 659,062 shares of common stock. |
The following were not included in the computation of diluted net loss per share for the six months
ended June 30, 2011 and 2010 as their inclusion would be antidilutive:
| Warrants to purchase 5,500,000 shares of common stock at $0.50 per share were outstanding and expire in November 2011. These were exercised in May 2011. | ||
| Stock options and restricted units to purchase 5,729,682 shares of common stock. | ||
| Convertible promissory notes that if-converted would result in 659,062 shares of common stock. |
NOTE 13 INCOME TAXES
As a result of the merger with CoolBrands International, Inc. on November 2, 2010, as
discussed in Note 1 in the 2010 Annual Report, the Company converted from a corporation taxed under
the provisions of Subchapter S of the Internal Revenue Code to a tax-paying entity and accounts for
income taxes under the asset and liability method. For the three and six months ended June 30,
2011, the Company has recorded an estimate for income taxes based on the
Companys projected taxable operating results for the year ending
December 31, 2011 and an effective income tax rate of 34.2%.
In addition, during 2011, the Company reversed the valuation allowance of $2,368,000 recorded
as of December 31, 2010 as a result of the Companys
expectation to utilize its deferred tax assets through the generation of future taxable income arising from deferred tax liability balances.
The
majority of these deferred tax liabilities were recorded as part of the acquisition of Choice on
March 1, 2011 as discussed in Note 3.
NOTE 14 SEGMENTS
On March 1, 2011, the Company completed its acquisition of Choice, a Florida based company
that provides a complete range of solid waste and recycling collection, transportation, processing
and disposal services. As a result of the acquisition of Choice, the Company now has two operating
segments: (1) Hygiene and (2) Waste. The Companys hygiene operating segment primarily provides
commercial hygiene services and products throughout much of the United States, and additionally
operates a worldwide franchise and license system to provide the same products and services in
markets where Company owned operations do not exist. The Companys waste segment primary consists
of the operations of Choice and acquisitions of solid waste collection businesses. Prior to the acquisition of
Choice, the Company managed, allocated resources, and reported in one segment.
The following table presents financial information for each of the Companys reportable
segments.
18
Table of Contents
Hygiene | Waste | Consolidated | ||||||||||
Three Months Ended June 30, 2011 |
||||||||||||
Revenue |
$ | 34,004,490 | $ | 17,671,585 | $ | 51,676,075 | ||||||
Depreciation and amortization |
3,292,468 | 2,791,956 | 6,084,424 | |||||||||
Loss from operations |
(6,829,385 | ) | (118,235 | ) | (6,947,620 | ) | ||||||
Interest expense and other, net |
(3,619,218 | ) | (73,392 | ) | (3,692,610 | ) | ||||||
Net loss before income taxes |
(10,448,602 | ) | (191,628 | ) | (10,640,230 | ) | ||||||
Capital expenditures, including non-cash |
$ | 4,782,470 | $ | 107,907 | $ | 4,890,377 | ||||||
Six Months Ended June 30, 2011 |
||||||||||||
Revenue |
55,596,975 | 23,475,403 | 79,072,378 | |||||||||
Depreciation and amortization |
5,175,365 | 3,617,011 | 8,792,376 | |||||||||
Loss from operations |
(12,386,096 | ) | (212,776 | ) | (12,598,872 | ) | ||||||
Interest expense and other, net |
(5,871,881 | ) | (93,848 | ) | (5,965,729 | ) | ||||||
Net loss before income taxes |
(18,257,977 | ) | (306,624 | ) | (18,564,601 | ) | ||||||
Capital expenditures, including
non-cash |
$ | 7,245,544 | $ | 402,397 | $ | 7,647,941 | ||||||
Total assets as of June 30, 2011 |
$ | 295,291,106 | $ | 131,546,738 | $ | 426,837,844 | ||||||
NOTE 15 COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the ordinary course of
its business. Although occasional adverse decisions (or settlements) may occur, the Company
believes that the final disposition of such matters will not have a material adverse effect on the
Companys financial position, results of operations or cash flows.
In connection with a distribution agreement entered into in December 2010, the Company
provided a guarantee that the distributors operating cash flows associated with the agreement
would not fall below certain agreed-to minimums, subject to certain pre-defined conditions, over
the ten year term of the distribution agreement. If the distributors annual operating cash flow
does fall below the agreed-to annual minimums, the Company will reimburse the distributor for any
such short fall up to a pre-designated amount. No value was assigned to the fair value of the
guarantee at June 30, 2011 and December 31, 2010 based on a probability assessment of the projected
cash flows. Management currently does not believe that it is probable that any amounts will be paid
under this agreement and thus there is no amount accrued for the guarantee in the Condensed
Consolidated Financial Statements. This liability would be considered a Level 3 financial
instruments given the unobservable inputs used in the projected cash flow model. See Note 7 for the
fair value hierarchy.
NOTE 16 SUBSEQUENT EVENTS
Subsequent to June 30, 2011, the Company acquired several businesses. While the terms, price,
and conditions of each of these acquisitions were negotiated individually, consideration to the
sellers typically consists of a combination of cash, our common stock, and issuance of debt.
Aggregate consideration paid for these acquired businesses was
approximately $21.0 million
consisting of approximately $14.3 million in cash, 815,726 shares of our common stock, and issuance
of promissory notes of approximately $2.1 million.
In August 2011, the Company entered into agreements to provide borrowings of up to $37.5 million that would be collateralized
by the Waste segments vehicles and containers and the Companys technology and related equipment. In connection with these financing
agreements, the Company entered into an amendment that modifies the covenants contained in the credit facility, including an increase
in permitted indebtedness to $40.0 million. In addition the Company
obtained additional financing of up to $25 million for new
and replacement vehicles for its fleet.
19
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Business Overview and Outlook
We provide essential hygiene and sanitation solutions to customers throughout much of North
America and internationally through our global network of company owned operations, franchises and
master licensees. These solutions include essential products and services that are designed to
promote superior cleanliness and sanitation in commercial environments, while enhancing the safety,
satisfaction and well-being of employees and patrons. These solutions are typically delivered by
employees on a regularly scheduled basis and involve providing our customers with: (i) consumable
products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the
rental and servicing of dish machines and other equipment for the dispensing of those products;
(ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor
mats, mops, bar towels and linens; (iii) manual cleaning of their facilities; and (iv) solid waste
collection services. We serve customers in a wide range of end-markets, with a particular emphasis
on the foodservice, hospitality, retail, industrial, and healthcare industries. In addition, our
solid waste collection services provide services primarily to commercial and residential customers
through contracts with commercial customers, municipalities, or other agencies.
Prospectively, we intend to grow in both existing and new geographic markets through a
combination of organic and acquisition growth. However, we will continue to focus our investments
towards those opportunities which will most benefit our core businesses, which currently are:
chemical, facility services, linen rental and supply, and waste collection services. Our
revenue outlook for 2011 is approximately $220 million, with current annualized run-rate revenue in
excess of $280 million. Run-rate revenue is defined as July 2011 estimated revenue annualized plus
the annualized revenue impact of acquisitions since July 2011.
We have company owned operations and franchise operations located throughout the United States
and Canada and 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.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with United
States generally accepted accounting principles involves the use of estimates and assumptions that
affect the recorded amounts of assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. As such, management
is required to make certain estimates, judgments and assumptions that are believed to be reasonable
based on the information available. These estimates and assumptions affect the reported amount of
assets and liabilities, revenue and expenses, and disclosure of contingent assets and liabilities
at the date of the condensed consolidated financial statements. Actual results may differ from
these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments
and uncertainties, the most important and pervasive accounting policies used and areas most
sensitive to material changes from external factors. See Note 2 in the 2010 Annual Report for
additional discussion of the application of these and other accounting policies. Any significant
changes to those policies or new significant policies are described below.
For the six months ended June 30, 2011, there were no changes in the methodology for computing
critical accounting estimates and no material changes to the important assumptions underlying the
critical accounting estimates.
Segments
On March 1, 2011, we completed our acquisition of Choice Environmental Services, Inc.
(Choice), a Florida based company that provides a complete range of solid waste and recycling
collection, transportation, processing and disposal services. As a result of the acquisition of
Choice, we now have two segments (1) Hygiene and (2) Waste. The Companys hygiene segment primarily
provides commercial hygiene services and products throughout much of the United States, and
additionally operates a worldwide franchise and license system to provide the same products and
services in markets where Company owned operations do not exist. The Companys waste segment
primarily consists of the operations of Choice and acquisitions of solid waste collection
businesses. Prior to the acquisition of Choice the Company managed, allocated resources, and
reported in one segment, Hygiene. See Note 14 in the Notes to the Condensed Consolidated Financial
Statements. The results of operations for the three and six months ended June 30, 2011 have been
presented in the Companys segments.
20
Table of Contents
Acquisition and merger expenses
Acquisition and merger expenses include costs directly-related to the acquisition of three of
our franchises and fifteen independent businesses during the three months ended June 30, 2011 and
the acquisition of seven of our franchises and twenty-five independent businesses during the six
months ended June 30, 2011. Acquisition and merger expenses also include costs directly-related to
the merger with CoolBrands International, Inc. as discussed in Note 1 of our 2010 Annual Report.
These costs include third party due diligence, legal, accounting and professional service expenses.
Adoption of Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the Financial Accounting Standards Board (FASB) issued
new standards for multiple-deliverable revenue arrangements. These new standards affect the
determination of when individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. In addition, these new standards modify the manner in
which the transaction consideration is allocated across separately identified deliverables,
eliminate the use of the residual value method of allocating arrangement consideration and require
expanded disclosure. These new standards will become effective for multiple-element arrangements
entered into or materially modified on or after January 1, 2011. Earlier application is permitted
with required transition disclosures based on the period of adoption. We adopted these standards
for multiple-element arrangements entered into or materially modified on or after January 1, 2011.
The adoption of this accounting standard did not have a material impact on the Companys Condensed
Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued new standards defining when step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts should be performed and
modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For reporting units with zero or negative carrying amounts an entity is required to
perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that
an impairment may exist. The standards are effective for fiscal years and interim periods within
those years, beginning December 15, 2010 and were effective for the Company on January 1, 2011. The
adoption of this accounting standard did not have a material impact on the Companys Condensed
Consolidated Financial Statements.
Business Combinations: In December 2010, the FASB issued new standards that clarify that if
comparative financial statements are presented the entity should disclose revenue and earnings of
the combined entity as though the business combination(s) that occurred during the current year had
occurred as of the beginning of the comparable prior annual reporting period only. The update also
expands the supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The standards are effective prospectively
for material (either on an individual or aggregate basis) business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2010, with early adoption permitted. The Company has included the required
disclosures in Note 3 to the Condensed Consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Comprehensive Income: In June 2011, the FASB issued new standards to improve
the comparability, consistency, and transparency of financial reporting and to increase
the prominence of items reported in other comprehensive income. This standard eliminates
the option to present components of other comprehensive income as part of the statement of
changes in stockholders equity. These standards are to be applied retrospectively and are
effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. Early application is permitted. We are currently evaluating the effect
of these standards on our Consolidated Financial Statements.
Fair Value Measurements: In May 2011, the FASB issued new standards clarifying
the wording used to describe the requirements for measuring fair value and for disclosing
information about fair value measurements and expands fair value disclosures. These
standards are to be applied prospectively and are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011. Early
application is not permitted. We are currently evaluating the effect of these
standards on our Consolidated Financial Statements.
21
Table of Contents
RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
During the year ended December 31, 2010, we acquired four franchises and five independent
businesses. In addition we acquired three franchises and fifteen independent businesses during the
three months ended June 30, 2011 and seven franchises and twenty-five independent businesses during
the six months ended June 30, 2011. The term Hygiene Acquisitions refers to the three
franchises and twelve independent hygiene and chemical businesses acquired during the three months
ended June 30, 2011 or the seven franchises and twenty-two hygiene and chemical independent
businesses acquired during the six months ended June 30, 2011. The waste segment includes Choice, acquired in March
2011, and two additional acquisitions of solid waste and collection companies during the three and
six months ended June 30, 2011. We refer to these acquisitions as Waste Acquisitions. The term
Acquisitions refers to both the Hygiene Acquisitions and Waste Acquisitions during the respective
periods.
Revenue
We derive our revenue through the delivery of a wide-variety of essential hygiene and
sanitation products and services. We deliver hygiene products and services on a regularly scheduled
basis which include providing our customers with (i) consumable products such as soap, paper,
cleaning chemicals, detergents, and supplies, together with the rental and servicing of dish
machines and other equipment for the dispensing of those products; (ii) the rental of facility
service items requiring regular maintenance and cleaning, such as floor mats, mops, bar towels, and
linens; (iii) manual cleaning of their facilities; and (iv) solid waste collection and recycling
services. We serve customers in a wide range of end-markets, with a particular emphasis on the
foodservice, hospitality, retail, industrial, and healthcare industries. Our waste segment provides
services primarily to commercial and residential customers through contracts with commercial
customers, municipalities, or other agencies.
FOR THE THREE MONTHS ENDED JUNE 30, 2011 AND 2010
Total revenue and the revenue derived from each revenue type by segment for the three months
ended June 30, 2011 and 2010 is as follows:
% of | % of | |||||||||||||||
Total | Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Revenue |
||||||||||||||||
Hygiene products and services |
||||||||||||||||
Chemical |
$ | 19,967,457 | 38.6 | % | $ | 4,021,849 | 26.5 | % | ||||||||
Hygiene services |
6,618,324 | 12.8 | 4,478,028 | 29.5 | ||||||||||||
Paper and supplies |
4,312,002 | 8.3 | 3,104,212 | 20.5 | ||||||||||||
Rental and other |
2,070,107 | 4.0 | 1,420,911 | 9.4 | ||||||||||||
Total hygiene product and services |
32,967,890 | 63.7 | 13,025,000 | 85.9 | ||||||||||||
Waste |
||||||||||||||||
Services |
16,044,242 | 31.1 | | | ||||||||||||
Products |
1,627,346 | 3.1 | | | ||||||||||||
Total products and service |
50,639,478 | 97.9 | 13,025,000 | 85.9 | ||||||||||||
Hygiene franchise |
1,036,597 | 2.1 | 2,138,556 | 14.1 | ||||||||||||
Total revenue |
$ | 51,676,075 | 100.0 | % | $ | 15,163,556 | 100.0 | % | ||||||||
Consolidated revenue increased $36,512,519 or 241% to $51,676,075 for the three
months ended June 30, 2011 as compared to the same period in 2010. This increase includes
$17,671,588 or 34.2% of consolidated revenue related to Waste Acquisitions and an
increase of $16,544,132 from Hygiene Acquisitions, which is offset by a $1,099,838 loss in
franchise revenue earned during the three months ended June 30, 2010. Excluding the impact of
Acquisitions, consolidated revenue increased $3,396,637 or 22.4% to $18,560,193 for the three
months ended June 30, 2011. This
22
Table of Contents
increase is comprised of an increase of $3,571,098 in hygiene
products and services revenue and decrease of $2,131 in hygiene franchise revenue
and is primarily due to the continued change in sales mix from lower priced hygiene services to higher priced chemical product sales.
Hygiene products and services revenue increased $19,942,890 or 153% during the three months
ended June 30, 2011 as compared to the same period in 2010. This increase includes $16,544,132
related to Hygiene Acquisitions. Excluding the impact from Hygiene Acquisitions, hygiene products
and services revenue increased $3,398,758 or 26.1% to $16,423,758. This increase is comprised of
$3,279,674 or 20% increase in chemical revenue and $119,084 or 3.6% increase in hygiene
services, paper and supplies, and rental and other.
During 2011, our sales mix has continued to shift towards our core chemical product sales from
our legacy hygiene business. Three principal factors contribute to this trend: (i)
we have placed particular emphasis on the development of our core markets including our
chemical offering, particularly as it relates to ware washing and laundry solutions and a lesser
focus on our legacy hygiene service offerings; (ii) we have aggressively
managed customer profitability terminating less favorable
arrangements; and (iii) from time to time, we are impacted by the
challenging economic conditions that result in customer attrition,
lower consumption levels of products and services, and a reduction or
elimination in spending for hygiene-related products and services by our customers.
Hygiene franchise revenue decreased $1,101,959 for the three months ended June 30, 2011 as
compared to the same period in 2010. This decrease includes $1,099,828 from Hygiene Acquisitions.
Acquisitions of our franchisees during the period result in less revenue from franchisee revenue,
which is offset by an increase in hygiene product and service revenue. Excluding the impact from
Hygiene Acquisitions, hygiene franchise revenue decreased $2,131 during the three months
ended June 30, 2011.
Cost of Sales
Hygiene cost of sales consists primarily of paper, air freshener, chemical and other
consumable products sold to our customers, franchisees and international licensees. Waste costs of
sales include costs related to the disposal of collections and cost of recycled paper purchases.
Cost of sales for the three months ended June 30, 2011 and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Company owned operations
|
$ | 11,905,159 | 36.1 | % | $ | 4,253,813 | 32.6 | % | ||||||||
Franchisee product sales
|
596,857 | 88.4 | 1,199,749 | 86.9 | ||||||||||||
Waste
|
5,212,614 | 29.5 | | | ||||||||||||
Total cost of sales
|
$ | 17,714,630 | 34.3 | % | $ | 5,453,562 | 36.0 | % | ||||||||
(1) | Represents cost as a percentage of the respective segments product and service line revenue. |
Consolidated cost of sales for the three months ended June 30, 2011 increased $12,261,068 or
225% to $17,714,630 as compared to the same period in 2010. This increase includes
$5,212,614 related to Waste Acquisitions and
$6,129,741 from Hygiene Acquisitions in the three months ended June 30, 2011 as compared to
the same period of 2010. Excluding the impact from Acquisitions, consolidated
cost of sales increased $918,713 or 16.9% to $6,372,275 for the three months ended June 30, 2011 as
compared to the same period in 2010.
Hygiene company owned operations cost of sales for the three months ended June 30, 2011
increased $7,651,346 or 180% to $11,905,159 as compared to the same period in 2010 and
includes $6,129,741 related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions,
cost of sales for company owned operations increased $1,521,605 or
35.8% to $5,775,418, or 34.8% of related revenue for the three
months ended June 30, 2011 as compared to 32.3% for the same
period in 2010. This increase is primarily due to the
continued change in sales mix from lower cost hygiene services to higher cost chemical product
sales, and
consisted primarily of approximately $1,030,545 or 24.2% in sales mix change from lower cost hygiene
services to higher cost chemical product sales, approximately
$1,440,744 or 39.9% due to the
current periods higher product sales volume, offset by approximately
$949,842 or 22.3% related to
product cost.
Hygiene cost of sales to franchisees for the three months ended June 30, 2011 decreased
$602,892 or 50.3% to $596,857 as compared to the same period in 2010 in part due to
Hygiene Acquisitions.
23
Table of Contents
We charge franchises a percentage of our costs, and,
therefore, we earn a lower margin on product sales to franchises,
which was 11.6% and 13.1% for the three months ended June 30, 2011 and 2010, respectively.
Excluding the effect of Acquisitions, cost of goods sold increased $158,108 or 13.2% during the three months
ended June 30, 2011 as compared to the same period in 2010.
Route Expenses
Route expenses consist primarily of the costs incurred by the Company for the delivery of
products and providing services to customers. The details of route expenses for the three months
ended June 30, 2011 and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Compensation
|
$ | 5,336,973 | 16.2 | % | $ | 2,260,539 | 17.4 | % | ||||||||
Vehicle and other
|
2,018,776 | 6.1 | 913,516 | 7.0 | ||||||||||||
Waste
|
5,802,564 | 32.8 | | | ||||||||||||
Total route expenses
|
$ | 13,158,313 | 26.0 | % | $ | 3,174,055 | 24.4 | % | ||||||||
(1) | Represents cost as a percentage of Products and Services revenue for the respective operating segment. |
Consolidated route expenses for the three months ended June 30, 2011 increased $9,984,258 or
315% to $13,158,313 as compared to the same period in 2010. This increase includes
$5,802,564, which is 36.2% of waste service revenue, related to Waste Acquisitions, and
$3,031,145 related to Hygiene Acquisitions.
Excluding the impact of Acquisitions, route expenses
increased $1,150,549 or 36.3% to $4,324,604 or 26.1% of related revenue for the three
months ended June 30, 2011 as compared to 24.4% for
the same period in 2010, primarily due to route
consolidation and optimization initiatives.
The increase of $1,150,549 consists primarily of $616,132 or 19.4% in compensation and
$534,417 or 16.8% in vehicle and other route expenses. These increases are primarily the result of
headcount and vehicles added as part of a distribution agreement entered into in December 2010 and
increasing fuel costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of the costs incurred for:
| Regional, branch office, and field management support costs that are related to field operations. These costs include compensation, occupancy expense and other general and administrative expenses. | ||
| Sales expenses, which include marketing expenses and compensation and commission for branch field sales representatives and corporate account and distribution sales personal. | ||
| Corporate office expenses that are related to general support services, which include executive management compensation and related costs, as well as department cost for information technology, human resources, accounting, purchasing and other support functions. |
The details of selling, general, and administrative expenses three months ended June 30, 2011
and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Compensation
|
$ | 10,319,380 | 30.4 | % | $ | 4,900,446 | 32.3 | % | ||||||||
Occupancy
|
1,034,478 | 3.0 | 641,723 | 4.2 | ||||||||||||
Other
|
3,740,559 | 11.0 | 1,325,026 | 8.7 | ||||||||||||
Waste
|
3,796,653 | 21.5 | | | ||||||||||||
Total selling, general, and administration expenses
|
$ | 18,891,070 | 36.6 | % | $ | 6,867,195 | 45.3 | % | ||||||||
(1) | Represents cost as a percentage of revenue for the respective segment. |
24
Table of Contents
Consolidated selling,
general, and administrative expenses for the three months ended June 30,
2011 increased $12,023,875 or 175% to $18,891,070 as compared to the same period of 2010. This
increase includes $3,796,653 related to Waste Acquisitions and $4,145,197 related to
Hygiene Acquisitions. Excluding the impact of Acquisitions, selling, general, and administrative
expenses increased $4,082,025 or 59.4%.
Hygiene compensation
for the three months ended June 30, 2011 increased $5,418,934 or 111% to
$10,319,380 as compared to the same period of 2010 and includes an increase of $2,587,909
related to Hygiene Acquisitions. Excluding the impact of Acquisitions, hygiene compensation expense
for the three months ended June 30, 2011 as compared to the same period in 2010 increased
$2,831,025 or 57.8% to $7,731,471. This increase was primarily the result of an increase of
approximately $1,569,228 in costs and expenses related primarily to our expansion of our corporate,
field and distribution sales organizations to
accelerate the growth in the our core chemical program, and an increase of approximately $1,261,797
of salaries and other costs largely associated with our transition from a private company to a
public company, which includes $700,797 for stock based compensation.
Occupancy expenses for the three months ended June 30, 2011 increased $392,755 or 61.2% to
$1,034,478 as compared to the same period of 2010, which includes an increase of $349,952
related to Acquisitions. Excluding the impact of these acquisitions, occupancy expenses for three
months ended June 30, 2011, as compared to the same period of 2010, increased $42,803 or 6.7%.
Other expenses for three months ended June 30, 2011 increased $2,415,533 or 182% to
$3,740,559 as compared to the same period in 2010 and includes an increase of $1,207,336
related to Hygiene Acquisitions. Excluding the impact of Acquisitions, other expenses for the
three months ended June 30, 2011 as compared to the same period of 2010, increased $1,208,197 or
91.2% to $2,533,223. This increase was primarily due to the expansion of our business and costs
related to being a public company, which includes the following: professional expenses of $661,000,
marketing expenses of $167,000 and insurance of $380,197.
Acquisition and merger expenses
Acquisition and merger expenses of $2,775,258 for the three months ended June 30, 2011 include
costs of $1,794,772 directly related to the acquisition of our three franchisees and fifteen
independent companies during the three months ended June 30, 2011. In addition $980,486 of these
costs is related to the merger with CoolBrands International, Inc.
These costs include costs for third party due diligence, legal, accounting and
professional service expenses.
Depreciation and amortization
Depreciation and amortization consists of depreciation of property and equipment and the
amortization of intangible assets. Depreciation and amortization for the three months ended June
30, 2011 increased $5,000,516 or 461% to $6,084,424 as compared to $1,083,908 during the same
period of 2010. This increase includes $4,148,415 for Acquisitions.
The increase for Acquisitions is primarily the result of amortization for
acquired other intangible assets including customer relationships and non-compete agreements
obtained in connection with these acquisitions. The remaining increase is primarily related to depreciation
on capital expenditures of $10,061,148 made since June 30, 2010.
Other expense, net
Other expense, net for the three months ended June 30, 2011 and 2010 are as follows:
Three Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Interest income
|
$ | 81,278 | $ | 21,675 | ||||
Interest expense
|
(347,052 | ) | (376,149 | ) | ||||
Unrealized loss, net
|
(3,554,900 | ) | | |||||
Gain on foreign currency
|
128,064 | | ||||||
Total other expense, net
|
$ | (3,692,610 | ) | $ | (354,474 | ) | ||
25
Table of Contents
Interest expense represents interest on borrowings under our credit facilities, notes
incurred in connection with acquisitions, including convertible
promissory notes, advances from shareholders and the purchase of equipment
and software. Interest expense for the three months ended
June 30, 2011 decreased $29,097 or 7.7% to
$347,052 as compared to the same period of 2010.
For the three months ended June 30, 2011, the unrealized loss, net consists primarily of
$3,624,900 related to the required adjustment for each reporting period for the fair value of the
convertible promissory notes. The fair value of these convertible promissory notes is impacted by
the market price of our stock. See Note 6 of the Condensed Consolidated Financial Statements.
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Revenue
Total revenue and the revenue derived from each revenue type by segment for the six months
ended June 30, 2011 and 2010 is as follows:
% of | % of | |||||||||||||||
Total | Total | |||||||||||||||
2011 | Revenue | 2010 | Revenue | |||||||||||||
Revenue |
||||||||||||||||
Hygiene products and services |
||||||||||||||||
Chemical |
$ | 29,441,476 | 37.2 | % | $ | 7,977,246 | 26.7 | % | ||||||||
Hygiene services |
11,986,450 | 15.2 | 8,801,078 | 29.4 | ||||||||||||
Paper and supplies |
7,997,812 | 10.1 | 6,015,485 | 20.1 | ||||||||||||
Rental and other |
3,623,611 | 4.6 | 2,773,764 | 9.3 | ||||||||||||
Total hygiene product and services |
53,049,349 | 67.1 | 25,567,573 | 85.5 | ||||||||||||
Waste |
||||||||||||||||
Services |
21,134,568 | 26.7 | | | ||||||||||||
Products |
2,340,835 | 3.0 | | | ||||||||||||
Total products and service |
76,524,752 | 96.8 | 25,567,573 | 85.5 | ||||||||||||
Hygiene franchise |
2,547,626 | 3.2 | 4,324,918 | 14.5 | ||||||||||||
Total revenue |
$ | 79,072,378 | 100.0 | % | $ | 29,892,491 | 100.0 | % | ||||||||
Consolidated revenue increased $49,179,887 or 165% to $79,072,378 for the six
months ended June 30, 2011 as compared to the same period in 2010. This increase includes
$23,475,403 or 29.7% of consolidated revenue related to Waste Acquisitions and an increase
of $22,409,100 from Hygiene Acquisitions, which is offset by a
$1,786,339 loss in franchise revenue
earned during the six months ended June 30, 2010. Excluding the impact of Acquisitions,
consolidated revenue increased $5,081,723 or 17.0% to $34,974,214 for the six months ended June 30,
2011. This increase is comprised of an increase of $5,706,755 in hygiene products and services
revenue and an increase of $9,047 in hygiene franchise revenue,
which are due to the continued change in sales mix from lower
priced hygiene services to higher priced chemical product sales.
Hygiene products and services revenue increased $27,481,776 or 107% during the six months
ended June 30, 2011 as compared to the same period in 2010. This
increase includes $22,409,100
related to Hygiene Acquisitions. Excluding the impact from Hygiene Acquisitions, hygiene products
and services revenue increased $5,072,676 or 19.8% and is primarily from increases in chemical
revenue of $4,544,271 or 14.8%, and $528,405 or 1.7% in hygiene
services, paper
and supplies, and rental and other.
During the six months of 2011, our sales mix has continued to shift towards our core chemical
product sales from our legacy hygiene business. Three principal factors have contributed to this
trend: (i) we have placed particular emphasis on the development of our core markets
including our chemical offering, particularly as it relates to ware washing and laundry solutions
and a lesser focus on our legacy hygiene service offerings;
26
Table of Contents
(ii) we have
aggressively managed customer profitability terminating less
favorable arrangements; and (iii) from time to time, we are impacted by
the challenging economic conditions that result in customer attrition,
lower consumption levels of products and services, and a reduction or
elimination in spending for hygiene-related products and services by
our customers.
Hygiene franchise revenue decreased $1,777,292, or 41.1% for the six months ended June 30,
2011 as compared to the same periods in 2010. This decrease includes
$1,786,339 from Hygiene
Acquisitions for the six months ended June 30, 2011 as compared to the comparable period in 2010.
Acquisitions of our franchisees during the period result in less revenue from franchisee revenue,
which is offset by an increase in hygiene product and service revenue. Excluding the impact from
Hygiene Acquisitions, hygiene franchise revenue increased $9,047 during the six months ended June
30, 2011.
Cost of Sales
Cost of sales for the six months ended June 30, 2011 and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Company owned operations |
$ | 18,578,643 | 35.0 | % | $ | 8,259,905 | 32.3 | % | ||||||||
Franchisee product sales |
1,593,542 | 90.7 | 2,502,605 | 89.3 | ||||||||||||
Waste |
7,126,130 | 30.4 | | | ||||||||||||
Total cost of sales |
$ | 27,298,315 | 34.5 | % | $ | 10,762,510 | 36.0 | % | ||||||||
(1) | Represents cost as a percentage of the respective segments product and service line revenue. |
Consolidated cost of sales for the six months ended June 30, 2011 increased $16,535,805 or
154% to $27,298,315 as compared to the same period in 2010. This increase includes
$7,126,130 related to Waste Acquisitions and $7,698,090 from Hygiene Acquisitions
in the six months ended June 30, 2011 as compared to the same
period of 2010. Excluding the impact from Acquisitions, consolidated cost of sales increased
$1,711,585 or 15.9% to $12,474,095 for the six months ended June 30, 2011 as compared to the same
period in 2010.
Hygiene company owned operations cost of sales for the six months ended June 30, 2011
increased $10,318,738 or 125% to $18,578,643 as compared to the same period in 2010 and
includes $7,698,090 related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions,
cost of sales for company owned operations increased $2,620,648 or
31.7% to $10,880,553 or 34.8% of related revenue for the six months
ended June 30, 2011 as compared to 32.3% for the same period in 2010, primarily due to the
continued change in sales mix from lower cost hygiene services to higher cost chemical product
sales, and
consisted primarily of approximately $1,244,458 or 15.1% in sales mix change from lower cost
hygiene services to higher cost chemical product sales, approximately $1,843,637 or 22.3% due to
the current periods higher product sales volume, offset by approximately $467,447 or 5.7% related
to reduced product cost.
Hygiene cost of sales to franchisees for the six months ended June 30, 2011 decreased $909,063
or 36.3% to $1,593,542 as compared to the same period in 2010 in part due to Hygiene Acquisitions.
We charge franchises a percentage of our costs and, therefore, we
earn a lower margin on product sales to franchises, which was 9.3% and 10.7% for the six months ended June 30, 2011 and 2010, respectively.
Excluding the effect of Hygiene
Acquisitions, cost of goods sold increased $220,794 or 8.8% during the six months ended June 30,
2011 as compared to the same period in 2010.
Route expenses
The details of route expenses for the six months ended June 30, 2011 and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Compensation
|
$ | 9,236,188 | 17.4 | % | $ | 4,527,504 | 17.7 | % | ||||||||
Vehicle and other
|
3,283,359 | 6.2 | 1,820,727 | 7.1 | ||||||||||||
Waste
|
7,753,837 | 33.0 | | | ||||||||||||
Total route expenses
|
$ | 20,273,384 | 26.5 | % | $ | 6,348,231 | 24.8 | % | ||||||||
(1) | Represents cost as a percentage of Products and Services revenue for the respective operating segment. |
27
Table of Contents
Consolidated route expenses for the six months ended June 30, 2011 increased $13,925,153 or
219% to $20,273,384 as compared to the same period in 2010. This increase includes
$7,753,837, which is 36.7% of waste service revenue, related to Waste Acquisitions, and
$4,347,675 related to Hygiene Acquisitions.
Excluding the impact of Acquisitions, route expenses increased
$1,823,641 or 28.7% to $8,171,872 or 26.1% of related revenue for the six months ended June
30, 2011 as compared to 24.8% for the same period in 2010, primarily due to route consolidation and optimization
initiatives.
The increase of $1,823,641 consisted primarily of $1,102,599 or 17.4% in compensation
and $721,042 or 11.4% in vehicle and other route expenses. These increases are primarily the result
of headcount and vehicles added as part of a distribution agreement entered into in December 2010
and increasing fuel costs.
Selling, general, and administrative
The details of selling, general, and administrative expenses six months ended June 30, 2011
and 2010 are as follows:
2011 | %(1) | 2010 | %(1) | |||||||||||||
Hygiene |
||||||||||||||||
Compensation
|
$ | 18,331,277 | 33.0 | % | $ | 9,375,113 | 31.4 | % | ||||||||
Occupancy
|
2,110,700 | 3.8 | 1,627,095 | 5.4 | ||||||||||||
Other
|
5,714,604 | 10.3 | 2,372,142 | 7.9 | ||||||||||||
Waste
|
5,059,358 | 21.6 | | | ||||||||||||
Total selling, general, and administration expenses
|
$ | 31,215,939 | 39.5 | % | $ | 13,374,350 | 44.7 | % | ||||||||
(1) | Represents cost as a percentage of revenue for the respective segment. |
Consolidated selling, general, and administrative expenses for the six months ended June 30,
2011 increased $18,025,589 or 135% as compared to the same period of 2010. This increase includes
$5,059,358 related to Waste Acquisitions and $5,392,202 related to Hygiene
Acquisitions. Excluding the impact of Acquisitions, selling, general, and administrative expenses
increased $7,574,029 or 56.6% to $20,948,379.
Hygiene compensation for the six months ended June 30, 2011 increased $8,956,164 or 95.5% to
$18,331,277 as compared to the same period of 2010 and includes an increase of $3,485,372
related to Hygiene Acquisitions. Excluding the impact of Hygiene Acquisitions, hygiene compensation
expense for the six months ended June 30, 2011 as compared to the same period in 2010 increased
$5,470,792 or 58.4% to $14,845,905. This increase was primarily the result of an increase of
approximately $3,681,000 in costs and expenses related to our expansion of our corporate, field and
distribution sales organizations to accelerate the
growth in the our core chemical program, and an increase of approximately $1,789,792 of salaries
and other costs largely associated with our transition from a private company to a public company,
which includes $1,331,639 for stock based compensation.
Occupancy expenses for the six months ended June 30, 2011 increased $483,605 or 29.7% to
$2,110,700 as compared to the same period of 2010, which includes an increase of $389,793
related to Acquisitions. Excluding the impact of these acquisitions, occupancy expenses for six
months ended June 30, 2011, as compared to the same period of 2010, increased $93,812 or 5.8%.
Other expenses for six months ended June 30, 2011 increased $3,342,462 or 141% to
$5,714,604 as compared to the same period in 2010 and includes an increase of $1,040,068
for Hygiene Acquisitions. Excluding the impact of these acquisitions, other expenses for the six
months ended June 30, 2011 as compared to the same period of 2010, increased $2,302,394 or 97.1% to
$4,674,536. This increase was primarily due to the expansion of our business and included
increases in: (i) marketing expenses of $273,000, (ii) insurance of $486,000, (iii) travel costs of
$250,000, and (iv) professional fees of $1,293,394 associated with being a public company.
Acquisition and merger expenses
Acquisition and merger expenses of $4,091,236 for the six months ended June 30, 2011 include
costs of $2,146,878 directly-related to the acquisition of our seven franchisees and twenty-five
independent companies during the six months ended June 30, 2011. In addition $1,944,358 of these
costs is related to the merger with
28
Table of Contents
CoolBrands International, Inc. These costs include costs for third party due diligence, legal, accounting and
professional service expenses.
Depreciation and amortization
Depreciation
and amortization for the six months ended June 30, 2011
increased $6,665,637 or
313% to $8,792,376 as compared to $2,126,739 during the same period of 2010. This increase
includes $5,190,441 for Acquisitions.
The increase for Acquisitions is primarily the result of amortization for acquired other
intangible assets including customer relationships and non-compete agreements obtained in connection with
these acquisitions. The remaining increase is primarily related to depreciation on capital
expenditures of $10,061,148 made since June 30, 2010.
Other expense, net
Other expense, net for the six months ended June 30, 2011 and 2010 are as follows:
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Interest income |
$ | 167,024 | $ | 36,681 | ||||
Interest expense |
(710,220 | ) | (682,420 | ) | ||||
Unrealized loss, net |
(5,586,000 | ) | | |||||
Gain on foreign currency |
163,467 | | ||||||
Total other expense, net |
$ | (5,965,729 | ) | $ | (645,739 | ) | ||
Interest expense represents interest on borrowings under our credit facilities, notes
incurred in connection with acquisitions including convertible prommissory notes, advances from shareholders and the purchase of equipment
and software. Interest expense for the six months ended June 30, 2011 increased $27,800 or 4.1% to
$710,220 as compared to the same period of 2010.
For
the six months ended June 30, 2011, the unrealized loss, net consists primarily of
$5,656,000 related to the required adjustment for each reporting period for the fair value of the
convertible promissory notes. The fair value of these convertible promissory notes is impacted by
the market price of our stock. See Note 6 of the Condensed Consolidated Financial Statements.
Cash Flow Summary
The following table summarizes cash flows for the six months ended June 30, 2011 and 2010:
2011 | 2010 | |||||||
Net cash used in operating activities |
$ | (10,204,200 | ) | $ | (260,302 | ) | ||
Net cash used in investing activities |
(69,977,410 | ) | (2,815,510 | ) | ||||
Net cash provided by financing activities |
153,684,359 | 2,428,395 | ||||||
Net increase (decrease) in cash and cash equivalents |
$ | 73,502,749 | $ | (647,417 | ) | |||
Operating Activities
For the six months ended June 30, 2011, net cash used in operating activities increased
$9,943,898 to $10,204,200, compared with net cash used in operating activities of $260,302 for the
same period of 2010. The increase includes $6,976,660 higher loss, which includes $4,091,236 of
acquisition and merger expenses, and is offset by non-cash items of $6,586,237, and changes in
working capital of $9,553,511.
Investing Activities
For the six months ended June 30, 2011, net cash used in investing activities increased
$67,161,900 to $69,977,410 compared with net cash used in investing activities of $2,815,510 for
the same period of 2010. This increase is due an increase in cash paid, net of issuance costs and
cash acquired, for acquisitions of $67,717,485, an
29
Table of Contents
increase in capital expenditures of $4,687,748,
offset by the release of restrictions on certain cash balances of $5,193,333. Cash paid, net of
issuance costs and cash acquired, for acquisitions consists of $7,212,914 for Choice and
$60,504,571 for all other acquisitions.
Financing Activities
For the six months ended June 30, 2011, cash provided by financing activities increased
$151,255,964 to $153,684,359, compared with net cash provided by financing activities of $2,428,395
during the same period in 2010. Net cash provided from financing activities consists primarily of:
(i) cash received from private placements; (ii) principal payments of debt, including debt assumed
in the acquisition of Choice; (iii) proceeds from advances and distributions to shareholders; (iv)
net borrowing under credit facilities; and (v) proceeds from stock option and warrant exercises.
During the six months ended June 30, 2011, we received $191,236,515, net of issuance costs,
from the issuance of 34,119,643 shares of our common stock; we repaid $39,219,160 of debt assumed
in the acquisition of Choice; and received $3,366,716 from the exercise of stock options and
warrants. During the six months ended June
30, 2011 as compared to the same period in 2010, principal payments on debt increased by
$45,107, and net proceeds and payment of shareholder advances decreased by $3,800,000.
Liquidity and Capital Resources
We fund the development and growth of our business with cash generated from operations,
shareholder advances, bank credit facilities, the sale of equity, third party financing for
acquisitions, and capital leases for equipment.
Revolving credit facilities
In March 2011, we entered into a $100 million senior secured revolving credit facility (the
credit facility). Borrowings under the credit facility are secured by a first priority lien on
substantially all of our existing and hereafter acquired assets, including $25 million of cash on
borrowings in excess of $75 million. Furthermore, borrowings under the facility are guaranteed by
all of our domestic subsidiaries and secured by substantially all the assets and stock of our
domestic subsidiaries and substantially all of the stock of our foreign subsidiaries. Interest on
borrowings under the credit facility will typically accrue at London Interbank Offered Rate
(LIBOR) plus 2.5% to 4.0%, depending on the ratio of senior debt to consolidated earnings before
interest, taxes, depreciation and amortization (EBITDA) (as such term is defined in the credit
facility, which includes specified adjustments and allowances authorized by the lender, as provided
for in such definition). We also have the option to request swingline loans and borrowings using a
base rate. Interest is payable monthly or quarterly on all outstanding borrowings. The credit
facility matures in July 2013.
Borrowings and availability under the credit facility are subject to compliance with financial
covenants, including achieving specified consolidated EBITDA levels, which will depend on the
success of our acquisition strategy, and maintaining leverage and coverage ratios and a minimum
liquidity requirement. The consolidated EBITDA covenant, the leverage and coverage ratios, and the
minimum liquidity requirements should not be considered indicative of the Companys expectations
regarding future performance. The credit facility also places restrictions on our ability to incur
additional indebtedness, make certain acquisitions, create liens or other encumbrances, sell or
otherwise dispose of assets, and merge or consolidate with other entities or enter into a change of
control transaction. Failure to achieve or maintain the financial covenants in the credit facility
or failure to comply with one or more of the operational covenants could adversely affect our
ability to borrow monies and could result in a default under the credit facility. The credit
facility is subject to other standard default provisions. We were in compliance with such covenants
as of June 30, 2011.
The credit facility replaces our prior $25 million aggregated credit facilities, which are
discussed in the 2010 Annual Report.
In August 2011, the Company entered into agreements to provide borrowings of up to $37.5 million that would be collateralized by the Waste segments
vehicles and containers and the Companys technology and related equipment. In connection with these financing agreements, the Company entered into an amendment that modifies the
covenants contained in the credit facility, including an increase in permitted indebtedness to $40.0 million. In addition the Company obtained additional
financing of up to $25 million for new and replacement vehicles for its fleet.
Private Placements
In connection with the merger with Choice, on February 23, 2011, we entered into an agency
agreement, which the agents agreed to market, on a best efforts basis 12,262,500 subscription
receipts (Subscription Receipts) at a price of $4.80 per Subscription Receipt for gross proceeds
of up to $58,859,594. Each Subscription Receipt entitled
30
Table of Contents
the holder to acquire one share of our
common stock, without payment of any additional consideration, upon completion of our acquisition
of Choice.
On
March 1, 2011, we closed the acquisition of Choice and issued 8,281,920 shares of our
common stock to the former shareholders of Choice and assumed $40,941,484 of debt, of which
$39,219,160 was paid down with proceeds from the private placement of the Subscription Receipts,
which we received cash of $56,253,791, net of issuance costs.
In connection with the closing of acquisition of Choice, the 12,262,500 Subscription Receipts
were exchanged for 12,262,500 shares of our common stock. We agreed to use commercially reasonable
efforts to file a resale registration statement with the SEC relating to the shares of common stock
underlying the Subscription Receipts. If the registration statement was not filed or declared
effective within specified time periods, or if it ceases to be effective for a period of time
exceeding certain grace periods, the initial subscribers of Subscription Receipts would be entitled
to receive an additional 0.1 share of common stock for each share of common stock underlying
Subscription Receipts held by any such initial subscriber at that time.
The Company filed a resale registration statement with the SEC relating to the 8,281,920 shares
issued to the former shareholders of Choice and the 12,262,500 shares issued in connection with
the private placement. The registration statement was effective as of the date of this filing.
On March 22, 2011, we entered into a series of arms length securities purchase agreements to
sell 12,000,000 shares of our common stock at a price of $5.00 per share, for aggregate proceeds of
$60,000,000 to certain funds of a global financial institution (the Private Placement). We intend
to use the proceeds from the Private Placement to further our organic and acquisition growth
strategy, as well as for working capital purposes.
On
March 23, 2011, we closed the Private Placement and issued 12,000,000 shares of our common
stock. Pursuant to the securities purchase agreements, the shares of common stock issued in the
Private Placement may not be transferred on or before June 24, 2011 without our consent. We agreed
to use our commercially reasonable efforts to file a resale registration statement with the SEC
relating to the shares of common stock sold in the Private Placement. If the registration statement
was not filed or declared effective within specified time periods, the investors will be entitled
to receive liquidated damages in cash equal to one percent of the original offering price for each
share that at such time remains subject to resale restrictions.
The Company filed a resale registration statement with the SEC
relating to the 12,000,000
shares issued in the private placement. The registration statement was effective as of the date
of this filing.
On April 15, 2011, we entered into a series of arms length securities purchase agreements to
sell 9,857,143 shares of our common stock at a price of $7.70 per share, for aggregate proceeds of
$75,900,000 to certain funds of a global financial institution. We completed this transaction on
April 19, 2011 and we intend to use the proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital purposes.
Pursuant to the securities purchase agreements, following July 24, 2011 we agreed to use
commercially reasonable efforts to file a resale registration statement with the SEC relating to
the shares of common stock sold in the private placement. If the registration statement was not
filed or declared effective within the specified time periods, the investors will be entitled to
receive liquidated damages in cash equal to one percent of the original offering price for each
share that at such time remains subject to resale restrictions.
The Company filed a resale registration statement with the SEC relating to the 9,857,143 shares.
The registration statement was effective as of the date of this filing.
Acquisitions
During the three month period ended June 30, 2011, we paid cash of $55,739,581 for
acquisitions. During the six month period ended June 30, 2011, we paid cash of $67,717,485 for
acquisitions, which $7,212,914 was for the acquisition of Choice. In addition subsequent to June
30, 2011, we acquired several businesses. While the terms, price, and conditions of each of these
acquisitions were negotiated individually, consideration to the sellers typically consists of a
combination of cash, our common stock, and debt issued. Aggregate consideration paid for these
acquired businesses was approximately $21.0 million consisting of approximately $14.3 million in
cash, 815,726 shares of our common stock, and issuance of promissory notes of approximately $2.1
million.
31
Table of Contents
Cash Requirements
Our cash requirements for the next twelve months consist primarily of: (i) capital
expenditures associated with dispensing equipment, dish machines and other items in service at
customer locations, equipment, vehicles, and software; (ii) financing for acquisitions; (iii)
working capital; and (iv) payment of principal and interest on borrowings under our credit
facility, debt obligations and convertible promissory notes incurred or assumed in connection with
acquisitions, and other notes payable for equipment and software.
As a result of the Private Placements discussed above our cash and cash equivalents increased
by $192,153,791 and were $112,434,487 at June 30, 2011. We expect that our cash on hand and the
cash flow provided by operating activities will be sufficient to fund working capital, general
corporate needs and planned capital expenditure for the next twelve months. However, there is no
assurance that these sources of liquidity will be sufficient to fund our internal growth
initiatives or the investments and acquisition activities that we may wish to pursue. If we pursue
significant internal growth initiatives or if we wish to acquire additional businesses in
transactions that include cash payments as part of the purchase price, we may pursue additional
debt or equity sources to finance such transactions and activities, depending on market conditions.
Financial Instruments Convertible Promissory Notes
We determine the fair value of certain convertible debt instruments issued as part of business
combinations based on assumptions that market participants would use in pricing the liabilities. We
have used a Black Scholes pricing model to estimate fair value of our convertible promissory notes,
which requires the use of certain assumptions such as expected term and volatility of our common
stock. The expected volatility was based on an analysis of industry peers historical stock price
over the term of the notes as we currently do not have our own stock price history. The expected
volatility was estimated at approximately 25%. Changes in the fair value of convertible debt
instruments are recorded in Other expense, net on the Condensed Consolidated Statement of
Operations. We would record approximately $575,000 of expense or income for every $1.00 increase or
decrease in our stock price. Increases or decreases in the market value of our stock price could
affect the fair value of these instruments and our earnings.
Income Taxes
As a result of the merger with CoolBrands International, Inc. in November 2010, as
discussed in Note 1 in the in the 2010 Annual Report the Company converted from a corporation taxed
under the provisions of Subchapter S of the Internal Revenue Code to a tax-paying entity and
accounts for income taxes under the asset and liability method. Therefore, for the six months ended
June 30, 2011, the Company has recorded an estimate for income taxes based on the Companys
projected tax operating results for the year ending December 31, 2011 and an effective income tax rate of
34.2%. The amount of income tax expense or benefit to be recorded in future periods is based on our
estimate of the full years net income, which we cannot predict with certainty.
In addition, during 2011, the Company reversed the valuation allowance of $2,368,000 recorded
as of December 31, 2010 as a result of the Companys
expectation to utilize its deferred tax assets through the
generation of future taxable income arising from deferred tax
liability balances. The majority of these deferred tax liabilities were recorded as part of the acquisition of Choice in
March 2011 as discussed in Note 3.
Litigation and Other Contingencies
We are subject to legal proceedings and claims which arise in the ordinary course of our
business. Although occasional adverse decisions (or settlements) may occur, we believe that the
final disposition of such matters will not have a material adverse effect on our financial
position, results of operations or cash flows.
Off-Balance Sheet Arrangements
Other than operating leases, there are no off-balance sheet financing arrangements or
relationships with unconsolidated entities or financial partnerships, which are often referred to
as special purpose entities. Therefore, there is no exposure to any financing, liquidity, market
or credit risk that could arise, had we engaged in such relationships.
In connection with a distribution agreement entered into in December 2010, we provided a
guarantee that the distributors operating cash flows associated with the agreement would not fall
below certain agreed-to minimums, subject to certain pre-defined conditions, over the ten year term
of the distribution agreement. If the distributors annual operating cash flow does fall below the
agreed-to annual minimums, we will reimburse the distributor for any such short fall up to a
pre-designated amount. No value was assigned to the fair value of the guarantee at June
32
Table of Contents
30, 2011
and December 31, 2010 based on a probability assessment of the projected cash flows. Management
currently does not believe that it is probable that any amounts will be paid under this agreement
and thus there is no amount accrued for the guarantee in the Condensed Consolidated Financial
Statements.
Adjusted EBITDA
In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures,
such as Adjusted EBITDA, in assessing our operating performance. We believe the non-GAAP measure
serves as an appropriate measure to be used in evaluating the performance of our business. We
define Adjusted EBITDA as net loss excluding the impact of income taxes, depreciation and
amortization expense, interest expense and income, gains on foreign currency, unrealized loss, net,
stock based compensation, and third party costs directly related to merger and acquisitions. We
present Adjusted EBITDA because we consider it an important supplemental measure of our operating
performance and believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of our results. Management uses this non-GAAP financial
measure frequently in our decision-making because it provides supplemental information that
facilitates internal comparisons to the historical operating performance of prior periods and gives
a better indication of our core operating performance. We include this non-GAAP financial measure
in our earnings announcement and guidance in order to provide transparency to
our investors and enable investors to better compare our operating performance with the operating
performance of our competitors. Adjusted EBITDA should not be considered in isolation from, and is
not intended to represent an alternative measure of, operating results or of cash flows from
operating activities, as determined in accordance with GAAP. Additionally, our definition of
Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
Under SEC rules, we are required to provide a reconciliation of non-GAAP measures to the most
directly comparable GAAP measures. Accordingly, the following is a reconciliation of Adjusted
EBITDA to our net losses for the three and six month periods ended June 30, 2011 and 2010:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (7,127,159 | ) | $ | (1,769,638 | ) | $ | (10,341,737 | ) | $ | (3,365,077 | ) | ||||
Income tax benefit |
(3,513,071 | ) | | (8,222,864 | ) | | ||||||||||
Depreciation and amortization expense |
6,084,424 | 1,083,908 | 8,792,376 | 2,126,739 | ||||||||||||
Interest expense, net |
265,774 | 354,474 | 543,196 | 645,738 | ||||||||||||
Gains on foreign currency |
(128,064 | ) | | (163,467 | ) | | ||||||||||
Unrealized loss, net |
3,554,900 | | 5,586,000 | | ||||||||||||
Stock based compensation |
1,097,597 | | 1,762,439 | | ||||||||||||
Acquisition and merger expenses |
2,775,258 | | 4,091,236 | | ||||||||||||
Adjusted EBITDA |
$ | 3,009,659 | $ | (331,256 | ) | $ | 2,047,179 | $ | (592,600 | ) | ||||||
FORWARD-LOOKING STATEMENTS
Our business, financial condition, results of operations, cash flows and prospects, and the
prevailing market price and performance of our common stock, may be adversely affected by a number
of factors, including the matters discussed below. Certain statements and information set forth in
this Form 10-Q, as well as other written or oral statements made from time to time by us or by our
authorized executive officers on our behalf, constitute forward-looking statements within the
meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our
forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this
statement and these risk factors in order to comply with such safe harbor provisions. You should
note that our forward-looking statements speak only as of the date of this Form 10-Q or when made
and we undertake no duty or obligation to update or revise our forward-looking statements, whether
as a result of new information, future events or otherwise. Although
33
Table of Contents
we believe that the
expectations, plans, intentions and projections reflected in our forward-looking statements are
reasonable, such statements are subject to risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. The risks,
uncertainties and other factors that our stockholders and prospective investors should consider
include the following:
| We have a history of significant operating losses and as such our future revenue and operating profitability are uncertain; | ||
| We may be harmed if we do not penetrate markets and grow our current business operations; | ||
| We may require additional capital in the future and no assurance can be given that such capital will be available on terms acceptable to us, or at all; | ||
| Failure to attract, train, and retain personnel to manage our growth could adversely impact our operating results; | ||
| We may not be able to properly integrate the operations of acquired businesses and achieve anticipated benefits of cost savings or revenue enhancements; | ||
| We may incur unexpected costs, expenses, or liabilities relating to undisclosed liabilities of our acquired businesses; | ||
| We may recognize impairment charges which could adversely affect our results of operations and financial condition; | ||
| Goodwill resulting from acquisitions may adversely affect our results of operations; | ||
| Future issuances of our common stock in connection with acquisitions could have a dilutive effect on your investment; | ||
| Future sales of Swisher Hygiene shares by our stockholders could affect the market price of our shares; | ||
| Our business and growth strategy depends in large part on the success of our franchisees and international licensees, and our brand reputation may be harmed by actions out of our control that are taken by franchisees and international licensees; | ||
| Failure to retain our current customers and renew existing customer contracts could adversely affect our business; | ||
| The pricing, terms, and length of customer service agreements may constrain our ability to recover costs and to make a profit on our contracts; | ||
| Changes in economic conditions that impact the industries in which our end-users primarily operate in could adversely affect our business; | ||
| Our solid waste collection operations are geographically concentrated and are therefore subject to regional economic downturns and other regional factors; | ||
| If we are required to change the pricing models for our products or services to compete successfully, our margins and operating results may be adversely affected; | ||
| Several members of our senior management team are critical to our business and if these individuals do not remain with us in the future, it could have a material adverse impact on our business, financial condition and results of operations; |
34
Table of Contents
| The financial condition and operating ability of third parties may adversely affect our business; | ||
| The volatility of our raw material costs may adversely affect our operations; | ||
| Increases in fuel and energy costs could adversely affect our results of operations and financial condition; | ||
| Our products contain hazardous materials and chemicals, which could result in claims against us; | ||
| We are subject to environmental, health and safety regulations, and may be adversely affected by new and changing laws and regulations, that generate ongoing environmental costs and could subject us to liability; | ||
| Future changes in laws or renewal enforcement of laws regulating the flow of solid waste in interstate commerce could adversely affect our results of operations and financial condition; | ||
| If our products are improperly manufactured, packaged, or labeled or become adulterated, those items may need to be recalled; | ||
| Changes in the types or variety of our service offerings could affect our financial performance; | ||
| We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business; | ||
| If we are unable to protect our information and telecommunication systems against disruptions or failures, our operations could be disrupted; | ||
| Insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business; | ||
| Our current size and growth strategy could cause our revenue and operating results to fluctuate more than some of our larger, more established competitors or other public companies; | ||
| Certain stockholders may exert significant influence over corporate action requiring stockholder approval; and | ||
| Provisions of Delaware law and our organizational documents may delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks, including changes in interest rates and fuel prices. We do not
use financial instruments for speculative trading purposes and we do not hold derivative financial
instruments that could expose us to significant market risk. We do not currently have any contract
with vendors where we have exposure to the underlying commodity prices. In such event, we would
consider implementing price increases and pursue cost reduction initiatives; however, we may not be
able to pass on these increases in whole or in part to our customers or realize costs savings
needed to offset these increases. The following discussion does not consider the effects that an
adverse change may have on the overall economy, and it also does not consider actions we may take
to mitigate our expose to these changes. We cannot guarantee that the action we take to mitigate
these exposures will be successful.
ITEM 4. CONTROLS AND PROCEDURES. |
We carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and
35
Table of Contents
procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of June 30, 2011. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
June 30, 2011
There has been no change in our internal control over financial reporting during the quarter
ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. |
We may be involved in litigation from time to time in the ordinary course of business. We do
not believe that the ultimate resolution of these matters will have a material adverse effect on
our business, financial condition or results of operations. However, the results of these matters
cannot be predicted with certainty and we cannot assure you that the ultimate resolution of any legal or administrative proceedings or disputes will not have a
material adverse effect on our business, financial condition and results of operations.
ITEM 1A. RISK FACTORS. |
In our report on Form 10-K for the year ended December 31, 2010, filed with the Securities
Exchange Commission on March 31, 2011 (Form 10-K), we identify under Item 1A important factors
which could affect our financial performance and could cause our actual results for future periods
to differ materially from our anticipated results or other expectation, including those expressed
in any forward-looking statements made in this Form 10-Q. See section entitled Forward-Looking
Statements located in Part 1, Item 2 of this report.
The risk described below supplements the risks described in our
Form 10-K.
The volatility of our raw material costs may adversely affect our operations.
We use a number of key raw materials in our business. The prices of many of these raw
materials are cyclical. If we are unable to minimize the effects of increased raw material costs
through sourcing or pricing actions, future increases in costs of raw materials could have a
material adverse effect on our business, financial condition, results of operations and prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
In addition to issuances reported on Current Reports on Form 8-K, we issued the following
shares of common stock during the quarter ended June 30, 2011:
(a) | On April 8, 2011, in connection with the acquisition of certain assets of Q Linen Service Inc., the Company issued 37,479 shares of our common stock to Q Linen Service Inc.; | ||
(b) | On April 11, 2011, in satisfaction of a promissory note issued in connection with the acquisition of certain assets of Budgetchem.com, the Company issued 50,027 shares of our common stock to Jay Felen; | ||
(c) | On April 11, 2011, in connection with the acquisition of Lawson Sanitation LLC, the Company issued 909,090 shares of our common stock to John Lawson, Jr.; | ||
(d) | On April 12, 2011, in connection with the acquisition of Hallmark Sales and Service, Inc., the Company issued 24,437 shares of our common stock to Harry F. Noyes, Jr.; | ||
(e) | On April 14, 2011, in connection with the acquisition of the minority equity interests of Service Tallahassee, LLC, the Company issued 25,000 shares of our common stock to Todd Bierling; and |
36
Table of Contents
(f) | On April 15, 2011, the Company entered into a series of arms length securities purchase agreements to sell 9,857,143 shares of our common stock at a price of $7.70 per share, for aggregate proceeds of $75.9 million to certain funds of a global financial institution. The Company completed this private placement on April 19, 2011. |
The issuance of the securities described in paragraphs (a) through (f) above were exempt from
the registration requirements of the Securities Act afforded by Section 4(2) thereof and Regulation
D promulgated thereunder, which exception Swisher Hygiene believes is available because the
securities were not offered pursuant to a general solicitation and such issuances were otherwise
made in compliance with the requirements of Regulation D and Rule 506. The securities issued in
these transactions are restricted and may not be resold except pursuant to an effective
registration statement filed under the Securities Act or pursuant to a valid exemption from the
registration requirements of the Securities Act.
ITEM 6. EXHIBITS. |
Exhibit | ||
Number | Description | |
10.1
|
Securities Purchase Agreement, dated April 15, 2011. (On April 15, 2011, Swisher Hygiene Inc. entered into an additional 16 securities purchase agreements which are substantially identical in all material respects to this exhibit expect as to the parties thereto and the number of shares of common stock of Swisher Hygiene purchased. Attached to this exhibit is a schedule identifying the parties to the additional 16 securities purchase agreements and the number of shares of common stock Swisher Hygiene purchased by such parties.) (incorporated by reference to Exhibit 10.29 of the Companys Pre-Effective Amendment No. 3 to Registration Statement on Form S-4, filed with the Securities and Exchange Commission on April 21, 2011) | |
10.2
|
Amended and Restated Swisher Hygiene Inc. 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Companys Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 9, 2011).* | |
10.3
|
Swisher Hygiene Inc. Senior Executive Officers Performance Incentive Bonus Plan (incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2011).* | |
10.4
|
Employment Agreement of Michael Kipp (incorporated by reference to Exhibit 10.3 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2011).* | |
31.1
|
Section 302 Certification of Chief Executive Officer. | |
31.2
|
Section 302 Certification of Chief Financial Officer. | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
101.INS
|
XBRL Instance Document.*** | |
101.SCH
|
XBRL Taxonomy Extension Schema.*** | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.*** | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase.*** | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.*** |
* | Management contracts or compensatory plans, contracts, or arrangements. | |
** | Furnished herewithin. | |
*** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections. |
37
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SWISHER HYGIENE INC. (Registrant) |
||||
Dated: August 15, 2011 | ||||
By: | /s/ STEVEN R. BERRARD | |||
Steven R. Berrard | ||||
President, Chief Executive
Officer and Director (Principal Executive Officer) |
||||
By: | /s/ MICHAEL J. KIPP | |||
Michael J. Kipp | ||||
Senior Vice President, Chief Financial
Officer (Principal Financial and Accounting Officer) |
||||
Dated: August 15, 2011
38
Table of Contents
SWISHER HYGIENE INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit | ||
Number | Description | |
31.1
|
Section 302 Certification of Chief Executive Officer. | |
31.2
|
Section 302 Certification of Chief Financial Officer. | |
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS
|
XBRL Instance Document. | |
101.SCH
|
XBRL Taxonomy Extension Schema. | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase. | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase. | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase. |
39