See Notes to Consolidated Financial Statements

 

 

See Notes to Consolidated Financial Statements

 

 

See Notes to Consolidated Financial Statements

 

 

See Notes to Consolidated Financial Statements

 

 

Mt. Hood Solutions Company (“MHS”) is a manufacturer and distributor of over 300 industrial detergents and other cleaning compounds headquartered in Portland, Oregon. Its customers primarily consist of institutional and commercial enterprises in Oregon, Washington, Utah, Colorado, California and Idaho.

 

AML2, LLC (“AML2”) was founded in 2008, to manufacture a cleaning compound for use in institutional and commercial enterprises. AML2 is headquartered in Portland, Oregon.

 

Principles of Combination and Consolidation

 

MHS and AML2 (collectively the “Company”) have common ownership and management. The financial statements of these two companies have been consolidated in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation”.

 

The non-controlling equity interest amounts shown represent the third-party ownership interest in AML2. All inter-company transactions are eliminated in these consolidated financial statements.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

 

Cash and Cash Equivalents

 

The Company considers all cash accounts and all highly liquid short-term investments purchased with an original maturity of three months or less to be cash or cash equivalents. As a result of the Company’s cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in trade accounts payable and totaled $243,007 and $44,063 at March 31, 2011 and December 31, 2010, respectively.

 

Marketable Securities

 

At March 31, 2011 and December 31, 2010, the Company held equity securities classified as available for sale. Available for sale securities are carried at fair market value with the unrealized holding gains and losses reported in other comprehensive income. For determining gross realized gains and losses, the cost of securities sold is based upon specific identification. Quoted market prices are used in determining the fair market value of the Company’s investments.

 

Accounts and Notes Receivable

 

Accounts and notes receivable consist of amounts due from customers for product sales and services. Accounts and notes receivable are reported net of an allowance for doubtful accounts. The allowance is management’s best estimate of uncollectible amounts and is based on a number of factors, including overall credit quality, age of outstanding balances, historical write-off experience and specific account analysis that projects the ultimate collectability of the outstanding balances. As of March 31, 2011and December 31, 2010, the allowance was $123,394 and $206,460, respectively.

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Inventory

 

Inventory is stated at the lower of cost or market determined using the last in-first out (LIFO) cost method.

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of individual assets or classes of assets as follows:

 

 

When an asset is sold or otherwise disposed, the related cost and accumulated depreciation or amortization are removed from the respective accounts and the gain or loss is recognized. Maintenance and repairs are charged to expense when incurred.

 

Intangible Assets

 

Intangible assets include customer relationships and formulas purchased during acquisitions. Customer relationships are amortized on a straight-line basis over the expected average life of the acquired accounts, which is five years.

 

Long-lived Assets

 

In accordance with FASB ASC 360-10-35 “Impairment of Disposal of Long-lived Assets”, losses related to the impairment of long-lived assets are recognized when the carrying amount is not recoverable and exceeds its fair value. When facts and circumstances indicate that the carrying values of long-lived assets may be impaired, management of the Company evaluates recoverability by comparing the carrying value of the assets to projected future cash flows, in addition to other qualitative and quantitative analyses.

 

Compensated Absences

 

Employees of the Company are entitled to paid vacation, sick days and personal days, depending on job classification, length of service, and other factors. It is impractical to estimate the amount of compensation for future absences and accordingly no liability has been recorded in the accompanying financial statements. The company’s policy is to recognize the costs of compensated absences when actually paid to employees.

 

Revenue Recognition

 

Revenue from product sales and services is recognized when the services are performed or the products are delivered to the customer, provided that persuasive evidence of a sales arrangement exists, both title and risk of loss have passed to the customer, and collection is reasonably assured.

 

Advertising

 

The Company expenses non-direct advertising costs when incurred. Advertising expense was $18,114 and $18,195 for the three months ended March 31, 2011 and 2010, respectively.

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Income Taxes

 

Effective July 1, 2003, the Company’s stockholder elected that the corporation be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under this provision, the stockholder is taxed on his proportionate share of the Company’s taxable income. As a Subchapter S corporation, the Company bears no liability or expense for federal income taxes. The Company is required to file income tax returns in several states. Various states do not recognize Subchapter S of the Internal Revenue Code and as such the Company may incur income tax expense.

 

FASB ASC 740-10, “Income Taxes”, clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the balance sheet. It also provides guidance on derecognition, measurement and classification of amounts related to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim period disclosures and transition relating to the adoption of new accounting standards. Under FASB ASC 740-10, the recognition for uncertain tax positions should be based on a more likely than not threshold that the tax position will be sustained upon audit. The tax position is measured as the largest amount of benefit that has a greater than fifty percent probability of being realized upon settlement. Management has determined that adoption of this topic has had no effect on the Company’s balance sheet.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments include cash, marketable securities, receivables and accrued liabilities. The Company adopted the provisions of FASB ASC Topic 820 “Fair Value Measurements and Disclosures”, effective January 1, 2008. Under FASB ASC 820-10-30-2, 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.

 

FASB ASC 820-10-30-2 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are from sources independent of the Company, whereas unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1 inputs are valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

 

Level 2 inputs are valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 inputs are valuations that are unobservable and significant to the overall fair value measurement.

 

The Company did not have any outstanding financial derivative instruments.

 

Segment Information

 

FASB ASC 280, “Segment Reporting”, establishes standards for reporting information regarding operating segments in annual financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group in making decisions on how to allocate resources and assess performance.

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company manages, allocates resources and reports in one business segment. The Company’s chief operating decision-maker, as defined under FASB ASC 280, is the Company’s chief executive officer.

 

Based on the information reviewed by its chief executive officer, the Company operates in one business segment.

 

 

The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820-10-30-2, as described in Note 2. The following table presents information about the Company’s marketable securities measured at fair value as of March 31, 2011 and at December 31, 2010.

 

 

 

 

Property and equipment as of March 31, 2011 and December 31, 2010 consists of the following:

 

 

Depreciation expense for the three months ended March 31, 2011 and 2010 is $187,710 and $183,990, respectively.

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Intangible assets as of March 31, 2011 and December 31, 2010 consists of the following:

 

 

Amortization expense for the three months ended March 31, 2011 and 2010 is $2,685 and $2,685 respectively.

 

As of March 31, 2011, future amortization of customer relationships for the next three years is as follows:

 

 

 

In July 2010, the Company amended its revolving line of credit with a financial institution having a maximum borrowing of up to $3,000,000. The line of credit matures on March 31, 2012. Borrowings under these lines are used for general working capital purposes and capital expenditures. The line of credit is collateralized by accounts receivable and substantially all assets not otherwise encumbered. Interest is payable monthly at the bank’s announced prime rate less 0.50%, which at March 31, 2011 was 3.25%. The line of credit contains financial covenants which the Company met at March 31, 2011. At March 31, 2011 and December 31, 2010, the Company had borrowings totaling $625,155 and $738,210, respectively.

 

 

The Company leases its headquarters and other facilities, equipment and vehicles under operating leases that expire at varying times through 2023. Future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2011 are as follows:

 

 

The Company leases its headquarters from a limited liability company related through common ownership. The lease expires March 2023 and has two five-year renewal options. Under terms of the lease, the Company is responsible for utilities, maintenance, taxes and insurance. Future payments under this lease

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

totaling $8,059,200 are included in the above figures. During the three months ended March 31, 2011 and 2010, the Company paid this related party $160,810 and $166,950, respectively, as rent for use of the facility.

 

Total rent expense for operating leases, including those with terms of less than one year was approximately $189,734 for the three months ended March 31, 2011.

 

The Company has determined that, as a potentially responsible party, it is likely that it has incurred a liability for environmental remediation costs resulting from leasing certain real property in past years. The Company has accrued approximately $150,000 of estimated environmental remediation costs in accrued liabilities as of March 31, 2011 and December 31, 2010.

 

 

As of March 31, 2011, the Company had guaranteed the debt of its related party lessor totaling approximately $4,655,159, which is fully collateralized by property and facilities. The Company is required to perform under the guaranty in the event the related party fails to make contractual payments. The term of the loan covered by this guaranty is through March 2018. There is no recognition of any potential future payment obligation as the Company believes the potential for making this payment is remote.

 

 

The Company has a 401(k) profit sharing plan which covers all eligible employees. Plan participants can make voluntary contributions of up to $16,500 of compensation, subject to certain limitations. Under this plan, the Company may contribute to participants’ accounts at management’s discretion. Total Company contributions to the plan for the three months ended March 31, 2011 and 2010 was $60,000 and $60,000, respectively. Accrued contributions of $59,859 and $230,000 are included in accrued liabilities at March 31, 2011 and December 31, 2010, respectively.

 

 

Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities as of March 31, 2011 and December 31, 2010 consists of the following:

 

 

The Company entered into a deferred compensation agreement with an employee in December 1993. The agreement provides that the Company pay the employee an incentive bonus based upon the number of full employment years and average monthly pay of the employee at termination. The amount is fully vested. The Company’s liability is approximately $783,896 at March 31, 2011 and December 31, 2010.

 

MT. HOOD SOLUTIONS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Supplemental Disclosure of Cash Flow Information

 

Supplemental cash flow information with respect to the three months ended March 31, 2011 and the year ended December 31, 2010 is as follows:

 

 

 

The Company evaluated all events and transactions through July 12, 2011, the date these financial statements were issued. During this period, there were no material recognizable or non-recognizable subsequent events except for the following:

 

On May 4, 2011, the Company entered into an agreement under which it sold certain assets and liabilities of the Company to Swisher Hygiene, Inc. Assets sold included substantially all inventory and supplies, accounts receivable, property and equipment, customer lists, and other assets.