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United States
Securities and Exchange Commission
Washington, D.C.  20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________, to____________.
 
001-35067
Commission File Number
 
 
SWISHER HYGIENE INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
27-3819646
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
     
4725 Piedmont Row Drive, Suite 400
   
Charlotte, North Carolina
 
28210
(Address of Principal Executive Offices)
 
(Zip Code)
 
(704) 364-7707
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  o   No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Check one:
 
Larger Accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o   No þ
 
Number of shares outstanding of each of the registrant's classes of Common Stock at March 11, 2013: 175,157,404 shares of Common Stock, $0.001 par value per share.
 


 
 

 
 
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
 
TABLE OF CONTENTS
 
      Page  
PART I. FINANCIAL INFORMATION
           
    1  
      1  
      2  
      3  
      4  
      5  
    19  
    34  
    35  
           
PART II. OTHER INFORMATION
 
           
    37  
    38  
    39  
 
 
PART I. FINANCIAL INFORMATION
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
 
September 30,
   
December 31,
 
 
2012
   
2011
 
ASSETS
Current assets
         
Cash and cash equivalents
  $ 9,876     $ 70,508  
Accounts receivable (net of allowance for doubtful accounts of $2,660 at September 30, 2012 and $2,185 at December 31, 2011)
    22,567       27,747  
Inventory
    16,719       15,689  
Assets of discontinued operations
    139,975       141,726  
Other assets
    3,471       2,619  
Total current assets
    192,608       258,289  
Property and equipment, net
    47,533       38,954  
Goodwill
    107,586       106,036  
Other intangibles, net
    51,970       56,958  
Deferred income tax assets
    14,829       14,579  
Other noncurrent assets
    3,604       3,588  
Total assets
  $ 418,130     $ 478,404  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
               
Accounts payable and accrued expenses
  $ 33,207     $ 34,450  
Long-term debt and obligations due within one year
    30,784       13,566  
Advances from shareholder
    2,000       2,000  
Liabilities of discontinued operations
    32,508       33,588  
Total current liabilities
    98,499       83,604  
Long-term debt and obligations
    12,409       47,267  
Other long-term liabilities
    3,389       3,677  
Total noncurrent liabilities
    15,798       50,944  
                 
Commitments and contingencies (Note 16)
               
                 
Stockholders' equity
               
Swisher Hygiene Inc. stockholders’ equity
               
Preferred stock, par value $0.001, authorized 10,000,000 shares, no shares issued and outstanding
         
at September 30, 3012 and December 31, 2011
    -       -  
Common stock, par value $0.001, authorized 600,000,000 shares; 175,064,011 and 174,810,082
         
shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    175       175  
Additional paid-in capital
    382,509       378,824  
Accumulated deficit
    (78,044 )     (34,330 )
Accumulated other comprehensive loss
    (829 )     (835 )
Total Swisher Hygiene Inc. stockholders’ equity
    303,811       343,834  
Non-controlling interest
    22       22  
Total stockholders' equity
    303,833       343,856  
                 
Total liabilities and stockholders' equity
  $ 418,130     $ 478,404  
 
See Notes to Condensed Consolidated Financial Statements
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share data)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
                       
Products
  $ 52,391     $ 41,719     $ 156,409     $ 82,782  
Services
    6,263       6,883       20,016       18,869  
Franchise and other
    365       638       928       3,307  
Total revenue
    59,019       49,240       177,353       104,958  
                                 
Costs and expenses
                               
Cost of sales
    26,045       21,317       78,124       42,711  
Route expenses
    10,990       9,311       31,756       22,070  
Selling, general, and administrative expenses
    30,032       20,951       95,598       51,852  
Acquisition and merger expenses
    59       643       220       4,641  
Depreciation and amortization
    5,656       3,860       15,820       8,463  
Gain from bargain purchase
    -       (4,359 )     -       (4,359 )
Total costs and expenses
    72,782       51,723       221,518       125,378  
Loss from continuing operations
    (13,763 )     (2,483 )     (44,165 )     (20,420 )
                                 
Other expense, net
    (507 )     (243 )     (1,306 )     (6,179 )
Net loss from continuing operations before income taxes
    (14,270 )     (2,726 )     (45,471 )     (26,599 )
                                 
Income tax (expense) benefit
    (22 )     782       (109 )     10,915  
Net loss from continuing operations
    (14,292 )     (1,944 )     (45,580 )     (15,684 )
                                 
Income (Loss) from discontinued operations, net of tax
    2,749       74       1,866       (276 )
Net loss
    (11,543 )     (1,870 )     (43,714 )     (15,960 )
Net income attributable to non-controlling interest
    -       (1 )     -       (1 )
Net loss attributable to Swisher Hygiene Inc.
    (11,543 )     (1,871 )     (43,714 )     (15,961 )
Comprehensive loss
                               
Foreign currency translation adjustment
    23       (288 )     6       (28 )
Comprehensive loss
  $ (11,520 )   $ (2,159 )   $ (43,708 )   $ (15,989 )
                                 
Loss per share from continuing operations
                               
Basic and diluted
  $ (0.08 )   $ (0.01 )   $ (0.26 )   $ (0.10 )
                                 
Weighted-average common shares used in the computation of loss per share
                               
Basic and diluted
    175,057,385       173,429,586       174,961,822       154,025,525  
 
See Notes to Condensed Consolidated Financial Statements
 
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share data)
 
                     
Accumulated
   
Swisher
             
         
Additional
         
Other
   
Hygiene Inc.
   
Non-
   
Total
 
   
Common Stock
   
Paid-in
   
Accumulated
   
Comprehensive
   
Stockholders'
   
Controlling
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Equity
   
Interest
   
Equity
 
                                                 
Balance at December 31, 2011
    174,810,082     $ 175     $ 378,824     $ (34,330 )   $ (835 )   $ 343,834     $ 22     $ 343,856  
                                                                 
Shares issued for non-controlling interest
    10,000       0       37       -       -       37       -       37  
Conversion of convertible promissory
                                                               
note payable
    10,047       0       37       -       -       37       -       37  
Issuance of common stock on contingent earnout
    90,909       0       170       -       -       170               170  
                                                                 
Stock based compensation
    -       -       3,441       -       -       3,441       -       3,441  
Issuance of common stock issued under stock based payment plans
    142,973       0       0       -       -       -       -       -  
Foreign currency translation adjustment
    -       -       -       -       6       6       -       6  
Net loss
    -       -       -       (43,714 )     -       (43,714 )     0       (43,714 )
                                                                 
Balance at September 30, 2012
    175,064,011     $ 175     382,509     $ (78,044 )   $ (829 )   $ 303,811     $ 22     $ 303,833  
 
Preferred stock, par value $0.001, authorized 10,000,000 shares, no shares issued and outstanding at September 30, 3012 and December 31, 2011
 
See Notes to Condensed Consolidated Financial Statements
 
 
3

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash used in operating activities of continuing operations
           
Net loss from continuing operations
  $ (45,580 )   $ (15,684 )
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities of continuing operations:
               
Depreciation and amortization
    15,820       8,463  
Provision for doubtful accounts
    2,956       896  
Stock based compensation
    3,441       3,033  
Realized and unrealized (gain) loss on fair value of financial instruments
    (199 )     4,767  
Deferred income tax liabilities
    (250 )     (11,859 )
Gain from bargain purchase
    -       (4,359 )
Changes in working capital components:
               
Accounts receivable
    2,464       (8,861 )
Inventory
    (951 )     (3,556 )
Other assets and noncurrent assets
    (871 )     (1,527 )
Accounts payable, accrued expenses, and other current liabilities
    (1,227 )     2,066  
Cash used in operating activities of continuing operations
    (24,397 )     (26,621 )
Cash used in investing activities of continuing operations
               
Purchases of property and equipment
    (15,792 )     (10,028 )
Acquisitions, net of cash acquired
    (4,310 )     (113,716 )
Restricted cash
    -       5,193  
Cash used in investing activities of continuing operations
    (20,102 )     (118,551 )
Cash (used in) provided by financing activities of continuing operations
               
Proceeds from private placements, net of issuance costs
    -       191,235  
Proceeds from line of credit, net of issuance costs
    -       41,573  
Payoff of lines of credit
    -       (27,841 )
Principal payments on long-term debt and obligations
    (18,671 )     (3,922 )
Proceeds from exercise of stock options
    -       3,366  
Cash (used in) provided by financing activities of continuing operations
    (18,671 )     204,411  
                 
Discontinued operations:
               
Net cash provided by operating activities
    4,990       7,653  
Net cash used in investing activities
    (2,741 )     (21,720 )
Net cash provided by (used in) financing activities
    289       (274 )
Cash provided by (used in) discontinued operations
    2,538       (14,341 )
                 
Net (decrease) increase in cash and cash equivalents
    (60,632 )     44,898  
Cash and cash equivalents at the beginning of the period
    70,508       38,932  
Cash and cash equivalents at the end of the period
  $ 9,876     $ 83,830  
 
See Notes to Condensed Consolidated Financial Statements
 
 
NOTES TO 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 sanitizing 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; and (iii) manual cleaning of their facilities. The Company serves customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.
 
Prospectively, we intend to grow in both existing and new geographic markets through a combination of organic and acquisition growth. However, we will continue to focus our investments towards those opportunities which will most benefit our core businesses; chemical and linen processing services. Subsequent to the sale of our Waste segment in November 2012, we will outsource waste and recycling services only through third-party providers. See Note 17, "Audit Committee Review and Subsequent Events" for additional information concerning the sale of our Waste segment.
 
We have Company-owned operations and franchise operations located throughout the United States and Canada and have entered into seven Master License Agreements covering the United Kingdom, the Netherlands, Singapore, the Philippines, Taiwan, Hong Kong/Macau/China, and Mexico. Franchise revenue from these Master Licensees was $0.9 million for the nine months ended September 30, 2012.
 
NOTE 2 —  DISCONTINUED OPERATIONS
 
During the quarter ended June 30, 2012, the Company’s Board of Directors determined that the Company would sell its Waste segment. As a result, at September 30, 2012, the Waste segment’s net assets met the “held for sale” criteria in accordance with generally accepted accounting principles and the Company has disclosed the Waste segment as discontinued operations. Accordingly, the Company has discontinued the depreciation and amortization of assets pertaining to the discontinued operations during the period following the initial change in classification. The Company would have recorded depreciation and amortization expense of $3.2 million for the three months ended September 30, 2012 had the assets relating to the Waste segment not been classified as "held for sale."
 
Upon the disposition of the Waste segment in the fourth quarter of 2012, the Company realized a gain, which will be recognized in the fourth quarter of 2012. The results of operations and the cash flows related to this segment have been reclassified to discontinued operations in our Condensed Consolidated Statements of Operations and Comprehensive Loss and Condensed Consolidated Statement of Cash Flows for all periods presented. The assets and liabilities of this segment have been reclassified to “Assets of discontinued operations” and “Liabilities of discontinued operations” in our Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011. The following table presents summarized operating results for these discontinued operations for the three and nine months ended September 30, 2012 and 2011:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
(in thousands)
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue
  $ 17,010     $ 18,168     $ 52,405     $ 41,650  
Net income (loss) after taxes
  $ 2,749     $ 74     $ 1,866     $ (276 )
 
 
Any corporate management overhead charged to the Waste segment in prior year filings has been included in continuing operations as the amounts are not expected to change as a result of the sale of the Waste segment.
 
On March 1, 2011, we closed the acquisition of Choice Environmental Services, Inc. ("Choice") and issued 8,281,920 shares of our common stock to the former shareholders of Choice, assumed $1.7 million of debt, and paid off $39.2 million of Choice debt. In paying the balance on this Choice debt, we incurred a prepayment penalty of $1.5 million which is included in loss from discontinued operations in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
Components of Assets and Liabilities from discontinued operations consist of the following as of September 30, 2012 and December 31, 2011:
 
   
2012
   
2011
 
   
(in thousands, except per share data)
 
Current assets:
               
Accounts Receivable
 
$
6,728
   
$
5,646
 
Inventory
   
23
     
88
 
Other
   
1,568
     
803
 
Total current assets from discontinued operations
 
$
8,319
   
$
6,537
 
                 
Noncurrent assets:
               
Property and equipment, net
 
$
32,265
   
$
32,663
 
Goodwill
   
53,324
     
53,324
 
Other intangibles, net
   
45,084
     
48,308
 
Other
   
983
     
894
 
Total noncurrent assets of discontinued operations
 
$
131,656
   
$
135,189
 
                 
Total assets from discontinued operations
 
$
139,975
   
$
141,726
 
                 
Current liabilities:
               
Accounts payable, accrued expenses and other current liabilities
 
$
6,163
   
$
7,276
 
Short term obligations
   
876
     
530
 
Total current liabilities of discontinued operations
 
$
7,039
   
$
7,806
 
                 
Noncurrent liabilities:
               
Long term obligations
 
$
3,722
   
$
3,991
 
Deferred tax liabilities
   
21,747
     
21,791
 
Total noncurrent liabilities from discontinued operations
 
$
25,469
   
$
25,782
 
                 
Total liabilities from discontinued operations
 
$
32,508
   
$
33,588
 
 
 
Income (loss) per share from discontinued operations for the three and nine months ended September 30, 2012 and 2011 is as follows:
 
   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2012
   
2011
 
2012
 
2011
 
Income (loss) per share from discontinued operations
                   
Basic and diluted
  $ 0.02     $ 0.00     $ 0.01     $ (0.00 )
 
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 the former shareholders of Choice, to finance the cost of leasing office buildings and properties, including warehouses. The fair value of these leased properties and the related capital lease obligations of $2.9 million and $2.2 million, respectively, are included in assets from discontinued operations and liabilities from discontinued operations.
 
The Company completed the sale of its Waste segment on November 15, 2012. See further discussion of this transaction in Note 17, “Audit Committee Review and Subsequent Events.”
 
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Principles of Consolidation
 
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission ("SEC") and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The Company's Condensed Consolidated Financial Statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented. The information at December 31, 2011 in the Company's Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 26, 2013 (the "2011 Form 10-K"). This quarterly report should be read in conjunction with the 2011 Annual Report.
 
All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform prior periods to the current year presentation, with no effect on net income.
 
Tabular information, other than share and per share data, is presented in thousands of dollars.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
 
The Company's significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements in our 2011 Form 10-K. Any significant changes to those policies or new significant policies are described below.
 
 
Adoption of Newly Issued Accounting Pronouncements
 
Fair Value:  In May 2011, the FASB issued updated accounting guidance on fair value measurements. The updated guidance resulted in common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards ("IFRS"). The Company adopted this guidance effective January 1, 2012. The adoption did not have a material impact on the disclosures of the Company’s consolidated financial information.
 
Comprehensive Income:  In June 2011 and subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Under the newly issued guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate but consecutive statements. The Company adopted this guidance effective January 1, 2012, with net loss and comprehensive loss shown as one continuous statement.
 
NOTE 4 — ACQUISITIONS
 
During the nine months ended September 30, 2012, the Company acquired four independent businesses and purchased the remaining non-controlling interest in one of its subsidiaries. The results of operations of these acquisitions have been included in the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss since their respective acquisition dates. None of these acquisitions were significant individually or in the aggregate to the Company's consolidated financial results and therefore, supplemental pro forma financial information is not presented.
 
The following table summarizes the preliminary allocation of the purchase price of these acquisitions based on the fair value of the acquired assets and assumed liabilities:
 
Net assets acquired:
       
Accounts receivable
 
$
263
 
Inventory
   
86
 
Property and equipment
   
2,079
 
Other intangibles
   
1,532
 
Accounts payable, accrued expenses and other liabilities
   
(42)
 
         
Total net assets acquired
   
3,918
 
Goodwill
   
1,550
 
         
Total purchase price
   
5,468
 
Less: debt issued or assumed
   
(1,121)
 
Less: issuance of shares
   
(37)
 
Cash Paid
 
$
4,310
 
 
Acquisition and merger expenses include costs for third party due diligence, legal, accounting and other professional services fees directly-related to the acquisition of four independent companies and the remaining non-controlling interest in one subsidiary during the nine months ended September 30, 2012.
 
The purchase price allocations for these acquisitions are preliminary and subject to changes in the fair value of assets and liabilities as of the effective dates.
 
The Company made no acquisitions during the three months ended September 30, 2012.
 
 
NOTE 5 — GAIN FROM BARGAIN PURCHASE
 
 During the nine months ended September 30, 2011, the Company recorded income of $4.4 million on the accompanying Condensed Consolidated Statement of Operations as a "Gain from bargain purchase" resulting from the Company's acquisition of J.F. Daley International, LTD. (a chemical manufacturer, referred to as "Daley"). The Company recognized the gain on bargain purchase in accordance with Accounting Standards Codification 805, and particularly sections 805-30-25 and 805-30-30 (collectively, "ASC 805"), based on its analysis described below.
 
 In accordance with ASC 805, before recognizing a gain on bargain purchase, the Company reassessed and concluded that it had identified all of the assets acquired and all of the liabilities assumed. In addition, the Company reviewed the procedures used to measure the amounts to be recognized with respect to identifiable assets acquired and liabilities assumed, as well as the aggregate consideration transferred. The objective of the review was to ensure that the measurements appropriately reflected all available information as of the acquisition date. Based on this review, the Company concluded that the fair value of the consideration transferred in the acquisition of Daley was less than the fair value of the net identifiable assets acquired, resulting in the $4.4 million gain recognized in connection with the acquisition (the "Bargain Purchase").
 
 The Company identified the following primary factors leading to the Bargain Purchase, which presented the Company with a favorable environment to negotiate pricing and purchase terms, which environment may not have been available had these factors not been present:
 
In 2010, Daley lost its largest customer and did not have a timely reaction to the resulting reduced volume or corresponding reduction in its cost structure.
 
Daley was operating under a forbearance agreement with its lender, which included significantly burdensome terms and requirements, which if not met would result in the lender demanding immediate payment of its loan to Daley.
 
Daley's lender required a personal guarantor to the loan.
 
It is the Company's understanding that both the lender and Daley desired to end their creditor/debtor relationship.
 
As a result of the transaction with Swisher, Daley was able to have significant pre-payment penalties under the terms of the forbearance agreement forgiven.
 
The opportunity for key Daley employees to continue employment post-sale with the Company pursuant to two-year employment agreements.
 
The seller was further motivated based on a desire to decrease his personal workload and to focus on other opportunities in the part of the business he would retain.
 
No other potential acquirers participated in the bidding process.
 
The Company concluded that these factors led to a situation where external circumstances caused the seller to extend favorable terms to the Company and, based on these circumstances, the Company further concluded that the gain on bargain purchase is appropriate for recognition.
 
 
NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill and other intangible assets have been recognized in connection with the Company's acquisitions and substantially all of the balance is expected to be fully deductible for income tax purposes over 15 years. Changes in the carrying amount of goodwill and other intangibles during the nine months ended September 30, 2012 were as follows:
 
   
Goodwill
   
Customer
Relationships
   
Non-Compete Agreements
   
Trademarks
   
Formulas
 
                               
Balance at December 31, 2011
  $ 106,906     $ 43,140     $ 6,947     $ 1,977     $ 4,894  
                                         
Accumulated Impairment Losses
    (870 )     -       -       -       -  
Total
    106,036       43,140       6,947       1,977       4,894  
Acquisition/Additions
    1,550       1,276       126       130       -  
Amortization
    -       (4,601 )     (1,539 )     (170 )     (187 )
Foreign currency translation
    -       (16 )     (7 )                
                                         
Balance at September 30, 2012
  $ 107,586     $ 39,799     $ 5,527     $ 1,937     $ 4,707  
 
The fair value of the customer relationships acquired were originally valued using future discounted cash flows expected to be generated from those customers. These customer relationships and contracts will be amortized on a straight-line basis over five to ten years, which is primarily based on historical customer attrition rates and lengths of contracts. The fair value of the non-compete agreements will be amortized on a straight-line basis over the length of the agreements, typically not exceeding five years. The fair value of formulas is amortized on a straight-line basis over twenty years. Trademarks and tradenames are generally indefinite lived intangibles with no amortization. In instances where there is a finite life remaining on a particular trademark or tradename, the Company amortizes them on a straight-line basis over this period. Total accumulated amortization of intangibles was $19.7 million and $13.2 million as of September 30, 2012 and December 31, 2011, respectively.
 
We assess our goodwill and other intangible assets and long-lived assets for impairment on an annual basis using a measurement date of October 31. Generally Accepted Accounting Principles require that we also assess the impairment of our goodwill and identifiable intangible assets whenever events, circumstances or other conditions indicate that we may not recover the carrying value of the asset.  As a result of the net loss from continuing operations of $45.6 million for the nine months ended September 30, 2012, an interim impairment analysis was performed.  Although we did not identify any impairment as of September 30, 2012, further testing and analysis could result in the recording of impairment losses during the quarter ended December 31, 2012.
 
NOTE 7 – INVENTORY
 
 Inventory is comprised of the following components at September 30, 2012 and December 31, 2011:
 
Finished goods
 
$
12,231
 
 
$
12,231
 
Raw materials
   
3,963
     
3,105
 
Work in process
   
525
     
353
 
                 
   
$
16,719
    $
15,689
 
 
 
NOTE 8 — STOCKHOLDERS’ EQUITY
 
Changes in stockholders’ equity for the nine months ended September 30, 2012 consisted of the following:
 
Balance at December 31, 2011
 
$
343,856
 
Conversion of convertible promissory note payable
   
37
 
Stock based compensation
   
3,441
 
Shares issued for non-controlling interest
   
37
 
Shares issued on contingent earnout
   
170
 
Foreign currency translation adjustment
   
6
 
Net loss
   
(43,714)
 
         
Balance at September 30, 2012
 
$
303,833
 
 
Acquisitions and Asset Purchases
 
We issued a total of 10,000 shares of our common stock in connection with the purchase of the remaining non-controlling interest in a subsidiary during the nine months ended September 30, 2012. Our stock price was at a weighted-average price of $3.68 at the time these shares were issued.
 
Stock Based Compensation
 
Stock based compensation is the result of the recognition of the fair value of stock based compensation on the date of grant over the service period for which the awards are expected to vest.
 
NOTE 9 — LONG-TERM DEBT AND OBLIGATIONS
 
Long-term obligations consisted of the following as of September 30, 2012 and December 31, 2011:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
                 
Line of credit agreement dated March 2011 and maturing in July 2013, interest rate of 2.8% at September 30, 2012.
 
$
17,273
   
$
25,000
 
Acquisition notes payables
   
4,841
     
7,675
 
Convertible promissory notes, 4.0% and matures at various dates through 2016
   
9,256
     
12,596
 
Capitalized lease obligations
   
11,823
     
15,562
 
                 
Total debt and obligations
   
43,193
     
60,833
 
Long-term debt and obligations due within one year
   
(30,784)
     
(13,566
)
                 
Long-term debt and obligations
 
$
12,409
   
$
47,267
 
 
 
Revolving Credit Facilities
 
In March 2011, we entered into a $100.0 million senior secured revolving Credit Facility (the "Credit Facility"), which replaced the Company’s former credit facilities. Under the Credit Facility, the Company had an initial borrowing availability of $32.5 million, which increased to the fully committed $100.0 million upon delivery of our unaudited quarterly financial statements for the quarter ended March 31, 2011 and satisfaction of certain financial covenants regarding leverage and coverage ratios and a minimum liquidity requirement, which requirements we met as of March 31, 2011.
 
Borrowings under the Credit Facility were secured by a first priority lien on substantially all of our existing and thereafter acquired assets, including $25.0 million of cash on borrowings in excess of $75.0 million. Furthermore, borrowings under the facility were 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 would 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 had the option to request swingline loans and borrowings using a base rate. Interest was payable monthly or quarterly on all outstanding borrowings. The Credit Facility was set to mature on July 31, 2013.
 
Borrowings and availability under the Credit Facility were subject to compliance with financial covenants, including achieving specified consolidated EBITDA levels, which depends on the success of our acquisition strategy, and maintaining leverage and coverage ratios and a minimum liquidity requirement. The Credit Facility also placed 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 have adversely affected our ability to borrow monies and could have resulted in a default under the Credit Facility. The Credit Facility was subject to other standard default provisions.
 
In August 2011, the Company entered into an amendment to the Credit Facility that modified the covenants, including an increase in permitted indebtedness to $40.0 million. 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 have adversely affected our ability to borrow monies and could have resulted in a default under the Credit Facility. The Credit Facility was subject to other standard default provisions.
 
During 2012, we amended our Credit Facility with Wells Fargo Bank, National Association on each of April 12, 2012, May 15, 2012, June 28, 2012, July 30, 2012, August 31, 2012, September 27, 2012, and October 31, 2012, in each case, primarily to extend the dates by which we were required to file our 2011 Form 10-K and Forms 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012 and to avoid potential defaults for not timely filing these reports. In addition, the August 31, 2012 amendment reduced the Company’s maximum borrowing limit to $50.0 million, provided that the Company met certain borrowing base requirements. The September 27, 2012 amendment further reduced the Company’s maximum borrowing limit to $25.0 million, provided that the Company met certain borrowing base requirements. The October 31, 2012 amendment required the Company to place certain amounts in the collateral account under the sole control of the administrative agent to meet the Company’s unencumbered liquidity requirements. In connection with the sale of our Waste segment on November 15, 2012, we paid off and terminated the Credit Facility.
 
Convertible Promissory Notes
 
During the nine months ended September 30, 2012 and in connection with certain acquisitions, the Company issued convertible promissory notes with an aggregate principal value of $1.1 million. The notes have a four percent interest rate and are convertible by the Company based on the trading price the day before conversion limited to a maximum aggregate of 320,352 shares of our common stock. The Company may convert the principal and interest into shares of common stock at any time conditional upon the listing of the common shares on NASDAQ or another National exchange.
 
 
NOTE 10 — 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 fair value of the above convertible promissory notes issued as a part of business combinations is based primarily on a Black-Scholes pricing model. The significant management assumptions and estimates used in determining the fair value included the expected term and volatility of our common stock. The expected volatility was based on an analysis of industry peer's historical stock price over the term of the notes as the Company did not have sufficient history of its own stock volatility, which was estimated at approximately 25%. Subsequent changes in the fair value of these instruments were recorded in other expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss. 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 are Level 3 financial instruments. The Company has no Level 1 or Level 2 financial instruments.
 
In addition, during 2011, the Company issued an earn out that was to be settled in up to 90,909 shares held in escrow within one year from the date of acquisition or once the acquired business’s revenue achieved an agreed upon level. The number of shares that would be released from escrow varied based on the achievement of agreed upon revenue metrics. In 2012, the Company released from escrow all 90,909 shares to the sellers.
 
The following table is a reconciliation of changes in fair value of the notes that are marked to market each subsequent reporting period for the nine months ended September 30, 2012:
 
Balance at December 31, 2011
 
$
3,129
 
Issuance of convertible promissory notes
   
-
 
Settlement/conversion of convertible promissory notes
   
(1,586)
 
Net gains included in earnings
   
(199)
 
Balance at September 30, 2012
 
$
1,344
 
The amount of gains included in earnings attributable to liabilities still held at the end of the period
 
$
66
 
 
 The above balance represents the value of convertible notes that are subject to continual remeasurement and mark to market accounting and is included in the $9.3 million balance for all of the Company’s convertible promissory notes at September 30, 2012.
 
 
Financial Instruments
 
The Company’s financial instruments, which may expose the Company to concentrations of credit risk, include cash and cash equivalents, accounts receivable, accounts payable, and debt. Cash and cash equivalents are maintained at financial institutions. The carrying amounts of cash and the current portion of accounts receivable and accounts payable approximate fair value due to the short maturity of these instruments. The fair value of the Company’s debt is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and maturities, and approximates the carrying value of these liabilities. As discussed above, the convertible promissory notes that are convertible into a variable number of the Company’s common shares are recorded at fair value at each reporting period date.
 
NOTE 11 — OTHER EXPENSE, NET
 
Other expense, net consisted of the following:
 
   
Three Months Ended September 30,
   
Nine Months Ended September,
 
   
2012
   
2011
   
2012
   
2011
 
                                 
Interest Income
  $ 0     $ 61     $ 0     $ 158  
Interest expense
    (433 )     (1,007 )     (1,545 )     (1,691 )
Realized and unrealized net (gain) loss on fair value of financial instruments
    -       819       199       (4,767 )
Foreign currency
    39       (105 )     (1 )     58  
Other
    (113 )     (11 )     41       63  
                                 
Total other expense, net
  $ (507 )   $ (243 )   $ (1,306 )   $ (6,179 )
 
NOTE 12 — SUPPLEMENTAL CASH FLOW INFORMATION
 
The following table includes supplemental cash flow information, including non-cash investing and financing activity for the nine months ended September 30, 2012 and 2011.
 
   
2012
   
2011
 
                 
Cash paid for interest
 
$
1,788
   
$
1,018
 
                 
Cash received from interest
 
$
0
   
$
204
 
                 
Conversion of promissory notes
 
$
37
   
$
5,077
 
                 
Debt issued or assumed in business combinations
 
$
1,121
   
$
20,321
 
                 
Issuance of shares on contingent earnout   $ 170     $ -  
                 
Issuance of shares for acquisitions, property and equipment
 
$
37
   
$
95,924
 
 
 
NOTE 13 — LOSS PER SHARE
 
Net loss attributable per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The following were not included in the computation of diluted loss per share for the nine months ended September 30, 2012 and 2011 as their inclusion would be anti-dilutive:
 
Warrants to purchase 5.5 million shares of common stock at $0.50 per share that were exercised in May 2011 for the period prior to exercise during 2011.
 
5,708,687 shares of common stock underlying outstanding stock options and restricted stock units.
 
NOTE 14 — INCOME TAXES
 
As a result of the merger with CoolBrands International, Inc. on November 2, 2010, 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 nine months ended September 30, 2012, the Company has recorded an estimate for income taxes based on the Company's projected net loss for the full twelve month period ending December 31, 2012 and an effective income tax rate of approximately 1%. The amount of income tax expense recorded for the period is based on the pre-tax net loss for the nine months ended September 30, 2012.
 
In addition, during the nine months ended September 30, 2012, management has concluded that it is not likely that the Company will realize the benefits of all of its deferred tax assets and as a result, believes a full valuation allowance will be required at December 31, 2012. This is primarily due to the projected net operating losses and the projected net deferred tax asset position created by the sale of the Waste segment on November 15, 2012. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended September 30, 2012. It should also be noted that the Company does not consider the tax deferred liabilities related to indefinite lived intangible assets when determining the need for a valuation allowance.
 
NOTE 15 — RELATED PARTY TRANSACTIONS
 
For the nine months ended September 30, 2012 and 2011, the Company incurred $0.1 million and $0.0 million, respectively, for training course development and utilization of the delivery platform from a company, the majority of which is owned by a partnership in which a shareholder and another director have a controlling interest.
 
In August 2010, the Company borrowed $2.0 million for working capital purposes, pursuant to an unsecured note payable to one of its shareholders that bears interest at the short-term Applicable Federal Rate. The balance as of September 30, 2012 and December 31, 2011 is $2.0 million. The note was paid in full following the sale of Choice in November 2012, which is discussed more fully in Note 17 “Audit Committee Review and Subsequent Events.”
 
The Company has agreed to pay an entity, related by common ownership with shareholders of the Company, a fee for services provided, including product development, marketing and branding strategy, and management advisory services.  During the nine months ended September 30, 2012 and 2011 the Company paid this entity $0.1 million in each period for these services.
 
During the three months ended September 30, 2012 and 2011, the Company purchased $1.8 million and $1.7 million, respectively, of chemical products from an entity owned, in part, by a Company employee. During the nine months ended September 30, 2012 and 2011, purchases were $5.6 million and $1.7 million, respectively.  At September 30, 2012 and December 31, 2011, the Company has $0.5 million and $1.1 million included in accounts payable to this entity.
 
At September 30, 2012 and December 31, 2011, the Company had receivable balances of $0.1 million and $2.1 million, respectively, from former owners of two acquired businesses.
 
 
The Company is obligated to make lease payments pursuant to certain real property and equipment lease agreements with employees that were former owners of acquired companies. Payments during the three months ended September 30, 2012 and 2011 to these companies totaled $0.4 million and $0.4 million, respectively.  During the nine months ended September 30, 2012 and 2011, lease payments were $1.2 million and $0.7 million, respectively.
 
At December 31, 2011, the Company had a liability of $0.2 million related to the funding of the 401(k) Profit Sharing Plan of an acquisition. The amount was paid in full by September 30, 2012.
 
In connection with the acquisition of Choice, we entered into capital leases that have initial terms of five or ten years with companies owned by shareholders of Choice, to finance the cost of leasing office buildings and properties, including warehouses. The fair value of these leased properties of $2.9 million is included in assets from discontinued operations and is being depreciated over the terms of the respective leases. Capital lease obligations of $2.2 million and $2.3 million is included in liabilities from discontinued operations as of September 30, 2012 and December 31, 2011, respectively.
 
The Company sold its Waste segment during the fourth quarter of 2012, as more fully described in Note 17 “Audit Committee Review and Subsequent Events.” and in connection therewith, transferred all remaining capital lease obligations to the buyers.
 
NOTE 16 — COMMITMENTS AND CONTINGENCIES
 
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
 
Securities Litigation
 
There have been six shareholder lawsuits filed in federal courts in North Carolina and New York asserting claims relating to the Company's March 28, 2012 announcement regarding the Company's Board conclusion that the Company's previously issued interim financial statements for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011, and the other financial information in the Company's quarterly reports on Form 10-Q for the periods then ended, should no longer be relied upon and that an internal review by the Company's Audit Committee primarily relating to possible adjustments to the Company's financial statements was ongoing.
 
On March 30, 2012, a purported Company shareholder commenced a putative securities class action on behalf of purchasers and sellers of the Company's common stock in the U.S. District Court for the Southern District of New York against the Company, the former President and Chief Executive Officer ("former CEO"), and the former Vice President and Chief Financial Officer ("former CFO"). The plaintiff asserted claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on alleged false and misleading disclosures in the Company's public filings. In April and May 2012, four more putative securities class actions were filed by purported Company shareholders in the U.S. District Court for the Western District of North Carolina against the same set of defendants. The plaintiffs in these cases have asserted claims alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") based on alleged false and misleading disclosures in the Company's public filings. In each of the putative securities class actions, the plaintiffs seek damages for losses suffered by the putative class of investors who purchased Swisher common stock.
 
On May 21, 2012, a shareholder derivative action was brought against the Company's former CEO and former CFO and the Company's directors for alleged breaches of fiduciary duty by another purported Company shareholder in the U.S. District Court for the Southern District of New York. In this derivative action, the plaintiff seeks to recover for the Company damages arising out of a possible restatement of the Company's financial statements.
 
On May 30, 2012, the Company, and its former CEO and former CFO filed a motion with the United States Judicial Panel on Multidistrict Litigation ("MDL Panel") to centralize all of the cases in the Western District of North Carolina by requesting that the actions filed in the Southern District of New York be transferred to the Western District of North Carolina.
 
In light of the motion to centralize the cases in the Western District of North Carolina, the Company, and its former CEO and former CFO requested from both courts a stay of all proceedings pending the MDL Panel's ruling. On June 4, 2012, the U.S. District Court for the Southern District of New York adjourned all pending dates in the cases in light of the motion to transfer filed before the MDL Panel. On June 13, 2012, the U.S. District Court for the Western District of North Carolina issued a stay of proceedings pending a ruling by the MDL Panel.
 
On August 13, 2012, the MDL Panel granted the motion to centralize, transferring the actions filed in the Southern District of New York to the Western District of North Carolina. In response, on August 21, 2012, the Western District of North Carolina issued an order governing the practice and procedure in the actions transferred to the Western District of North Carolina as well as the actions originally filed there.
 
On October 18, 2012, the Western District of North Carolina held an Initial Pretrial Conference at which it appointed lead counsel and lead plaintiffs for the securities class actions, and set a schedule for the filing of a consolidated class action complaint and defendants' time to answer or otherwise respond to the consolidated class action complaint. The Western District of North Carolina stayed the derivative action pending the outcome of the securities class actions.
 
 
Derivative Litigation
 
On April 11, 2012 and May 11, 2012, the Board received demand letters (the “Demands”) from two of the Company’s purported stockholders. In general, the Demands ask the Board to undertake an independent investigation into potential violations of Delaware and federal law relating to the Company's March 28, 2012 disclosure that its previously issued financial results for the first, second and third fiscal quarters of 2011 should no longer be relied upon, and to initiate claims against responsible parties and/or implement therapeutic changes as needed. The Board has not yet made a determination regarding its response to the Demands.
 
Other Related Matters
 
The Company has been contacted by the staff of the Atlanta Regional Office of the SEC and by the United States Attorney's Office for the Western District of North Carolina (the "U.S. Attorney's Office") after publicly announcing the Audit Committee's internal review and the delays in filing our periodic reports. The Company has been asked to provide information about these matters on a voluntary basis to the SEC and the U.S. Attorney's Office. The Company is fully cooperating with the SEC and the U.S. Attorney's Office. Any action by the SEC, the U.S. Attorney's Office or other government agency could result in criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees.
 
During 2011, we entered into a series of arm's length securities purchase agreements to sell an aggregate of 21,857,143 shares of our common stock to certain funds of a global financial institution (the "Private Placements"). 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 Placements. If the registration statement was not filed or declared effective within specified time periods, the investors would have been, or if the registration statement ceased to remain effective for a period of time exceeding a sixty day grace period, the investors would be entitled to receive monthly liquidated damages in cash equal to one percent of the original offering price for each share purchased in the private placement that at such time could not be sold by the investor, with an interest rate of one percent per month accruing daily for liquidated damages not paid in full within ten business days. On August 12, 2011, the SEC declared effective, a resale registration statement relating to the 21,857,143 shares issued in the Private Placements. The registration statement, including post-effective amendments to the registration statement, remained effective through April 12, 2012. As a result of not timely filing our 2011 Form 10-K, the registration statement relating to shares issued in the Private Placements is not effective, and as such we may be subject to liability under the penalty provision.
 
In connection with a distribution agreement entered into in December 2010, the Company provided a guarantee that the distributor's operating cash flows associated with the agreement would not fall below certain agreed-to minimums, subject to certain pre-defined conditions, over the ten year term of the distribution agreement. If the distributor's annual operating cash flow does fall below the agreed-to annual minimums, the Company will reimburse the distributor for any such short fall up to a pre-designated amount. No value was assigned to the fair value of the guarantee at September 30, 2012 and December 31, 2011 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 9, "Fair Value Measurements and Financial Instruments" for the fair value hierarchy.
 
The Company also entered into a Manufacturing and Supply Agreement (the "Cavalier Agreement") with another plant in conjunction with its acquisition of Sanolite and Cavalier in July of 2011. The agreement, which was scheduled to expire on December 31, 2012, was extended for an additional two year period with an automatic 18-month term. The agreement provides for pricing adjustments, up or down, on the first of each month based on the vendor's actual average product costs incurred during the prior month. Additional product payments made by the Company due to the vendors pricing adjustment as a result of this agreement have not been significant and have not represented costs materially above the going market price for such product.
 
In June of 2012, a fire occurred at a linen warehouse of one of the Company’s subsidiaries in Tampa, Florida.  The fire heavily damaged the leased building and its contents, requiring the building to be demolished.  Shortly after the fire, we were able to resume services to our customers through outsourcing arrangements and business interruption was minimal.  We maintain comprehensive general liability and property insurance, including business interruption insurance.  In November 2012, we reached agreement with our insurance carrier and settled the claims.  In accordance with generally accepted accounting principles, we expect to record a gain in other income (expense) on the involuntary conversion of assets in the fourth quarter of 2012. At September 30, 2012, the above events resulted in a receivable of $0.7 million recorded in other current assets.
 
 
NOTE 17 — AUDIT COMMITTEE REVIEW AND SUBSEQUENT EVENTS
 
Audit Committee Review and Restatements
 
On March 21, 2012, Swisher's Board of Directors (the "Board") determined that the Company's previously issued interim financial statements for the quarterly periods ended June 30, 2011 and September 30, 2011, and the other financial information in the Company's quarterly reports on Form 10-Q for the periods then ended should no longer be relied upon. Subsequently, on March 27, 2012, the Audit Committee concluded that the Company's previously issued interim financial statements for the quarterly period ended March 31, 2011 should no longer be relied upon. The Board and Audit Committee made these determinations in connection with the Audit Committee's then ongoing review into certain accounting matters. We refer to the interim financial statements and the other financial information described above as the "Prior Financial Information."
 
The Audit Committee initiated its review after an informal inquiry by the Company and its independent auditor regarding a former employee's concerns with the application of certain accounting policies. The Company first initiated the informal inquiry by requesting that both the Audit Committee and the Company’s independent auditor look into the matters raised by the former employee. Following this informal inquiry, the Company’s senior management and its independent auditor advised the Chairman of the Company’s Audit Committee regarding the matters. Subsequently, the Audit Committee determined that an independent review of the matters presented by the former employee should be conducted. During the course of its independent review, and due in part to the significant number of acquisitions made by the Company, the Audit Committee determined that it would be in the best interest of the Company and its stockholders to review the accounting entries relating to each of the 63 acquisitions made by the Company during the year ended December 31, 2011.
 
On May 17, 2012, Swisher announced that the Audit Committee had substantially completed the investigative portion of its internal review. In connection with substantial completion of its internal review, the Audit Committee recommended to the Board that the Company's Chief Financial Officer and two additional senior accounting personnel be separated from the Company as a result of their conduct in connection with the preparation of the Prior Financial Information. Following this recommendation, the Board determined that these three accounting personnel be separated from the Company, effective immediately. In making these employment determinations, the Board did not identify any conduct by these employees intended for or resulting in any personal benefit.
 
On May 17, 2012, the Company further announced that it had commenced a search process for a new Chief Financial Officer and that Steven Berrard, then the Company’s President and Chief Executive Officer, would also serve as the Company’s interim Chief Financial Officer.
 
On February 19, 20, and 21, 2013, respectively, the Company filed amended quarterly reports on Form 10-Q/A for the quarterly periods ended March 31, 2011, June 20, 2011, and September 30, 2011 (the "Affected Periods"), including restated financial statements for the Affected Periods, to reflect adjustments to previously reported financial information.
 
On February 27, 2013, the Company provided the NASDAQ Hearings Panel (the "Panel") an update on the Company’s compliance efforts and requested a further extension of time to become current in the filing of its periodic reports. The Company requested an extension through March 15, 2013 to file its Form 10-Qs for the quarterly periods ended March 31, 2012, June 30, 2012 and September 31, 2012 (collectively, the “2012 Form 10-Qs”). Additionally, the Company requested an extension through April 30, 2013 to file its Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).
 
On February 28, 2013, the Company received a letter from the Panel granting the Company continued listing on NASDAQ through March 15, 2013, provided the Company files the 2012 Form 10-Qs by March 15, 2013. The Panel also advised the Company that it will retain jurisdiction to make a determination whether to continue listing the Company through the filing of the 2012 Form 10-K.
 
During 2012, we incurred costs in excess of $6.0 million directly attributable to the Audit Committee’s investigation process. In addition, during 2012 and through February 15, 2013, we have incurred approximately $12.0 million in additional review-related expenses, including fees for additional audit work, accounting review, IT consulting, legal representation, and valuation services.
 
Sale of Waste Segment
 
On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment, to Waste Services of Florida, Inc. for $123.3 million. The stock purchase agreement contains earn-out provisions that could provide additional sale proceeds to the Company of $1.8 million upon achievement of a predetermined revenue target and is also subject to customary purchase price adjustments, including revenue and EBITDA metrics. Ten percent of the purchase price is subject to a holdback and adjustment upon delivery of audited financial statements to the buyer.
 
As a result of the sale of Choice and all of its operations in the Waste segment, the Company operates in one business segment, Hygiene, for fiscal year 2012 filings. In connection with the acquisition of Choice on March 1, 2011, the Company recorded deferred tax liabilities that allowed the Company to make a determination that the valuation allowance for the deferred tax asset of $2.4 million recorded at December 31, 2010 was no longer necessary at March 31, 2011. Upon the sale of Choice in the fourth quarter of 2012 and with our history of operating losses, a valuation allowance is projected to be necessary in 2012, as discussed more fully in Note 14.
 
Revolving Credit Facility
 
During 2012, we amended our Credit Facility with Wells Fargo Bank, National Association on each of April 12, 2012, May 15, 2012, June 28, 2012, July 30, 2012, August 31, 2012, September 27, 2012, and October 31, 2012, in each case, primarily to extend the dates by which we were required to file our 2011 Form 10-K and Forms 10-Q for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 and to avoid potential defaults for not timely filing these reports. In addition, the August 31, 2012 amendment reduced the Company’s maximum borrowing limit to $50.0 million, provided that the Company met certain borrowing base requirements. The September 27, 2012 amendment further reduced the Company’s maximum borrowing limit to $25.0 million, provided that the Company met certain modified borrowing base requirements. The October 31, 2012 amendment required the Company to place certain amounts in a collateral account under the sole control of the administrative agent to meet the Company’s unencumbered liquidity requirements. In connection with the sale of our Waste segment on November 15, 2012, we paid off the Credit Facility, which resulted in the termination of the Credit Facility.
 
 
 
You should read the following discussion and analysis in conjunction with our unaudited Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of this Quarterly Report on Form 10-Q as well as our "Selected Financial Data" and our audited Consolidated Financial Statements and the related notes thereto included in Item 6 and Item 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). In addition to historical consolidated financial information, this discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Actual results could differ from these expectations as a result of certain risk factors, including those described under Item 1A, "Risk Factors," of our 2011 Form 10-K.
 
Business Overview and Outlook
 
Swisher Hygiene Inc. provides essential hygiene and sanitizing 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; and (iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.
 
Prospectively, we intend to grow in both existing and new geographic markets through a combination of organic and acquisition growth. However, we will continue to focus our investments towards those opportunities which will most benefit our core businesses, chemical and linen processing services. Subsequent to the sale of our Waste segment in November 2012, we will offer outsourced waste and recycling services only through third-party providers.
 
See Note 17, “Audit Committee Review and Subsequent Events.” in the Notes to Condensed Consolidated Financial Statements for significant developments subsequent to September 30, 2012.
 
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 operated in two segments: Hygiene and Waste. During the quarter ended June 30, 2012, the Company’s Board of Directors determined to sell its Waste segment. On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment to Waste Services of Florida, Inc. for $123.3 million. As discussed in Note 2 to the Condensed Consolidated Financial Statements, the Company has applied discontinued operations accounting treatment and disclosures for this transaction on a retroactive basis. See Note 2, “Discontinued Operations” and Note 17, “Audit Committee Review and Subsequent Events” of the Notes to the Condensed Consolidated Financial Statements for further information. As a result of the sale of the Waste segment, the Company’s continuing operations are classified in one business segment, Hygiene, for fiscal year 2012.
 
 
Acquisitions
 
During the nine months ended September 30, 2012, the Company acquired four independent businesses and the remaining non-controlling interest in one of its subsidiaries. Aggregate consideration included cash of $4.3 million and assumed debt of $1.1 million. The Company made no acquisitions during the three months ended September 30, 2012.
 
See Note 4, "Acquisitions" of the Notes to Condensed Consolidated Financial Statements for a further description of the acquisitions.
 
Sale of Waste Segment
 
On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment, to Waste Services of Florida, Inc. for $123.3 million. The stock purchase agreement contains earn-out provisions that could provide additional sale proceeds to the Company of $1.8 million upon achievement of a predetermined revenue target and is also subject to customary purchase price adjustments, including revenue and EBITDA metrics. Ten percent of the purchase price is subject to a holdback and adjustment upon delivery of audited financial statements to the buyer.
 
As a result of the sale the Waste segment, the Company operates in one business segment, Hygiene, for fiscal year 2012 filings. In connection with the acquisition of Choice on March 1, 2011, the Company recorded deferred tax liabilities that allowed the Company to make a determination that the valuation allowance for the deferred tax asset of $2.4 million recorded at December 31, 2010 was no longer necessary at March 31, 2011. Upon the sale of the Waste segment in the fourth quarter of 2012 and with our history of operating losses, a valuation allowance is projected to be necessary in 2012, as discussed more fully in Note 14 “Income Taxes” of the Notes to Condensed Consolidated Financial Statements.
 
Acquisition and Merger Expenses
 
Acquisition and merger expenses include costs directly-related to the acquisition of four independent businesses and the remaining non-controlling interest in one of its subsidiaries during the nine months ended September 30, 2012. These costs include costs directly related to acquisitions and the merger and include third party due diligence, legal, accounting and professional service expenses.
 
Critical Accounting Policies and Estimates
 
The preparation of condensed consolidated financial statements in conformity with GAAP 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. These critical accounting policies have not changed since the filing of our 2011 Form 10-K.
 
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.
 
 
Adoption of Newly Issued Accounting Pronouncements
 
 Fair Value:  In May 2011, the FASB issued updated accounting guidance on fair value measurements. The updated guidance resulted in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The Company adopted this guidance effective January 1, 2012. The adoption did not have a material impact on the disclosures of the Company’s consolidated financial information.
 
 Comprehensive Income:  In June 2011 and subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Under the newly issued guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate but consecutive statements. The Company adopted this guidance effective January 1, 2012, with net loss and comprehensive loss shown as one continuous statement.
 
RESULTS OF CONTINUING OPERATIONS
 
Impact of Acquisitions
 
During the year ended December 31, 2011, we acquired nine franchisees and 54 independent businesses, including four in our Waste segment. During the nine months ended September 30, 2012, we acquired four independent businesses. The term "Acquisitions" refers to the nine franchisees and 54 independent businesses acquired during the year ended December 31, 2011 and the four independent businesses and the remaining non-controlling interest of one of our subsidiaries acquired during the nine months ended September 30, 2012, including the subsequent growth in existing customer revenue existing at the time of acquisition as well as revenue from new customer relationships created by the acquired business. See Note 17, “Audit Committee Review and Subsequent Events.” of the Notes to Condensed Consolidated Financial Statements for information concerning the sale of businesses subsequent to September 30, 2012.
 
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012
 
Revenue
 
We derive our revenue from the delivery of a wide variety of hygiene and sanitation products and services. We deliver these 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; and (iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.
 
Total revenue and the revenue derived from each revenue type for the three months ended September 30, 2012 and 2011 are as follows:
 
   
2012
   
%
   
2011
   
%
 
Revenue
 
(In thousands)
 
Company-owned operations:
                       
Chemical products
 
$
40,985
     
69.4
%
 
$
34,128
     
69.3
%
Hygiene product and services
   
11,064
     
18.7
     
11,245
     
22.9
 
Rental and other
   
6,605
     
11.2
     
3,229
     
6.5
 
Total Company-owned operations
   
58,654
     
99.4
     
48,602
     
98.7
 
Franchise products and fees:
   
365
     
0.6
     
638
     
1.3
 
                                 
Total revenue
 
$
59,019
     
100.0
%
 
$
49,240
     
100.0
%
 
 
Consolidated revenue increased $9.8 million to $59.0 million for the three month period ending September 30, 2012 as compared to $49.2 million for the same period in 2011. The components of the revenue growth were a $10.1 million increase in revenue from Company-owned operations offset by a $0.3 million reduction in revenue from franchise products and fees. These amounts represented revenue changes of 19.9% for total revenue, 20.7% for Company-owned operations, and (42.8%) for franchise revenue.
 
Within Company-owned operations excluding acquisitions for the three months ended September 30, 2012, the $1.2 million in revenue growth from the same period in 2011 was comprised primarily of growth in chemical products of $1.3 million.
 
Excluding the impact of Acquisitions, revenue from Company-owned operations increased by 3.0% and total revenue increased 1.9%. The lower percentage increase in total revenue is attributable to the decline in franchise products and fees due to the purchase of Swisher franchisees.
 
 The change in revenue mix as well as the growth of the Company-owned operations was primarily attributable to (i) acquisition efforts focused on chemical product and service companies to round out our North American operating footprint, (ii) our emphasis on the expansion of our core ware-washing and laundry chemical offerings both through direct sales efforts and via distributors, (iii) with a reduction in focus on our legacy hygiene services offering, and (iv) strategic expansion in the linen rental marketplace.
 
Cost of Sales
 
Cost of sales consists primarily of paper, air freshener, chemical and other consumable products sold to our customers, franchisees and international licensees. Cost of sales for the three months ended September 30, 2012 and 2011 are as follows:
 
   
2012
   
%(1)
   
2011
   
%(1)
 
Cost of Sales
 
(In thousands)
 
Company-owned operations
 
$
25,682
     
43.8
%
 
$
21,130
     
43.5
%
Franchise products and fees
   
363
     
99.3
     
187
     
29.3
 
                                 
Total cost of sales
 
$
26,045
     
44.1
%
 
$
21,317
     
43.3
%
 
(1)            Represents cost as a percentage of the respective product line revenue.
 
 
Cost of sales increased $4.7 million or 22.2% to $26.0 million for the three months ended September 30, 2012 as compared to the same period in 2011, which includes $3.8 million of total cost of sales related to Acquisitions. Excluding the impact of Acquisitions, cost of sales increased $0.9 million or 5.8% for the three months ended September 30, 2012 as compared to the same period in 2011.
 
Company-owned operations cost of sales increased $4.6 million or 21.5% to $25.7 million for the three months ended September 30, 2012 as compared to the same period in 2011 and includes $8.7 million related to Acquisitions. Excluding the impact of Acquisitions, Company-owned cost of sales increased $0.8 million to $17.0 million or 41.0% of related revenue for the three months ended September 30, 2012 as compared to $16.1 million or 40.3% of related revenue for the same period in 2011. The decrease in the percentage of Company-owned cost of sales for the three months ended September 30, 2012, is a result of the increased revenue from chemical products, including direct and wholesale chemical sales, which have a higher cost to produce versus other Company-owned products, offset by efficiencies from the Company's shift to internal manufacturing.
 
Route Expenses
 
Route expenses consist of costs incurred by the Company for the delivery of products and providing services to customers. The details of route expenses for the three months ended September 30, 2012 and 2011 are as follows:
 
   
2012
     
%(1)
     
2011
     
%(1)
 
Route Expenses
    (In thousands)  
Company-owned operations:
                             
Compensation
 
$
7,921
     
13.5
%
 
$
6,898
     
14.2
%
Vehicle and other expenses
   
3,069
     
5.2
     
2,413
     
5.0
 
Total route expenses
 
$
10,990
     
18.7
%
 
$
9,311
     
19.2
%
 
(1)
Represents route expenses as a percentage of total revenue from Company-owned operations.
 
Route expenses increased $1.7 million or 18.0% to $11.0 million for the three months ended September 30, 2012 as compared to $9.3 million in the same period in 2011, including an increase of $0.9 million or 8.1% of total route expenses related to Acquisitions. Excluding the impact of Acquisitions, route expenses increased $0.8 million or 8.5% for the three months ended September 30, 2012 and 2011 compared to the same period in 2011 as a result of a decrease in compensation and vehicle costs in the amount of $0.5 million and $0.3 million, respectively, related to the increase in revenue. As a percentage of revenue, route expenses decreased 0.2 percentage points to 18.7%
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of the costs incurred for:
 
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.
 
Selling expenses, which include marketing expenses and compensation and commission for branch sales representatives and corporate account executives.
 
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 for the three months ended September 30, 2012 and 2011 are as follows:
 
   
2012
      %(1)       2011       %(1)  
Selling, General & Administrative Expenses
 
(In thousands)
 
Compensation
  $ 15,902       27.1 %   $ 15,077       31.0 %
Occupancy
    2,499       4.3       1,626       3.3  
Other
    11,631       19.8       4,248       8.7  
                                 
Total selling, general & administrative expenses
  $ 30,032       51.2 %   $ 20,951       43.1 %
 
(1)            Represents expenses as a percentage of the related revenue.
 
Selling, general, and administrative expenses increased $9.0 million or 43.3% to $30.0 million for the three months ended September 30, 2012 as compared to $21.0 million in the same period of 2011 and includes $4.3 million from Acquisitions. Excluding the impact from Acquisitions, selling, general, and administrative expenses increased $4.8 million or 22.9%.
 
Compensation expenses increased $0.8 million or 5.5% to $15.9 million for the three months ended September 30, 2012 as compared to $15.1 million in the same period of 2011 and includes $2.3 million related to Acquisitions. Excluding the impact of these Acquisitions, hygiene compensation expense decreased $1.5 million or 11.4% to $11.8 million for the three months ended September 30, 2012 as compared to the same period in 2011. This decrease is primarily due to a planned reduction in compensation.
 
Occupancy expenses increased $0.9 million or 53.7% to $2.5 million for the three months ended September 30, 2012 as compared to $1.6 million in the same period of 2011 and is a result of Acquisitions.
 
Other selling, general and administrative expenses increased $7.4 million or 173.8% to $11.6 million for the three months ended September 30, 2012 as compared to $4.2 million in the same period in 2011 and includes an increase of $1.3 million related to acquisitions.  Excluding the impact from Acquisitions, other expenses increased $6.1 million or 159.1% to $10.0 million primarily due to the expansion of our business that included increases in expenses for professional fees, including $5.0 in investigation and review-related expenses, reserve for allowance for bad debt, utilities, office equipment, and other office and administrative expenses, many of which relate to our transition from a private company to a public company.
 
Depreciation and Amortization
 
Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization increased $1.8 million or 46.5% to $5.7 million for the three months ended September 30, 2012 as compared to $3.9 million during the same period of 2011. This decrease includes $1.1 million for Acquisitions and is primarily the result of amortization for acquired other intangible assets including customer contracts and relationships and non-compete agreements obtained as part of these acquisitions. The remaining increase is primarily related to depreciation on capital expenditures unrelated to business combinations of $6.8 million made since September 30, 2011.
 
 
 Other Expense, Net
 
Details of other expense, net for the three months ended September 30, 2012 and 2011 follows:
 
   
2012
   
2011
 
             
Interest income
  $ 0     $ 61  
Interest expenses
    (433 )     (1,007 )
Realized and unrealized net gain (loss) on fair value of financial instruments
    -       819  
Foreign currency
    39       (105 )
Other
    (113 )     (11 )
                 
Total other expense, net
  $ (507 )   $ (243 )
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
 
Revenue
 
Total revenue and the revenue derived from each revenue type for the nine months ended September 30, 2012 and 2011 are as follows:
 
   
2012
   
%
   
2011
   
%
 
Revenue
 
(In thousands)
 
Company-owned operations:
                       
Chemical products
 
$
122,859
     
69.3
%
 
$
63,570
     
60.6
%
Hygiene product and services
   
34,412
     
19.4
     
31,229
     
29.8
 
Rental and other
   
19,154
     
10.8
     
6,852
     
6.5
 
Total Company-owned operations
   
176,425
     
99.5
     
101,651
     
96.8
 
Franchise products and fees:
   
928
     
0.5
     
3,307
     
3.1
 
                                 
Total revenue
 
$
177,353
     
100.0
%
 
$
104,958
     
100.0
%
 
Consolidated revenue increased $72.4 million to $177.4 million for the nine month period ending September 30, 2012 as compared to $105 .0 million for the same period in 2011. The components of the revenue growth were a $74.8 million increase in revenue from Company-owned operations offset by a $2.4 million reduction in revenue from franchise products and fees. These amounts represented revenue changes of 69.0% for total revenue, 73.6% for Company-owned operations, and (71.9%) for franchise revenue.
 
 
Within Company-owned operations, excluding acquisitions, for the nine months ended September 30, 2012, the $6.9 million in revenue growth from the same period in 2011 was comprised of growth in chemical products of $9.2 million, offset by a decrease in franchise revenue of $2.4 million.  These changes in revenue represent 19.5% and (71.9%), respectively.
 
Excluding the impact of Acquisitions, revenue from Company-owned operations increased by 6.8% and total revenue increased 6.6%. The lower percentage increase in total revenue is attributable to the decline in franchise products and fees due to the purchase of Swisher franchisees.
 
The change in revenue mix as well as the growth of the Company-owned operations was primarily attributable to (i) acquisition efforts focused on chemical product and service companies to round out our North American operating footprint, (ii) our emphasis on the expansion of our core ware-washing and laundry chemical offerings both through direct sales efforts and via distributors, (iii) with a reduction in focus on our legacy hygiene services offering, and (iv) strategic expansion in the linen rental marketplace.
 
Cost of Sales
 
Cost of sales for the nine months ended September 30, 2012 and 2011 are as follows:
 
     
2012
     
%(1)
     
2011
     
%(1)
 
Cost of Sales
      (In thousands)  
Company-owned operations
  $ 77,404       43.9 %   $ 40,930       40.3 %
Franchise products and fees
    720       77.6       1,781       53.9  
                                 
Total cost of sales
  $ 78,124       44.0 %   $ 42,711       40.7 %
 
(1)            Represents cost as a percentage of the respective product line revenue.
 
Cost of sales increased $35.4 million or 82.9% for the nine months ended September 30, 2012 as compared to the same period in 2011, which includes an increase of $29.9 million of total cost of sales related to Acquisitions. Excluding the impact of Acquisitions, cost of sales increased $5.5 million or 16.8% for the nine months ended September 30, 2012 as compared to the same period in 2011.
 
Company-owned operations cost of sales increased $36.5 million or 89.1% to $77.4 million for the nine months ended September 30, 2012 as compared to the same period in 2011 and includes an increase of $30.8 million related to Acquisitions. Excluding the impact of Acquisitions, Company-owned cost of sales increased $5.7 million to $36.5 million or 4.6% of related revenue for the nine months ended September 30, 2012 as compared to $31.0 million or 37.8% of related revenue for the same period in 2011. The increase of Company-owned cost of sales for the nine months ended September 30, 2012, is a result of the increased revenue from chemical products, including direct and wholesale chemical sales; the decrease in the percentage is due to a higher cost incurred in chemical versus other products.
 
 
Route Expenses
 
The details of route expenses for the nine months ended September 30, 2012 and 2011 are as follows:
 
   
2012
     
%(1)
     
2011
     
%(1)
 
Route Expenses
    (In thousands)  
Company-owned operations:
                             
Compensation
 
$
22,735
     
12.9
%
 
$
16,416
     
16.1
%
Vehicle and other expenses
   
9,021
     
5.1
     
5,654
     
5.6
 
Total route expenses
 
$
31,756
     
18.0
%
 
$
22,070
     
21.7
%
 
(1)
Represents route expenses as a percentage of total revenue from Company-owned operations.
 
Route expenses increased $9.7 million or 43.9% to $31.8 million for the nine months ended September 30, 2012 as compared to $22.0 million in the same period in 2011, including an increase of $8.3 million or 37.6% of total route expenses related to Acquisitions. Excluding the impact of Acquisitions, route expenses increased $1.4 million or 6.3% for the nine months ended September 30, 2012 and 2011 compared to the same period in 2011 as a result of a change in compensation and vehicle costs in the amount of $0.4 million and $1.0 million, respectively, related to the increase in revenue. As a percentage of revenue, route expenses decreased 17.1% to 18.0% due to the Company's ability to leverage its revenue growth in Company-owned operations.
 
Selling, General and Administrative Expenses
 
The details of selling, general and administrative expenses for the nine months ended September 30, 2012 and 2011 are as follows:
 
   
2012
      %(1)       2011       %(1)  
Selling, General & Administrative Expenses
 
(In thousands)
 
Compensation
  $ 49,260       27.9 %   $ 33,610       33.1 %
Occupancy
    7,476       4.2       3,829       3.8  
Other
    38,862       22.0       14,413       14.2  
                                 
Total selling, general & administrative expenses
  $ 95,598       54.2 %   $ 51,852       51.0 %
 
(1)
Represents expenses as a percentage of the related revenue.
 
Selling, general, and administrative expenses increased $43.7 million or 84.4% to $95.6 million for the nine months ended September 30, 2012 as compared to $51.9 million in the same period of 2011 and includes an increase of $24.5 million from Acquisitions. Excluding the impact from Acquisitions, selling, general, and administrative expenses increased $19.3 million or 37.2%.
 
 
Compensation expenses increased $15.6 million or 46.6% to $49.3 million for the nine months ended September 30, 2012 as compared to $33.6 million in the same period of 2011 and includes an increase of $15.4 million related to Acquisitions. Excluding the impact of these Acquisitions, hygiene compensation expense increased $0.2 million or 0.8% to $30.0 million for the nine months ended September 30, 2012 as compared to the same period in 2011. This increase is primarily the result of costs related to the expansion of our corporate, field and distribution sales organizations that began in 2009 and has continued into 2012 to accelerate the growth in our core chemical program.
 
Occupancy expenses increased $3.6 million or 95.3% to $7.5 million for the nine months ended September 30, 2012 as compared to $3.9 million in the same period of 2011 and is primarily a result of Acquisitions.
 
Other selling, general and administrative expenses increased $24.4 million or 169.6% to $38.9 million for the nine months ended September 30, 2012 as compared to $14.4 million in the same period in 2011 and includes an increase of $6.0 million for Acquisitions. Excluding the impact from Acquisitions, other expenses increased $18.5 million or 137.6% to $31.9 million primarily due to the expansion of our business that included increases in expenses for professional fees, including $16.4 million in investigation and review-related expenses, reserve for allowance for bad debt, utilities, office equipment, and other office and administrative expenses, many of which relate to our transition from a private company to a public company.
 
Depreciation and Amortization
 
Depreciation and amortization increased $7.4 million or 86.9% to $15.8 million for the nine months ended September 30, 2012 as compared to $8.5 million during the same period of 2011. This increase includes $1.4 million for Acquisitions and is primarily the result of amortization for acquired other intangible assets including customer contracts and relationships and non-compete agreements obtained as part of these acquisitions. The remaining increase is primarily related to depreciation on capital expenditures unrelated to business combinations of $6.8 million made since September 30, 2011.
 
Other Expense, Net
 
Details of other expense, net for the nine months ended September 30, 2012 and 2011 follows:
 
   
2012
   
2011
 
                 
Interest income
 
$
0
   
$
158
 
Interest expenses
   
(1,545)
     
(1,691)
 
Realized and unrealized net gain (loss) on fair value of convertible notes
   
199
     
(4,767)
 
Foreign currency
   
(1)
     
58
 
Other
   
41
     
63
 
                 
Total other expense, net
 
$
(1,306)
   
$
(6,179)
 
 
The net loss on debt related fair value measurements for the nine months ended September 30, 2012 is the result of the required adjustment to fair value of the convertible promissory notes that were issued during the first nine months of 2011 and the first nine months of 2012. The fair value of these convertible promissory notes is impacted by the market price of our stock. See Note 8, "Long-term Debt and Obligations" of the Notes to Condensed Consolidated Financial Statements.
 
 
Cash Flows Summary
 
The following table summarizes cash flows from continuing operations for the nine months ended September 30, 2012 and 2011:
 
   
2012
   
2011
 
Cash Flows Summary
 
(In thousands)
 
Net cash used in operating activities
 
$
(24,397)
   
$
(26,621)
 
Net cash used in investing activities
   
(20,102)
     
(118,551)
 
Net cash (used in) provided by financing activities
   
(18,671)
     
204,411
 
Net increase (decrease) in cash from continuing operations
   
(63,170)
     
59,239
 
Net increase (decrease) in cash from discontinued operations
   
2,538
     
(14,341)
 
Net increase (decrease) in cash and cash equivalents
 
$
(60,632)
   
$
44,898
 
 
Net cash used in operating activities for the nine months ended September 30, 2012 was $24.4 million compared to $26.6 million in the same period of 2011. The decrease of $2.2 million is due to an increase in the net loss of $29.9 million which is partially offset by an increase in depreciation of $7.4 million, an increase in net deferred tax liabilities of $11.6 million, plus $4.4 million due to 2011 gain from bargain purchase.
 
Net cash used in investing activities decreased $98.4 million to $20.1 million for the nine months ended September 30, 2012 compared with net cash used in investing activities of $118.6 million for the same period of 2011. This decrease is due to a decrease in acquisitions of $109.4 million, partially offset by, an increase in purchases of property and equipment of $5.8 million, and the release of restricted cash of $5.2 million in 2011.
 
Cash used in financing activities was $18.7 million for the nine months ended September 30, 2012, compared with net cash provided by financing activities of $204.4 million during the same period in 2011. This change of $223.0 million was primarily due to $191.2 million of proceeds from private placements of our common stock in 2011, plus net proceeds from the lines of credit of $13.7 million.
 
Liquidity and Capital Resources
 
We fund the development and growth of our business with cash generated from operations, bank credit facilities, the sale of equity, third party financing for acquisitions, and capital leases for equipment.
 
Revolving Credit Facilities
 
In March 2011, we entered into a $100.0 million senior secured revolving Credit Facility (the "Credit Facility"), which replaced the Company’s former credit facilities. Under the Credit Facility, the Company had an initial borrowing availability of $32.5 million, which increased to the fully committed $100.0 million upon delivery of our unaudited quarterly financial statements for the quarter ended March 31, 2011 and satisfaction of certain financial covenants regarding leverage and coverage ratios and a minimum liquidity requirement, which requirements we met as of March 31, 2011.