Swisher Hygiene Inc.
Swisher Hygiene Inc. (Form: 10-Q, Received: 08/10/2015 18:03:10)


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 June 30, 2015
OR
 
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
 
 
Commission File Number: 001-35067
 
SWISHER HYGIENE INC.
 
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
27-3819646
(State or Other Jurisdiction of
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  þ  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  þ  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
 
 Larger Accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ
 
Number of shares outstanding of each of the registrant's classes of Common Stock at August 6, 2015: 17,628,914 shares of Common Stock, $0.001 par value per share.

 
 

 
SWISHER HYGIENE INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
 
TABLE OF CONTENTS
 
   
Page
PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
1
 
Condensed Consolidated Balance Sheets at June 30, 2015 (Unaudited) and December 31, 2014
 
1
 
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three  and Six Months Ended June 30, 2015 and 2014
 
2
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2015 and 2014
 
3
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
4
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
11
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
22
ITEM 4.
CONTROLS AND PROCEDURES
 
22
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
25
ITEM 1A.
RISK FACTORS
 
26
ITEM 6.
EXHIBITS
27
 
 
 

 
 
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
   
June 30,
       
   
2015
   
December 31,
 
   
(Unaudited)
   
2014
 
Current assets
           
Cash and cash equivalents
  $ 1,672     $ 7,233  
Restricted cash
    231       231  
Accounts receivable (net of allowance for doubtful accounts of approximately $0.9 million at June 30, 2015 and $1.0 million at December 31, 2014)
    16,024       18,751  
Inventory, net
    13,592       15,426  
Deferred income taxes
    497       534  
Other assets
    3,367       2,525  
Total current assets
    35,383       44,700  
Property and equipment, net
    32,162       37,037  
Other intangibles, net
    5,471       6,654  
Customer relationships and contracts, net
    19,585       22,792  
Other noncurrent assets
    1,725       2,015  
Total assets
  $ 94,326     $ 113,198  
                 
Current liabilities
               
Accounts payable
  $ 10,763     $ 13,627  
Accrued payroll and benefits
    2,806       3,467  
Accrued expense
    7,741       7,122  
Long-term debt and obligations due within one year
    1,935       1,884  
Line of credit
    611       -  
Total current liabilities
    23,856       26,100  
Long-term debt and obligations
    931       1,185  
Deferred income taxes
    558       558  
Other long-term liabilities
    4,028       4,065  
Total noncurrent liabilities
    5,517       5,808  
                 
Equity
               
Preferred stock, par value $0.001, authorized 10,000,000 shares; no shares issued and outstanding at June 30, 2015 and December 31, 2014
    -       -  
Common stock, par value $0.001, authorized 600,000,000 shares; 17,622,216 shares and 17,612,278 shares issued and outstanding at June 30, 2015 and December 31, 2014 (1)
    18       18  
Additional paid-in capital (1)
    390,145       389,942  
Accumulated deficit
    (323,884 )     (307,363 )
Accumulated other comprehensive loss
    (1,326 )     (1,307 )
Total equity
    64,953       81,290  
Total liabilities and equity
  $ 94,326     $ 113,198  
 
(1)   
All outstanding share amounts and computations using such amounts have been retroactively adjusted to reflect the June 3, 2014 one-for-ten reverse stock split.
 
See Notes to Condensed Consolidated Financial Statements
 
 
1

 
 
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share data)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Revenue
                       
Products
  $ 40,160     $ 44,780     $ 79,423     $ 88,021  
Services
    4,398       4,809       8,727       9,503  
Franchise and other
    276       366       526       726  
Total revenue
    44,834       49,955       88,676       98,250  
                                 
Costs and expenses
                               
Cost of sales (exclusive of route expenses and related depreciation and amortization)
    20,706       22,973       40,668       44,785  
Route expenses
    11,630       12,598       23,321       24,961  
Selling, general, and administrative expenses
    15,858       17,134       32,370       36,904  
Depreciation and amortization
    4,530       5,175       9,120       10,533  
Impairment loss on assets held for sale
    -       960       -       2,989  
Impairment loss on goodwill and intangible assets
    166       5,821       166       5,821  
Total costs and expenses
    52,890       64,661       105,645       125,993  
Loss from operations
    (8,056 )     (14,706 )     (16,969 )     (27,743 )
                                 
Other income (expense), net
    357       (501 )     471       (1,219 )
Net loss before income taxes
    (7,699 )     (15,207 )     (16,498 )     (28,962 )
Income tax (expense) benefit
    5       60       (23 )     23  
Net loss
    (7,694 )     (15,147 )     (16,521 )     (28,939 )
                                 
Comprehensive loss
                               
Foreign currency translation adjustment
    8       16       (19 )     1  
Comprehensive loss
  $ (7,686 )   $ (15,131 )   $ (16,540 )   $ (28,938 )
                                 
Loss per share (1)
                               
Basic and diluted
  $ (0.43 )   $ (0.86 )   $ (0.93 )   $ (1.64 )
                                 
Weighted-average common shares used in the computation of loss per share (1)
         
Basic and diluted
    17,753,691       17,703,886       17,751,962       17,696,221  
 
(1)   
All outstanding share amounts and computations using such amounts have been retroactively adjusted to reflect the June 3, 2014 one-for-ten reverse stock split.
 
See Notes to Condensed Consolidated Financial Statements
 
 
2

 
 
SWISHER HYGIENE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
Operating activities
           
Net loss from continuing operations
  $ (16,521 )   $ (28,939 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation and amortization
    9,120       10,533  
Provision for doubtful accounts
    553       231  
Stock based compensation
    208       1,011  
Deferred income taxes
    37       (51 )
Impairment loss on assets held for sale
    -       2,989  
Impairment loss on intangible assets
    166          
Impairment loss on goodwill
    -       5,821  
Loss on sale of assets
    339       54  
(Gain) loss on sale of assets held for sale
    (1,190 )     814  
Changes in operating assets and liabilities:
               
Accounts receivable
    1,406       1,732  
Inventory
    1,834       (512 )
Accounts payable, accrued expense and other current liabilities
    (497 )     3,113  
Other assets and non-current assets
    (2,962 )     1,421  
Net cash used in operating activities of continuing operations
    (7,507 )     (1,783 )
Net cash used in operating activities of discontinued operations
    -       (2,069 )
Cash used in operating activities
    (7,507 )     (3,852 )
Investing activities
               
Purchases of property and equipment
    (2,962 )     (4,049 )
Cash received on sale of assets held for sale
    4,463       54  
Cash received on sale of property and equipment
    42       1,149  
Restricted cash
    -       1,087  
Cash provided by (used in) investing activities
    1,543       (1,759 )
Financing activities
               
Principal payments on debt
    (2,147 )     (2,525 )
Proceeds from debt issuances
    1,934       -  
Proceeds from line of credit, net of issuance costs
    3,935       -  
Payments on line of credit
    (3,324 )        
Proceeds from capital lease
    10       -  
Taxes paid related to income tax withheld on settlement of equity awards
    (5 )     (22 )
Cash provided by (used in) financing activities
    403       (2,547 )
                 
Net decrease in cash and cash equivalents
    (5,561 )     (8,158 )
Cash and cash equivalents at the beginning of the period
    7,233       21,465  
Cash and cash equivalents at the end of the period
  $ 1,672     $ 13,307  
 
See Notes to Condensed Consolidated Financial Statements
 
 
3

 
 
SWISHER HYGIENE INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
NOTE 1 — BASIS OF PRESENTATION
 
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 position, results of operations, comprehensive loss and cash flows for the periods presented. The information at December 31, 2014 in the Company's Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheet included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on April 1, 2015. The Company's 2014 Annual Report on Form 10-K is referred to in this quarterly report as the “2014 Annual Report.” This quarterly report should be read in conjunction with the 2014 Annual Report.
 
Intercompany balances and transactions have been eliminated in consolidation. Tabular information, other than share and per share data, is presented in thousands of dollars. Certain reclassifications have been made to prior year amounts for consistency with the current period presentation.
 
The preparation of financial statements in conformity with U.S. 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 1 of the Notes to Consolidated Financial Statements in our 2014 Annual Report. There have been no significant changes to those policies.
 
On June 3, 2014, a one-for-ten reverse split of the Company's issued and outstanding common stock, $0.001 par value per share, became effective ("Reverse Stock Split"). Trading of the common stock on a post-Reverse Stock Split adjusted basis began at the open of business on the morning of June 3, 2014. All historic share and per share information, including loss per share, in this Form 10-Q have been retroactively adjusted to reflect the Reverse Stock Split.
 
Going Concern
 
Our Condensed Consolidated Financial Statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. The Company has suffered recurring losses from operations and has not generated positive cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must do, but not limited to, some or all of the following: (i) improve operating results through improved customer retention, profitable organic revenue growth, and continued improvements in cost efficiencies; (ii) sell additional assets; (iii) raise additional equity; and/or (iv) obtain additional financing through debt. There can be no assurance that we will be able to improve operating results or obtain additional funds by selling additional assets, raising additional equity or obtaining additional financing when needed or that such funds, if available, will be obtainable on terms satisfactory to us.
 
If we are not able to improve operating results or obtain additional funds by selling additional assets, continued improvements in cost efficiencies, raising additional equity or obtaining additional financing, material adverse events may occur including, but not limited to: 1) a reduction in the nature and scope of our operations, 2) our inability to fully implement our current business plan, and 3) defaults under the Credit Facility (as defined below). There can be no assurances that we will be able to successfully improve our liquidity position. Our condensed consolidated financial statements do not reflect any adjustments that might result from the adverse outcome relating to this uncertainty.
 
 
4

 
 
Newly Issued Accounting Pronouncements
 
In April, 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . The amendments in this accounting standard raise the threshold for a disposal to qualify as a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This accounting standard update is effective for annual periods beginning on or after December 15, 2014 and related interim periods, with early adoption allowed. The adoption of this standard did not have a material impact on the Company’s consolidated financial results.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-09, Revenue from Contracts with Customers . This ASU is intended to clarify the principles for recognizing revenue by providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.

In August 2014, the Financial Accounting Standards Board issued ASU Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. The new requirements are effective for the annual periods ending after December 15, 2016, and for interim periods and annual periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.
 
NOTE 2 — DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
 
Discontinued Operations
 
For the six months ended June 30, 2015, there were no discontinued operations. For the six month period ended June 30, 2014, net cash used in operating activities of discontinued operations was $2.1 million and consisted of payments primarily related to legal fees and the settlement of a contractual dispute that the Company accepted responsibility to resolve as a part of the sale of the Waste segment. The Company completed the sale of its Waste segment on November 15, 2012.

Assets Held For Sale
 
In accordance with ASC 360, Property, Plant and Equipment , the Company’s estimates of fair value require significant judgment and are regularly reviewed and subject to change based on market conditions, changes in the customer base of the operations or routes, and our continuing evaluation as to the facility's acceptable sale price.  

During the second quarter of 2014, the Company updated its estimates of the fair value of certain linen routes and operations to reflect various events that occurred during the period. The cumulative impairment loss for the six months ended June 30, 2014 was $3.0 million, of which $1.7 million was attributable to a reduction in the estimate of net sale proceeds for a linen processing operation. The factors driving the $1.7 million reduction were the cancellation notifications, received from three major customers, resulting in a significant loss of forecasted revenue; and the operation’s 2014 year-to-date loss which was in excess of the Company’s estimates. The Company made the decision to close this linen processing operation and the fair value was written down to zero. During the first quarter of 2015, the Company completed the sale of equipment of this closed operation classified as asset held for sale, resulting in the net receipt of $0.3 million in cash and a $0.3 million gain. The gain is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
During March 2015, the Board of Directors of the Company approved a resolution to sell the Company’s remaining linen operation. In accordance with ASC 360, Property, Plant and Equipment, these assets were classified as assets held for sale at March 31, 2015 and were adjusted to the lower of historical carrying amount or fair value, less costs to sell, which was $3.1 million. The estimated fair value was derived based on the assessment of the potential net selling price. The Company completed the sale of this linen operation on May 12, 2015 receiving $4.0 million in cash and notes receivable plus purchased accounts receivables, resulting in a gain of $0.9 million. The gain is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
 
5

 
 
For the three and six months ended June 30, 2015, linen related revenue attributable to the assets held for sale and sold linen assets was $0.7 million and $2.3 million, respectively, and $1.1 million and $2.5 million for the three and six months ended June 30, 2014, respectively. The 2014 annual revenue was $9.6 million attributable to the assets held for sale and sold linen assets. As of June 30, 2015, there were no assets held for sale.
 
NOTE 3 GOODWILL AND OTHER INTANGIBLE ASSETS
 
The Company’s accounting policy is to perform an annual impairment test in the fourth quarter or more frequently whenever events or circumstances indicated that the carrying value of intangible assets may not be recoverable. On a quarterly basis, we monitor the key drivers of fair value to detect the existence of indicators or changes that would warrant an interim impairment test for our intangible assets. Goodwill was fully written-off in the second quarter of 2014 with a non-cash impairment charge of $5.8 million. The Company performed an assessment of its proprietary chemical formulas in the quarter ended June 30, 2015 because of initiatives throughout the organization to reduce the number of active stock keeping units (“SKUs”). Upon completion of the assessment and impairment testing, it was determined that the fair value of formulas was lower than the net book value, resulting in an impairment charge of $0.2 million.
 
Amortization expense on finite lived intangible assets for the three months ended June 30, 2015 and 2014 was $1.7 and $2.0 million, respectively, and for the six months ended June 30, 2015 and 2014 was $3.4 million and $4.0 million, respectively.
 
NOTE 4 — INVENTORY
 
Inventory, net of reserves, as of June 30, 2015 and December 31, 2014 consisted of the following:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
Finished goods
  $ 10,584     $ 12,286  
Raw materials
    2,573       2,780  
Work in process
    435       360  
Total
  $ 13,592     $ 15,426  
 
NOTE 5 — EQUITY
 
On May 15, 2014, the Reverse Stock Split of the Company’s issued and outstanding common stock at a ratio of one-for-ten was approved by the Company’s stockholders. The Reverse Stock Split became effective June 3, 2014, pursuant to a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation filed with the State of Delaware. The Company is authorized in its Amended and Restated Certificate of Incorporation to issue up to a total of 600,000,000 shares of common stock at a par value of $.001 per share and 10,000,000 shares of preferred stock at a par value of $.001 per share. The Company’s common stock continues to trade on the Nasdaq Capital Market under the symbol SWSH under a new CUSIP number.  In the Condensed Consolidated Balance Sheets, the Equity section has been retroactively adjusted to reflect the Reverse Stock Split for all periods presented by reducing the line item Common stock and increasing the line item Additional paid-in capital, with no change to Equity in the aggregate.
 
Changes in equity for the six months ended June 30, 2015 consisted of the following:
 
Balance at December 31, 2014
  $ 81,290  
Stock based compensation
    208  
Payments to cover RSU's
    (5 )
Foreign currency translation adjustment
    (19 )
Net loss
    (16,521 )
Balance at June 30, 2015
  $ 64,953  

 
6

 
 
Comprehensive Loss
 
A summary of the changes in the components of accumulated other comprehensive loss for the six months ended June 30, 2015 is provided below:
 
   
Foreign Currency Translation Adjustment
   
Employee Benefit Plan Adjustment, Net of Tax
   
Accumulated Other Comprehensive Loss
 
Balance at December 31, 2014
  $ (125 )   $ (1,182 )   $ (1,307 )
Current period other comprehensive loss
    (19 )     -       (19 )
Balance at June 30, 2015
  $ (144 )   $ (1,182 )   $ (1,326 )
 
NOTE 6 — LONG-TERM DEBT AND OBLIGATIONS
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
Notes payable
  $ 1,058     $ 1,193  
Convertible promissory notes, 4.0%: maturing at various dates through 2016
    486       832  
Capitalized lease obligations and other financing
    1,322       1,044  
Total debt and obligations
    2,866       3,069  
Long-term debt and obligations due within one year
    (1,935 )     (1,884 )
Long-term debt and obligations
  $ 931     $ 1,185  
 
Interest on notes payable range between 3.7% and 4.0% and mature at various dates through 2019. At the Company’s election, the Company may settle, at any time prior to and including the maturity date, any portion of the outstanding convertible promissory notes’ principal balance of $0.5 million, plus accrued interest, in a combination of cash and shares of common stock. To the extent that the Company’s common stock is part of such settlement, the settlement price is the most recent closing price of the Company’s common stock on the trading day prior to the date of settlement. Although none of these notes have been settled to date with shares, if all notes outstanding at June 30, 2015 were to be settled with shares the Company would issue 462,700 shares of common stock based on the per share value at June 30, 2015.
 
On August 29, 2014, the Company entered into a $20.0 million revolving credit facility, through the execution of a Loan and Security Agreement, by and among the Company, as Guarantor, and certain subsidiaries of the Company and collectively, as Borrower, and Siena Lending Group LLC, as Lender (the “Credit Facility”). The Credit Facility matures on August 29, 2017.
 
Interest on borrowings under the Credit Facility will accrue at the Base Rate plus 2.00% and will be payable monthly. Base Rate is defined as the greater of (1) the Prime Rate, (2) the Federal Funds Rate plus 0.50%, or (3) 3.25%. 
 
 Borrowings and availability under the Credit Facility are subject to a borrowing base and limitations, and compliance with other terms specified in the agreement. Borrowings under the Credit Facility are secured by a first priority lien on certain of the Company’s and its subsidiaries’ assets. The calculated borrowing base as of June 30, 2015 was $11.0 million, of which $4.1 million was outstanding under letters of credit, $0.6 million was outstanding under borrowings and $6.3 million was unused.
 
 The Credit Facility contains certain customary representations and warranties, and certain customary covenants on the Company’s ability to, among other things, incur additional indebtedness, 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. The Credit Facility contains various events of default and certain cash management and reporting requirements. The Company has met all required covenants under the Credit Facility as of June 30, 2015.
 
 
7

 
 
The Company has entered into capitalized lease obligations with third party finance companies to finance the cost of certain equipment. At June 30, 2015, these obligations bore interest at rates ranging between 4.0% and 18.4% and at December 31, 2014, interest ranged between 4.0% and 18.4%.
 
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.
 
NOTE 7 — OTHER INCOME (EXPENSE), NET
 
   
Three Months Ended
   
Six Months Ended
 
      June 30,       June 30,  
   
2015
   
2014
   
2015
   
2014
 
Interest income
  $ -     $ 3     $ -     $ 7  
Interest expense
    (103 )     (145 )     (197 )     (223 )
Foreign currency
    (100 )     (85 )     (171 )     (100 )
Other
    560       (274 )     839       (903 )
Total other income (expense), net
  $ 357     $ (501 )   $ 471     $ (1,219 )
 
As described in Note 2, “Discontinued Operations and Assets Held for Sale”, “Other” for the three and six months ended June 30, 2015, primarily consists of a $0.9 and $1.2 million gain related to closed operations, and for the three and six months ended June 30, 2014, primarily represents a $0.2 million and $0.8 million loss related to the sale of assets held for sale.
 
NOTE 8 — SUPPLEMENTAL CASH FLOW INFORMATION
 
      Six Months Ended June 30,  
   
2015
   
2014
 
Cash paid for income taxes
  $ 33     $ 91  
                 
Cash paid for interest
  $ 197     $ 223  
                 
Cash received from interest
  $ -     $ 7  
 
NOTE 9 — LOSS PER SHARE
 
Basic net loss attributable to common stockholders per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Shares of common stock underlying outstanding stock options of which the market price of the common stock is higher than the exercise price of the related stock awards and unvested restricted stock units of 75 were not included in the computation of diluted loss per share for the six months ended June 30, 2015, since their inclusion would be anti-dilutive.
 
Shares of common stock underlying outstanding stock options of which the market price of the common stock is higher than the exercise price of the related stock awards and unvested restricted stock units of 21,479 were not included in the computation of diluted loss per share for the six months ended June 30, 2014 since their inclusion would be anti-dilutive.
 
NOTE 10 — INCOME TAXES
 
In projecting the Company’s income tax expense for 2015, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2015. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended June 30, 2015.
 
 
8

 
 
For the three month and six months ended June 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded in the first and second quarter of 2015 included the accrual of income tax expense related to an additional valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a “naked credit”). Specifically, the Company does not consider the deferred tax liabilities related to indefinite lived intangible assets when determining the need for a valuation allowance.
 
NOTE 11— RELATED PARTY TRANSACTIONS
 
The Company paid fees 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 significant shareholder, former director and three former executives of the Company have a controlling interest. Fees paid during the three and six months ended June 30, 2015 and 2014 were less than $0.1 million.
 
As discussed further below in Note 12, “Commitments and Contingencies,” the Company entered into a Manufacturing and Supply Agreement (the “Cavalier Agreement”) with a plant in connection with its acquisition of Sanolite in July 2011.  The Cavalier Agreement was terminated in September 2014, pursuant to the terms of the agreement. In connection with the acquisition in 2011, two of the owners of both Sanolite and the manufacturing plant became Company employees.  There were no purchases, pursuant to the Cavalier Agreement, for the three and six months ended June 30, 2015 and $1.6 million and $3.1 million for the three and six months ending June 30, 2014, respectively. At June 30, 2015, there were no balances included in accounts payable due to this entity, and at December 31, 2014, the Company had $0.3 million included in accounts payable due to this entity. As described below, the transactions pursuant to the Cavalier Agreement were considered to be conducted at the going market prices for such products.
 
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. Such lease payments made were $0.2 million during the three months ended June 30, 2015 and 2014, and were $0.4 million during the six months ended June 30, 2015 and 2014.
 
NOTE 12 — COMMITMENTS AND CONTINGENCIES
 
Guarantees
 
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 June 30, 2015 and December 31, 2014, 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 instrument given the unobservable inputs used in the projected cash flow model.
 
As discussed above in Note 11, “Related Party Transactions,” the Company entered into the Cavalier Agreement. The agreement, which was scheduled to expire on December 31, 2012, was extended for an additional two year period with an automatic 18-month renewal term and a six month termination provision. 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. The Cavalier Agreement was terminated in September 2014 pursuant to the terms of the agreement. 
 
 
9

 
 
LEGAL MATTERS
 
We may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations. However, the results of these matters cannot be predicted with certainty and no assurance can be given that the ultimate resolution of any legal or administrative proceedings or disputes will not have a material adverse effect on our business, financial condition and results of operations.

  Securities Litigation
 
On May 21, 2012, a stockholder derivative action was brought against the Company’s former CEO and former CFO and the Company’s then directors for alleged breaches of fiduciary duty by a purported Company stockholder in the United States District Court for the Southern District of New York.  In this derivative action, captioned Arsenault v. Berrard, et al., 1:12-cv-4028, the plaintiff seeks to recover for the Company damages arising out of the Company’s March 28, 2012 announcement regarding the Board of Director’s 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 August 13, 2012, the Arsenault derivative action, along with a related putative securities class action pending in the Southern District of New York, was transferred to the United States District Court for the Western District of North Carolina where other related putative securities class actions were pending.  All actions were consolidated under the caption In re Swisher Hygiene, Inc. Securities and Derivative Litigation, MDL No. 2384.  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 Arsenault derivative action, pending the outcome of the securities class actions.
 
On August 6, 2014, following a hearing, the Western District of North Carolina approved a settlement of the securities class actions, and issued an Order and Final Judgment that, among other things, dismissed the securities class actions pending in the United States with prejudice and provided for full and complete releases to defendants. The Arsenault derivative action is still pending.
 
On June 11, 2013, an individual action was filed in the United States District Court for the Southern District of Florida captioned Miller, et al. v. Swisher Hygiene, Inc., et al., No. 0:13-CV-61292-JAL, against the Company, its former CEO and former CFO, and a former Company director, bringing state and federal claims founded on the allegations that in deciding to sell their company to the Company, plaintiffs relied on defendants’ statements about such things as the Company’s accounting and internal controls, which, in light of the Company’s restatement of its financial statements, were false. On July 17, 2013, the Company notified the United States Judicial Panel on Multidistrict Litigation (“MDL Panel”) of this action, and requested that it be transferred and centralized in the Western District of North Carolina with the other actions pending there. On July 23, 2013, the MDL Panel issued a Conditional Transfer Order (the “Miller CTO”), conditionally transferring the case to the Western District of North Carolina. On July 29, 2013, plaintiffs notified the MDL Panel that they would seek to vacate the Miller CTO. In light of the proceedings in the MDL Panel, defendants requested that the Southern District of Florida stay all proceedings pending the MDL Panel’s ruling. On August 6, 2013, the Southern District of Florida issued a stay of all proceedings pending a ruling by the MDL Panel.  On October 2, 2013, following briefing on the issue of whether the Miller CTO should be vacated, the MDL Panel issued an order transferring the action to the Western District of North Carolina.  The Company and the individual defendants filed motions to dismiss the complaint on March 20, 2014.  Briefing on the motions to dismiss was completed on May 12, 2014.  On June 2, 2014, plaintiffs filed a motion with the Western District of North Carolina seeking a suggestion for remand from that court to the MDL Panel. Briefing on that motion was completed on June 26, 2014. Oral argument on the motions to dismiss and motion for suggestion for remand were heard on July 22, 2014.   On August 5, 2014, the Western District of North Carolina denied plaintiffs’ motion for suggestion for remand.  On October 22, 2014, the Company filed a notice of supplemental authority in support of its motion to dismiss the complaint.  On November 4, 2014, plaintiffs filed a response to the notice of supplemental authority. On July 8, 2015, the Western District of North Carolina ruled on the motions to dismiss. The Western District of North Carolina dismissed plaintiffs’ federal claims and certain of their state law claims. Other state law claims against the Company, its former CEO, and a former Company director, were not dismissed. After issuing its ruling, the Western District of North Carolina recommended by letter to the MDL Panel that the action be transferred back to the Southern District of Florida. On July 16, 2015, the Western District of North Carolina issued an order staying all proceedings in the action pending a determination by the MDL Panel on its recommendation.
  
 
10

 
 
Other 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 the Company’s March 28, 2012 public announcement of the Audit Committee’s internal review and the delays in filing its periodic reports. The Company has been asked to make certain individuals available and to provide certain information about these matters 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 fines and/or criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees.
 
NOTE 13 — SUBSEQUENT EVENT

In August 2015, the Company sold its wholly owned subsidiary which conducted all of the Company's operations in Canada for total proceeds of $2.769 million. The difference between the sale price and the carrying value of the assets sold will be accounted for in the third quarter of 2015 and the Company expects to record a gain at that time.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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, 2014 (the “2014 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 2014 Form 10-K and this Quarterly Report on Form 10-Q.
 
Business Overview
 
We currently operate in one business segment, Hygiene, which encompasses providing essential hygiene and sanitizing service solutions to customers in a wide range of end-markets, including foodservice, hospitality, retail and healthcare industries. Certain of our products are registered with the Environmental Protection Agency and follow the Center for Disease Control guidelines for disinfection of surface areas such as children’s playgrounds, hospitals, and assisted living environments.  We sell consumable products such as detergents, cleaning chemicals, soap, paper, water filters and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products as well as additional services such as the deep cleaning and sanitizing of restrooms and other facilities. We continue to see the positive impact of cost efficiencies, capital resource management and planning, plant consolidations and route optimization efforts; however, we believe we still need to increase revenue in order to maximize our profitability. We are committed to our philosophy of Service, People and Profitability and to Selling Through Service. To that end, we are continuing our realignment of our field service and sales teams to better serve our customers since we believe this will ultimately drive increased revenues through improved customer retention and the ability to leverage our current customer base.
 
Critical Accounting Policies and Estimates
 
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2014 Form 10-K, describe these significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting policies since the filing of the 2014 Form 10-K.
 
 
11

 
 
Newly Issued Accounting Pronouncements

In April, 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . The amendments in this accounting standard raise the threshold for a disposal to qualify as a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This accounting standard update is effective for annual periods beginning on or after December 15, 2014 and related interim periods, with early adoption allowed. The adoption of this standard did not have a material impact on the Company’s consolidated financial results.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ASU No. 2014-09, Revenue from Contracts with Customers . This ASU is intended to clarify the principles for recognizing revenue by providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.

In August 2014, the Financial Accounting Standards Board issued ASU Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This ASU provides guidance related to management’s responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures.  The new requirements are effective for the annual periods ending after December 15, 2016, and for interim periods and annual periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of this standard and has elected to not adopt the standard early.

Assets Held for Sale
 
In accordance with ASC 360, Property, Plant and Equipment , the Company’s estimates of fair value require significant judgment and are regularly reviewed and subject to change based on market conditions, changes in the customer base of the operations or routes, and our continuing evaluation as to the facility's acceptable sale price.  

During the second quarter of 2014, the Company updated its estimates of the fair value of certain linen routes and operations to reflect various events that occurred during the period. The cumulative impairment loss for the six months ended June 30, 2014 was $3.0 million, of which $1.7 million was attributable to a reduction in the estimate of net sale proceeds for a linen processing operation. The factors driving the $1.7 million reduction were the cancellation notifications, received from three major customers, resulting in a significant loss of forecasted revenue; and the operation’s 2014 year-to-date loss which was in excess of the Company’s estimates. The Company made the decision to close this linen processing operation and the fair value was written down to zero. During the first quarter of 2015, the Company completed the sale of equipment of this closed operation classified as asset held for sale, resulting in the net receipt of $0.3 million in cash and a $0.3 million gain. The gain is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
During March 2015, the Board of Directors of the Company approved a resolution to sell the Company’s remaining linen operation. In accordance with ASC 360, Property, Plant and Equipment, these assets were classified as assets held for sale at March 31, 2015 and were adjusted to the lower of historical carrying amount or fair value, less costs to sell, which was $3.1 million. The estimated fair value was derived based on the assessment of the potential net selling price. The Company completed the sale of this linen operation on May 12, 2015 receiving $4.0 million in cash and notes receivable plus purchased accounts receivables, resulting in a gain of $0.9 million. The gain is included in “Other income (expense), net” in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
For the three and six months ended June 30, 2015, linen related revenue attributable to the assets held for sale and sold linen assets was $0.7 million and $2.3 million, respectively, and $1.1 million and $2.5 million for the three and six months ended June 30, 2014, respectively. The 2014 annual revenue was $9.6 million attributable to the assets held for sale and sold linen assets. As of June 30, 2015, there were no assets held for sale.
 
 
12

 
 
RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2015
 
Revenue
 
Revenue from products is primarily comprised of the sales and delivery of consumable products such as detergents and cleaning chemicals, the rental, sales and servicing of dish machines and other equipment used to dispense those products, the sale of paper items, rental fees, linen processing and other ancillary product sales. Revenues from services are primarily comprised of manual cleaning and delivery service fees. Franchise and other consists of fees charged to franchisees.
 
Total revenue and the revenue derived from each revenue type for the three months ended June 30, 2015 and 2014 are as follows:
 
   
2015
   
%
   
2014
   
%
 
Revenue
            (In thousands)        
Products
  $ 40,160       89.6 %   $ 44,780       89.7 %
Services
    4,398       9.8 %     4,809       9.6 %
Franchise and other
    276       0.6 %     366       0.7 %
Total revenue
  $ 44,834       100.0 %   $ 49,955       100.0 %
 
Consolidated revenue decreased $5.1 million or 10.3% to $44.8 million for the three months ended June 30, 2015 compared to 2014. Excluding revenue generated from linen assets sold and held for sale for the three months ended June 30, 2015 and 2014, consolidated revenue decreased 6.8% on a comparable basis. Product revenue decreased $4.6 million partially due to a $1.9 million decrease related to linen assets sold or held for sale. The remaining $2.7 million decrease is primarily due to a $0.9 million reduction in purchasing from large wholesale and distribution customers, and the attrition of $0.4 million in customers resulting from the termination of the Manufacturing and Supply Agreement (the “Cavalier Agreement”) which was terminated in September 2014, as well as $1.4 million of additional attrition, volume reductions and strategic separations from customers due to lack of profitability. Service revenues declined $0.4 million due to the loss of hygiene customers and customers sold in connection with assets held for sale. Franchise and other revenue declined $0.1 million primarily due to the timing of purchases with one of our international licensees.
 
Cost of Sales
 
Cost of sales consists primarily of the cost of chemical, paper, air freshener and other consumable products sold to, or used in the servicing of, our customers. These costs are exclusive of route expense and related depreciation and amortization. Cost of sales for the three months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Cost of Sales
            (In thousands)          
Products
  $ 20,604       51.3 %   $ 22,778       50.9 %
Services
    (4 )     -0.1 %     131       2.7 %
Franchise and other
    106       38.4 %     64       17.5 %
Total cost of sales
  $ 20,706       46.2 %   $ 22,973       46.0 %
 
(1)   
Represents cost as a percentage of the respective product and service line revenue.
 
Cost of sales decreased $2.3 million or 9.9% to $20.7 million for the three months ended June 30, 2015, compared to 2014 primarily due to a decline in sales volume. The increase in cost of sales as a percentage of revenue from the prior-year period primarily reflects the impact of exiting the linen business, partially offset by cost efficiencies. As a percentage of sales, consolidated cost of sales increased slightly from 46.0% to 46.2%.
 
 
13

 
 
Route Expenses
 
Route expenses consist of costs incurred by the Company for the delivery of products and providing services to customers. The components of route expenses for the three months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Route Expenses
            (In thousands)        
Compensation
  $ 8,896       20.0 %   $ 9,847       19.9 %
Vehicle and other expenses
    2,734       6.1 %     2,751       5.5 %
Total route expenses
  $ 11,630       26.1 %   $ 12,598       25.4 %
 
(1)   
Represents route expenses as a percentage of total non-franchise revenue .
 
Route expenses decreased $1.0 million or 7.7% to $11.6 million for the three months ended June 30, 2015 compared to 2014. The components of this change were decreases in compensation, primarily through route optimization efforts, of $1.0 million. Route expense as a percentage of total revenue was 26.1% and 25.4% for the three months ended June 30, 2015 and 2014, respectively. The increase as a percentage of revenue was primarily due to the decline in revenue from the prior period.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of the costs incurred for:
 
●  
Local 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 compensation and commissions for local sales representatives and corporate account representatives.
●  
Marketing expenses.
●  
Corporate office expenses which include executive management, information technology, human resource, accounting, purchasing and other support costs.
 
The details of selling, general and administrative expenses for the three months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Selling, General & Administrative Expenses
            (In thousands)          
Compensation
  $ 7,906       17.6 %   $ 10,007       20.0 %
Occupancy
    1,720       3.8 %     1,820       3.6 %
Other
    6,232       13.9 %     5,307       10.6 %
Total selling, general & administrative expenses
  $ 15,858       35.4 %   $ 17,134       34.2 %
 
(1)  
Represents expenses as a percentage of total revenue.
 
Selling, general and administrative expenses decreased $1.3 million to $15.9 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The components of this change were decreases in compensation of $2.1 million, occupancy of $0.1 million, and offset by an increase in other expenses of $0.9 million. Compensation expense decreased primarily due to headcount reductions primarily due to the sale of the linen business, a reduction in stock based compensation and other operational efforts. Occupancy decreased due to the closure of a linen plant, the sale of a linen plant and due to ongoing efforts to reduce facility infrastructure costs. Other expenses increased primarily due to an increase in professional fees of $0.5 million, an increase in bad debt expense of $0.2 million and an increase in bank charges of $0.1 million.
 
Depreciation and Amortization
 
Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $0.6 million to $4.5 million or 12.5% for the three months ended June 30, 2015. The decrease is primarily the result of fixed assets being fully depreciated and a decrease in capital expenditures.
 
 
14

 
 
Other Income (Expense), Net
 
Details of other income (expense), net for three months ended June 30, 2015 and 2014 are as follows:
 
   
2015
   
2014
 
        (In thousands)  
Interest income
  $ -     $ 3  
Interest expense
    (102 )     (145 )
Foreign currency loss
    (100 )     (85 )
Other income (expense)
    559       (274 )
Total other income (expense), net
  $ 357     $ (501 )
 
The increase in other income is due primarily to the $0.9 million gain related to the sale of a linen facility during the second quarter of 2015, offset by impairment loss on intangible assets of $0.2 million and loss on sale of assets of $0.3 million compared to the loss on sale of certain assets held for sale during the first quarter of 2014.
 
Income Tax Expense
 
In projecting the Company’s income tax expense for 2015, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2015. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended June 30, 2015.
 
For the three months ended June 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded in the first and second quarter of 2015 included the accrual of income tax expense related to an additional valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a “naked credit”). The Company does not consider the deferred tax liabilities related to indefinite lived intangible assets when determining the need for a valuation allowance.
 
RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2015
 
Revenue
 
Revenue from products is primarily comprised of the sales and delivery of consumable products such as detergents and cleaning chemicals, the rental, sales and servicing of dish machines and other equipment used to dispense those products, the sale of paper items, rental fees, linen processing and other ancillary product sales. Revenues from services are primarily comprised of manual cleaning and delivery service fees. Franchise and other consists of fees charged to franchisees.
 
Total revenue and the revenue derived from each revenue type for the six months ended June 30, 2015 and 2014 are as follows:
 
   
2015
   
%
   
2014
   
%
 
Revenue
          (In thousands)        
Products
  $ 79,423       89.6 %   $ 88,021       89.6 %
Services
    8,727       9.8 %     9,503       9.7 %
Franchise and other
    526       0.6 %     726       0.7 %
Total revenue
  $ 88,676       100.0 %   $ 98,250       100.0 %
 
Consolidated revenue decreased $9.6 million or 9.7% to $88.7 million for the six months ended June 30, 2015 compared to 2014. Excluding revenue generated from linen assets sold and held for sale for the six months ended June 30, 2015 and 2014, consolidated revenue decreased 6.5% on a comparable basis. Product revenue decreased $8.6 million partially due to a $3.1 million decrease related to linen assets sold or held for sale. The remaining $5.5 million decrease is primarily due to a $1.4 million reduction in purchasing from large wholesale and distribution customers, the attrition of $0.7 million in customers resulting from the termination of the Manufacturing and Supply Agreement (the “Cavalier Agreement”) which was terminated in September 2014, as well as $3.4 million of additional attrition, volume reductions and strategic separations from customers due to lack of profitability. Service revenues declined $0.8 million due to the loss of hygiene customers and customers sold in connection with assets held for sale. Franchise and other revenue declined $0.2 million primarily due to the timing of purchases with one of our international licensee.
 
 
15

 
 
Cost of Sales
 
Cost of sales consists primarily of the cost of chemical, paper, air freshener and other consumable products sold to, or used in the servicing of our customers. These costs are exclusive of route expense and related depreciation and amortization. Cost of sales for the six months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Cost of Sales
            (In thousands)          
Products
  $ 40,456       50.9 %   $ 44,358       50.4 %
Services
    (3 )     0.0 %     265       2.8 %
Franchise and other
    215       40.9 %     162       22.3 %
Total cost of sales
  $ 40,668       45.9 %   $ 44,785       45.6 %
                                 
 
Represents cost as a percentage of the respective product and service line revenue.
 
Cost of sales decreased $4.1 million or 9.2% to $40.7 million for the six months ended June 30, 2015, compared to 2014 primarily due to a decline in sales volume. The increase in cost of sales as a percentage of revenue from the prior-year period primarily reflects the impact of exiting the linen business, partially offset by cost efficiencies. As a percentage of sales, consolidated cost of sales increased slightly from 45.6% to 45.9%.
 
Route Expenses
 
Route expenses consist of costs incurred by the Company for the delivery of products and providing services to customers. The components of route expenses for the six months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Route Expenses
            (In thousands)          
Compensation
  $ 18,023       20.4 %   $ 19,264       19.8 %
Vehicle and other expenses
    5,298       6.0 %     5,697       5.8 %
Total route expenses
  $ 23,321       26.4 %   $ 24,961       25.6 %
 
 
Represents route expenses as a percentage of total non-franchise revenue .
 
Route expenses decreased $1.6 million or 6.6% to $23.3 million for the six months ended June 30, 2015 compared to 2014. The components of this change were decreases in compensation, primarily through route optimization efforts, of $1.2 million and also decreases in vehicle and other expenses of $0.4 million. Route expense as a percentage of total revenue was 26.4% and 25.6% for the six months ended June 30, 2015 and 2014, respectively. The increase as a percentage of revenue was primarily due to the decline in revenue from the prior period.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses consist primarily of the costs incurred for:
 
●  
Local 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 compensation and commissions for local sales representatives and corporate account representatives.
●  
Marketing expenses.
●  
Corporate office expenses which include executive management, information technology, human resource, accounting, purchasing and other support costs.
 
 
16

 
 
The details of selling, general and administrative expenses for the six months ended June 30, 2015 and 2014 are as follows:
 
   
2015
      % (1)       2014       % (1)  
Selling, General & Administrative Expenses
            (In thousands)          
Compensation
  $ 16,552       18.7 %   $ 20,922       21.3 %
Occupancy
    3,384       3.8 %     3,901       4.0 %
Other
    12,434       14.0 %     12,081       12.3 %
Total selling, general & administrative expenses
  $ 32,370       36.5 %   $ 36,904       37.6 %
 
 
Represents expenses as a percentage of total revenue.
 
Selling, general and administrative expenses decreased $4.5 million to $32.4 million for the six months ended June 30, 2015 compared to 2014. The components of this change were decreases in compensation of $4.4 million, occupancy of $0.5 million, offset by an increase in other expenses of $0.4 million. Compensation expense decreased primarily due to headcount reductions, primarily due to the sale of the linen business, a reduction in stock based compensation and other operational optimization efforts. Occupancy decreased due to the closure of a linen plant and due to ongoing efforts to reduce facility infrastructure costs. Other expenses increased primarily due to increases in bad debt expense of $0.3 million and bank charges of $0.2 million, offset by decreases in other SG&A of $0.1 million.
 
Depreciation and Amortization
 
Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $1.4 million to $9.1 million or 13.4% for the six months ended June 30, 2015. The decrease is primarily the result of fixed assets being fully depreciated and a decrease in capital expenditures.
 
Other Income (Expense), Net
 
Details of other income (expense), net for six months ended June 30, 2015 and 2014 are as follows:
 
   
2015
   
2014
 
      (In thousands)  
Interest income
  $ -     $ 7  
Interest expense
    (197 )     (223 )
Foreign currency loss
    (171 )     (100 )
Other income (expense)
    839       (903 )
Total other income (expense), net
  $ 471     $ (1,219 )
 
The increase in other income is due primarily to the $0.9 million gain related to the sale of a linen facility during the second quarter of 2015, compared to the loss on sales of certain assets held for sale during the first quarter of 2014.
 
Income Tax Expense
 
In projecting the Company’s income tax expense for 2015, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2015. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended June 30, 2015.
 
For the six months ended June 30, 2015, the Company has recorded an estimate for income taxes based on the Company’s projected income tax expense for the twelve month period ending December 31, 2015. The Company’s tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded in the first and second quarter of 2015 included the accrual of income tax expense related to an additional valuation allowance in connection with the tax amortization of the Company’s indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a “naked credit”). The Company does not consider the deferred tax liabilities related to indefinite lived intangible assets when determining the need for a valuation allowance.
 
 
17

 
 
Cash Flows Summary
 
Cash flows from continuing operations for the six months ended June 30, 2015 and 2014 were:
 
   
2015
   
2014
 
      (In thousands)  
Net cash used in operating activities
  $ (7,507 )   $ (1,783 )
Net cash provided by (used) in investing activities
    1,543       (1,759 )
Net cash provided by (used in) financing activities
    403       (2,547 )
Net decrease in cash and cash equivalents from continuing operations
  $ (5,561 )   $ (6,089 )
 
Net cash used in operating activies increased by $5.7 million primarily due to a $6.0 million change in operating assets and liabilities as the net loss for both periods, as adjusted for non-cash items including depreciation and amortization, impairment and (gain) loss on sale of assets, was relatively constant. Net cash provided by investing activities increased by $3.3 million, primarily due to a $1.1 million reduction in purchase of property and equipment and a $3.3 million increase in cash received from sale of assets held for sale and property and equipment offset by a $1.1 million change in restricted cash. Cash provided by financing activities was $0.4 million compared with $2.5 million used during the same period in 2014. The increase of $2.9 million was primarily due to an increase in proceeds from debt issuances related to insurance financing of $1.9 million and payments on the line of credit of $3.9 million, offset by proceeds from the line of credit of $3.3 million, and a decrease in principal payments on debt of $0.4 million.
 
Cash flows used in discontinued operations for the six months ended June 30, 2014 were $2.1 million. For the six months ended June 30, 2015, there were no discontinued operations.
 
Cash flows used in operating activities from discontinued operations in 2014 consisted of payments made related to legal fees and a settlement payment related to a contractual dispute that the Company accepted responsibility to resolve as a part of the sale of the Waste segment.
 
Liquidity and Capital Resources
 
Going Concern

Our Condensed Consolidated Financial Statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. The Company has suffered recurring losses from operations and has not generated positive cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must do, but not limited to, some or all of the following: (i) improve operating results through improved customer retention, profitable organic revenue growth, and continued improvements in cost efficiencies; (ii) sell additional assets; (iii) raise additional equity; and/or (iv) obtain additional financing through debt. There can be no assurance that we will be able to improve operating results or obtain additional funds by selling additional assets, raising additional equity or obtaining additional financing when needed or that such funds, if available, will be obtainable on terms satisfactory to us.
 
If we are not able to improve operating results or obtain additional funds by selling additional assets, continuing improvements in cost efficiencies, raising additional equity or obtaining additional financing, material adverse events may occur including, but not limited to: 1) a reduction in the nature and scope of our operations, 2) our inability to fully implement our current business plan, and 3) defaults under the Credit Facility. There can be no assurances that we will be able to successfully improve our liquidity position. Our consolidated financial statements do not reflect any adjustments that might result from the adverse outcome relating to this uncertainty.
 
 
18

 
 
Cash Requirements

As a result of the activities discussed above, our cash and cash equivalents decreased by $5.5 million to $1.7 million at June 30, 2015 compared to $7.2 million at December 31, 2014. Our cash requirements for the next twelve months consist primarily of: (i) capital expenditures associated with dispensing equipment, dish machines and other items in service at customer locations, equipment, vehicles and software; (ii) working capital; and (iii) payment of principal and interest on borrowings under our convertible promissory notes, acquisition notes payable and capital lease obligations and other financing. We expect that through capital resource management and the use of additional customer equipment programs, our annual capital expenditures in 2015 are expected to be less than 2014 capital expenditures of $8.6 million.

We expect that our cash on hand, the cash flow provided by operating activities along with availability under our Credit Facility, and the cash flow from investing activities, including the potential sale of assets, such as the sale of the Company's Canadian operations in August of 2015 as discussed in Note 13 of the financial statements, will be sufficient to execute our business plan for the next twelve months. However, we believe it is contingent upon improved customer retention, profitable organic growth and continued improvement in cost efficiencies in 2015. Failure to execute our plan successfully or unforecasted shortfalls in available cash may require us to alter our plan, sell other assets, or raise additional equity which could be dilutive to existing shareholders or obtain additional financing through debt. There can be no assurances that we could sell assets in a timely manner, or that such equity and debt would be available and would be likely subject to prevailing market conditions and the Company’s performance.

Credit Facility

On August 29, 2014, we entered into a $20.0 million revolving credit facility, through the execution of a Loan and Security Agreement, by and among the Company, as Guarantor, and certain subsidiaries of the Company and collectively, as Borrower, and Siena Lending Group LLC, as Lender (the “Credit Facility”). The Credit Facility matures on August 29, 2017.
 
Interest on borrowings under the Credit Facility will accrue at the Base Rate plus 2.00% and will be payable monthly. The Base Rate is defined as the greater of (1) the Prime Rate, (2) the Federal Funds Rate plus 0.50%, or (3) 3.25%.  

Borrowings and availability under the Credit Facility are subject to a borrowing base and limitations, and compliance with other terms specified in the agreement.  Borrowings under the Credit Facility are secured by a first priority lien on certain of the Company’s assets. The calculated borrowing base as of June 30, 2015 was $11.0 million, of which $4.1 million was outstanding under letters of credit, $0.6 million was outstanding under borrowings and $6.3 million was unused.

The Credit Facility contains certain customary representations and warranties, and certain customary covenants on the Company’s ability to, among other things, incur additional indebtedness, 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. The Credit Facility contains various events of default and reporting requirements. The Company has met all required covenants under the Credit Facility as of June 30, 2015.
 
Off-Balance Sheet Arrangements
 
Other than operating leases, there are no significant off-balance sheet financing arrangements or relationships with unconsolidated entities or financial partnerships which are often referred to as “variable interest entities.” Therefore, there is no exposure to any financing, liquidity, market or credit risk that could arise had we engaged in such relationships.
 
In connection with a distribution agreement entered into in December 2010 between the Company and a distributor of Company-owned products, we 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, we reimburse the distributor for any such short fall up to a pre-designated amount. No value was assigned to the fair value of this guarantee at June 30, 2015 and December 31, 2014 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 provision in the agreement and thus there is no amount accrued for the guarantee in the Condensed Consolidated Financial Statements.

 
19

 
 
FORWARD-LOOKING STATEMENTS
 
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
 
●  
We have a history of significant operating losses and as such, our future revenue and operating profitability are uncertain.
 
●  
Our independent registered public accounting firm’s report for our audited financial statements for the year ended December 31, 2014 contains an explanatory paragraph that expresses substantial doubt as to our ability to continue as a going concern.
 
●  
The Company may need to raise additional equity or capital in the future and such capital may not be available when needed or at all.
 
●  
Our failure or inability to meet certain terms of our Credit Facility could have a material adverse effect on our business, financial condition and results of operations.
 
●  
We have identified material weaknesses in our internal control over financial reporting and we may be unable to develop, implement and maintain appropriate controls in future periods. If the material weaknesses are not remediated, then they could result in material misstatements to the financial statements.
 
●  
Failure to retain our current customers and renew existing customer contracts could adversely affect our business.
 
●  
Changes in economic conditions that impact the industries in which our end-users primarily operate in could adversely affect our business.
 
●  
The financial condition and operating ability of third parties may adversely affect our business.
 
●  
We recognized significant impairment charges in 2014 and prior years, and may recognize additional impairment charges in the future which could adversely affect our results of operations and financial condition.
 
●  
The availability of our raw materials and the volatility of their costs may adversely affect our operations.
 
●  
We are and may in the future be subject to legal proceedings, the outcome of which are uncertain, and resolutions adverse to us could negatively affect our earnings, financial condition and cash flows.
 
●  
The pricing, terms, and length of customer service agreements may constrain our ability to recover costs and to make a profit on our contracts.
 
●  
If we are required to change the pricing models for our products or services to compete successfully, our margins and operating results may be adversely affected.
 
 
20

 
 
●  
The consolidation of customers may adversely affect our business, consolidated financial condition or results of operations.
 
●  
We may fail to maintain our listing on The Nasdaq Stock Market.
 
●  
The loss of one or more key members of our senior management, or our inability to attract and retain qualified personnel could adversely impact our business, financial condition and results of operations.
 
●  
Increases in fuel and energy costs and fuel shortages could adversely affect our results of operations and financial condition.
 
●  
Our products contain hazardous materials and chemicals, which could result in claims against us.
 
●  
We are subject to environmental, health and safety regulations, and may be adversely affected by new and changing laws and regulations, that generate ongoing environmental costs and could subject us to liability.
 
●  
If our products are improperly manufactured, packaged, or labeled or become adulterated or expire, those items may need to be recalled or withdrawn from sale.
 
●  
Changes in the types or variety of our service offerings could affect our financial performance.
 
●  
Prior acquisitions involve a number of risks and could have an adverse effect on results of operations.
 
●  
We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.
 
●  
Interruptions in our information and telecommunication systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, could adversely affect our business.
 
●  
Insurance policies may not cover all operating risks and a casualty loss beyond the limits of our coverage could adversely impact our business.
 
●  
Our stock price has been and may in the future be volatile, which could cause purchasers of our common stock to incur substantial losses.
 
●  
Certain stockholders may exert significant influence over any corporate action requiring stockholder approval.
 
●  
Provisions of Delaware law and our organizational documents may delay or prevent an acquisition of our Company, even if the acquisition would be beneficial to our stockholders.
 
 
21

 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risks including changes in interest rates and fuel prices. Borrowings under the Credit Facility are indexed to a variable interest rate. As of June 30, 2015, there was $0.6 million outstanding under borrowings from our Credit Facility, and we have $4.1 million of letters of credit outstanding at a fixed fee under our Credit Facility. As of June 30, 2015, a hypothetical 10% change in our interest rate would change our results of operations by less than $0.1 million.
 
  We do not use financial instruments for speculative trading purposes and we do not hold derivative financial instruments that could expose us to significant market and commodity risk. We do not currently have any contract with vendors where we have exposure to the underlying commodity prices. In such event, we would consider implementing price increases and pursue cost reduction initiatives; however, we may not be able to pass on these increases in whole or in part to our customers or realize the cost savings needed to offset these increases. This discussion does not consider the effects that may have an adverse change on the overall economy, and it also does not consider actions we may take to mitigate our exposure to these changes. We cannot guarantee that the action we take to mitigate these exposures will be successful.
 
Fuel costs represent a significant operating expense. To date, we have not entered into any contracts or employed any strategies to mitigate our exposure to fuel costs. Historically, we have made limited use of fuel surcharges or delivery fees to help offset rises in fuel costs. Such potential charges have not been in the past, and we believe will not be going forward, applicable to all customers. Consequently, an increase in fuel costs normally results in a decrease in our operating margin percentage. At our current consumption level, a $0.50 per gallon change in the price of fuel changes our fuel costs by approximately $0.6 million on an annual basis.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and, include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
 
In connection with the preparation of this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2015. Based upon that evaluation, management concluded that the deficiencies in our internal control over financial reporting identified in the 2014 Form 10-K were under ongoing remediation and therefore continue to exist, and as such our disclosure controls and procedures were not effective as of June 30, 2015 for the following reasons :

We did not maintain an effective control environment as we lacked sufficient oversight of activities related to our internal control over financial reporting. In addition, we did not have a sufficient structure in place to identify and evaluate gaps in the knowledge and technical experience of the accounting personnel responsible for the implementation and execution of our control environment.
 
We did not maintain effective controls over certain control activities. Specifically, the following individual material weaknesses were identified in connection with our control activities:
 
 
We did not implement effective controls to properly account for the sale, disposal and movement of dish machines at customer locations and our own facilities, which resulted in substantial post-closing journal entries that our review process failed to identify.
 
 
22

 
 
   
We did not implement effective controls to accurately and completely evaluate and calculate our allowance for doubtful accounts. Additionally, our review process was not sufficient to detect material errors in the methodology and calculations of the allowance resulting in material post-closing adjustments.
     
   
We did not implement effective controls to properly identify, analyze and account for non-routine transactions reflected in the financial statements.
     
   
We did not develop and implement an overall financial reporting review process that encompassed all significant financial statement accounts or contained an appropriate level of precision. This review process did not identify the issues surrounding the accounting and recording for our dish machines, allowance for doubtful accounts, and non-routine transactions.
     
   
We did not design, implement and maintain effective controls over the corporate review of significant journal entries processed at our field-level locations, which represents a significant portion of our business, to ensure that these entries were appropriate in nature and correct.
 
We did not maintain effective controls over user security and program change management for the information technology systems and accounting software at the field-level locations.
 
We did not maintain effective controls to ensure the timely preparation of financial records sufficient to allow management adequate time to prevent or detect and correct material misstatements and to fulfill its other control activity responsibilities.
 
We did not maintain effective information and communication controls to generate relevant and quality information for use in the financial reporting close process. These control failures contributed to the transactions involving our dish machines and to information generated relating to the allowance for doubtful accounts.

We did not maintain effective information and communication controls with external parties due to delays in our financial statement close process as evidenced by the untimely filing of our Annual Report on form 10-K for the year ended December 31, 2014, and our failure to identify and timely disclose control deficiencies in previous filings.
 
We did not maintain effective monitoring controls sufficient to ascertain whether key components of internal control were present and functioning, as evidenced by our incorrect initial assessment of the effectiveness of our internal controls over financial reporting.
 
We did not maintain effective monitoring controls to communicate the deficiencies in our internal control over financial reporting to our board of directors in sufficient time to allow them to take corrective action.
 
 
 A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Based on its evaluation of internal control over financial reporting, management has determined that the control deficiencies identified above should be considered material weaknesses in our internal control over financial reporting. 
 
As set forth below, management has taken and will continue to take steps to remediate the control deficiencies identified above. Notwithstanding the control deficiencies identified above, management concludes that the financial statements included in this report fairly represent, in all material aspects, our financial condition, results of operations and cash flows for the periods presented.
 
 
23

 
 
  Management's Remediation Plan
 
 As reported in the Annual Report on Form 10-K for the year ended December 31, 2014, we are engaged in remedial actions in response to the deficiencies discussed above, and we plan to continue efforts underway to improve internal control over financial reporting:
 
Management will continue to enhance its training programs for our accounting personnel both at the corporate and field-level, emphasizing financial reporting responsibilities and accountability for implementing and maintaining effective internal control over financial reporting.
 
Dish machines are being serialized in the fixed asset system to track the movement of the dish machines and periodic field observations will be performed to ensure the existence and accuracy of these fixed assets.
 
Management will continue to track collection trends across the business and evaluate the accuracy of the assumptions used in the estimates for the allowance for doubtful accounts on an annual basis, at a minimum.
 
Management will put in place controls to properly identify, analyze and account for non-routine transactions and will use the appropriate level of oversight to ensure the transactions are reflected accurately and timely in the financial statements.
 
Management continues to implement controls over user access and change management related to the field-level information technology systems.
 
Management will perform a comprehensive review to re-evaluate our activities related to internal control over financial reporting, including monitoring controls related to the operating effectiveness, timeliness and communication of certain control activities.

While management and our audit committee are closely monitoring the implementation of these remediation plans, there is no assurance that the aforementioned plans will be sufficient to fully remediate the deficiencies identified above and that additional remediation steps may be necessary.
 
 Changes in Internal Control over Financial Reporting
 
Other than the changes noted above to remediate the previously reported material weaknesses, there have been no adverse changes in our internal control over financial reporting during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.   
 

 
24

 
 
PART II.  OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
We may be involved in litigation from time to time in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations. However, the results of these matters cannot be predicted with certainty and no assurance can be given that the ultimate resolution of any legal or administrative proceedings or disputes will not have a material adverse effect on our business, financial condition and results of operations.
 
Securities Litigation
 
On May 21, 2012, a stockholder derivative action was brought against the Company's former CEO and former CFO and the Company's then directors for alleged breaches of fiduciary duty by a purported Company stockholder in the United States District Court for the Southern District of New York.  In this derivative action, captioned Arsenault v. Berrard, et al., 1:12-cv-4028, the plaintiff seeks to recover for the Company damages arising out of the Company's March 28, 2012 announcement regarding the Board of Director's 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 August 13, 2012, the Arsenault derivative action, along with a related putative securities class action pending in the Southern District of New York, was transferred to the United States District Court for the Western District of North Carolina where other related putative securities class actions were pending.  All actions were consolidated under the caption In re Swisher Hygiene, Inc. Securities and Derivative Litigation, MDL No. 2384.  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 Arsenault derivative action, pending the outcome of the securities class actions.
 
On August 6, 2014, following a hearing, the Western District of North Carolina approved a settlement of the securities class actions, and issued an Order and Final Judgment that, among other things, dismissed the securities class actions pending in the United States with prejudice and provided for full and complete releases to defendants. The Arsenault derivative action is still pending.
 
On June 11, 2013, an individual action was filed in the United States District Court for the Southern District of Florida captioned Miller, et al. v. Swisher Hygiene, Inc., et al., No. 0:13-CV-61292-JAL, against the Company, its former CEO and former CFO, and a former Company director, bringing state and federal claims founded on the allegations that in deciding to sell their company to the Company, plaintiffs relied on defendants' statements about such things as the Company's accounting and internal controls, which, in light of the Company's restatement of its financial statements, were false. On July 17, 2013, the Company notified the United States Judicial Panel on Multidistrict Litigation ("MDL Panel") of this action, and requested that it be transferred and centralized in the Western District of North Carolina with the other actions pending there. On July 23, 2013, the MDL Panel issued a Conditional Transfer Order (the "Miller CTO"), conditionally transferring the case to the Western District of North Carolina. On July 29, 2013, plaintiffs notified the MDL Panel that they would seek to vacate the Miller CTO. In light of the proceedings in the MDL Panel, defendants requested that the Southern District of Florida stay all proceedings pending the MDL Panel's ruling. On August 6, 2013, the Southern District of Florida issued a stay of all proceedings pending a ruling by the MDL Panel.  On October 2, 2013, following briefing on the issue of whether the Miller CTO should be vacated, the MDL Panel issued an order transferring the action to the Western District of North Carolina.  The Company and the individual defendants filed motions to dismiss the complaint on March 20, 2014.  Briefing on the motions to dismiss was completed on May 12, 2014.  On June 2, 2014, plaintiffs filed a motion with the Western District of North Carolina seeking a suggestion for remand from that court to the MDL Panel. Briefing on that motion was completed on June 26, 2014. Oral argument on the motions to dismiss and motion for suggestion for remand were heard on July 22, 2014.   On August 5, 2014, the Western District of North Carolina denied plaintiffs' motion for suggestion for remand.  On October 22, 2014, the Company filed a notice of supplemental authority in support of its motion to dismiss the complaint.  On November 4, 2014, plaintiffs filed a response to the notice of supplemental authority. On July 8, 2015, the Western District of North Carolina ruled on the motions to dismiss. The Western District of North Carolina dismissed plaintiffs' federal claims and certain of their state law claims. Other state law claims against the Company, its former CEO, and a former Company director, were not dismissed. After issuing its ruling, the Western District of North Carolina recommended by letter to the MDL Panel that the action be transferred back to the Southern District of Florida. On July 16, 2015, the Western District of North Carolina issued an order staying all proceedings in the action pending a determination by the MDL Panel on its recommendation.
  
 
25

 
 
Other 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 the Company's March 28, 2012 public announcement of the Audit Committee's internal review and the delays in filing its periodic reports. The Company has been asked to make certain individuals available and to provide certain information about these matters 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 fines and/or criminal or civil sanctions against the Company and/or certain of its current or former officers, directors or employees.

  ITEM 1A.
RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 which could materially affect our business, financial condition, or future results. There have been no material changes to the risk factors previously disclosed in our 2014 Form 10-K.
 
 
26

 
 
ITEM 6.
EXHIBITS
 
Exhibit Number
 
Description
10.1
 
Waiver letter, dated May 11, 2015 by Siena Lending Group LLC (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities and Exchange Commission on May 11, 2015).
31.1
 
Section 302 Certification of Chief Executive Officer.
31.2
 
Section 302 Certification of Chief Financial Officer.
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
________________________
 
*
Furnished herewith.
   
 
 
27

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SWISHER HYGIENE INC.
 
(Registrant)
 
     
Dated: August 10, 2015
By:
/s/William M. Pierce
   
William M. Pierce
President and Chief Executive Officer
(Principal Executive Officer)
 
     
Dated: August 10, 2015
By:
/s/William T. Nanovsky
   
William T. Nanovsky
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
     
Dated: August 10, 2015
By:
/s/Linda C. Wilson-Ingram
   
Linda C. Wilson-Ingram
Vice President, Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
 
 
28

 

 
EXHIBIT INDEX
 
Exhibit Number
 
 
Description
10.3
 
 
Waiver letter, dated May 11, 2015 by Siena Lending Group LLC (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities and Exchange Commission on May 11, 2015).
31.1
 
Section 302 Certification of Chief Executive Officer.
31.2
 
Section 302 Certification of Chief Financial Officer.
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
________________________
 
*
Furnished herewith.
   
 
29

 
EXHIBIT 31.1
 
CERTIFICATION
 
I, William M. Pierce, certify that:
 
1           I have reviewed this Quarterly Report on Form 10-Q of Swisher Hygiene Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
Date: August 10, 2015
By:
/s/  William M. Pierce  
   
William M. Pierce
 
   
President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
 
EXHIBIT 31.2
 
CERTIFICATION
I, William T. Nanovsky, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Swisher Hygiene Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: August 10, 2015
By:
/s/ William T. Nanovsky  
    William T. Nanovsky  
   
Senior Vice President and Chief Financial Officer
 
   
(Principal Financial Officer)
 
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
 
18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Swisher Hygiene Inc. (the “Company”) for the quarter ended June 30, 2015, as filed with the Securities and Exchange Commission (the “Report”), I, William M. Pierce, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1)           the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2)           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: August 10, 2015
By:
/s/ William M. Pierce  
   
William M. Pierce
 
   
President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
 
 
EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
 
18 U.S.C. SECTION 1350,
 
AS ADOPTED PURSUANT TO
 
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q of Swisher Hygiene Inc. (the “Company”) for the quarter ended June 30, 2015, as filed with the Securities and Exchange Commission (the “Report”), I, William T. Nanovsky, Senior Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
 
(1)           the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2)           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: August 10, 2015
By:
/s/ William T. Nanovsky  
    William T. Nanovsky  
   
Senior Vice President and Chief Financial Officer
 
   
(Principal Financial Officer)