S-1 1 a14-11572_1s1.htm S-1

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As filed with the Securities and Exchange Commission on September 2, 2014

Registration Number 333-        

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-1

 

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


 

U.S. Dry Cleaning Services Corporation

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

81323

77-0357037

(State or other jurisdiction of incorporation or
organization)

(Primary Standard Industrial Classification Code
Number)

(I.R.S. Employer Identification No.)

 

20250 Acacia Street, Suite 230

Newport Beach, CA 92660

(949) 734-7310

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

 


 

Alexander Bond

Chief Executive Officer

U.S. Dry Cleaning Services Corporation

20250 Acacia Street, Suite 230

Newport Beach, CA 92660

(949) 734-7310

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

Copies to:

 

Larry A. Cerutti, Esq.

Sarah E. Williams, Esq.

Rushika Kumararatne de Silva, Esq.

Tamar Aydin Donikyan, Esq.

Troutman Sanders LLP

Ellenoff Grossman & Schole LLP

5 Park Plaza, Suite 1400

1345 Avenue of the Americas, 11th Floor

Irvine, California

New York, New York 10105

(949) 622-2700/(949) 622-2739 (fax)

(212) 370-1300

 


 

Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date hereof.

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Larger accelerated filer

o

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

x

 


 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered

 

Proposed Maximum
Aggregate Offering Price (1)

 

Amount of
Registration Fee (2)

 

Common Stock, $0.001 par value per share (3)

 

$

13,800,000

 

$

1,777.44

 

Warrants to purchase common stock (3)

 

 

(4)       

 

 

(5)    

 

Shares of common stock underlying warrants (3) (6)

 

 

 

 

 

 

Representative’s warrants (7)

 

 

 

(5)    

 

Shares of common stock underlying Representative’s warrants (6)(7)(8)

 

$

1,214,400

 

$

156.41

 

Total

 

$

15,014,400

 

$

1,933.85

 

 

(1)

 

Estimated solely for the purpose of calculating the registration fee under Rule 457(o) under the Securities Act of 1933, as amended, or Securities Act.

(2)

 

Calculated pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant.

(3)

 

Includes the offering price of the additional securities which may be issued upon full exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.

(4)

 

The warrants to be issued to investors hereunder are included in the price of the common stock above.

(5)

 

No separate registration fee is required pursuant to Rule 457(g) under the Securities Act.

(6)

 

Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.

(7)

 

Assumes that the underwriters’ over-allotment option is fully exercised.

(8)

 

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The underwriter’s warrants are exercisable at a per share exercise price equal to 110% of the public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the representative’s warrant is $1,214,400 (which is equal to 110% of $1,104,000 (8% of $13,800,000).

 

 

 

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

 

 

 



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The information in this prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold until the registration statement becomes effective. This prospectus is not an offer to sell and is not a solicitation of an offer to buy in any state in which an offer, solicitation, or sale is not permitted.

 

Subject To Completion, Dated September 2, 2014

 

PROSPECTUS

 

GRAPHIC

 

SHARES OF COMMON STOCK AND

WARRANTS TO PURCHASE        SHARES OF COMMON STOCK

 

This is a firm commitment public offering of               shares of common stock and            warrants to purchase            shares of common stock of U.S. Dry Cleaning Services Corporation, which will be sold in combination consisting of one share of common stock and one warrant.  We expect that the public offering price for one combination consisting of one share of common stock and one warrant will be between $            and $         .  Although issued together, the shares of common stock and warrants may be transferred separately immediately upon issuance.

 

Each warrant is immediately exercisable for one share of common stock at an exercise price of 100% of the public offering price of one combination in this offering.  The warrants will expire 60 months after the issuance date.

 

The shares of common stock issuable from time to time upon the exercise of the warrants are also being offered pursuant to this prospectus.

 

We have applied to list our common stock and our warrants on The NASDAQ Capital Market under the symbols “DCLN” and “DCLNW”, respectively.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 15 to read about factors you should consider before buying our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

 

 

Per Combination

 

Total

 

Public offering price

 

$

 

 

$

 

 

Underwriting discounts and commissions (1)

 

$

 

 

$

 

 

Proceeds, before expenses, to us (2)

 

$

 

 

$

 

 

 


(1)                     We have agreed to issue warrants to the representative of the underwriters and to reimburse the underwriters for certain expenses. See “Underwriting” on page 105 of this prospectus for a description of these arrangements.

(2)                     We estimate the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $     .

 

The underwriters expect to deliver our securities, against payment, on or about          , 2014.

 

We have granted the underwriters a 45-day option to purchase up to              additional shares of common stock and/or up to               additional warrants to purchase          additional shares of common stock from us at the offering price for each security, less underwriting discounts and commissions, to cover over-allotments, if any.

 

Sole Book Running Manager

 

Maxim Group LLC

 

Co-Managers

 

 

The date of this prospectus is              , 2014.

 



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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 


 

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

 



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PROSPECTUS SUMMARY

 

This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider before buying our securities. You should read the entire prospectus carefully, especially the “Risk Factors” section and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our securities. Some of the statements in this prospectus constitute forward-looking statements.  See “Information Regarding Forward-Looking Statements.”  Unless the context requires otherwise, references in this prospectus to “the Company, ““we,” “us” and “our” refer to U.S. Dry Cleaning Services Corporation.

 

Our Company

 

We believe we are the largest owner-operator of dry cleaning and laundry stores in the United States, with 70 retail locations located in Arizona, Central California, Southern California, Hawaii, Indiana and Virginia. Given the relatively large size and extremely fragmented nature of our industry, our net sales of $21.4 million in fiscal 2013 represent a market share that is less than 0.3% of the approximately $9.0 billion dry cleaning and laundry market, as reported in the IBISWorld Industry Report (November 2013).  We believe these market dynamics provide us with tremendous opportunities for growth.

 

We established our business through several acquisitions completed between 2005 and 2008. We financed each of these acquisitions using cash raised through the sale of debt instruments with relatively short maturities.  However, given the financial crisis and the associated difficulties with raising capital in late 2008, we were unable to repay or restructure our debt obligations. As a result, we filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California. On September 23, 2011, the Bankruptcy Court approved our plan of reorganization, or Bankruptcy Plan, which enabled us to eliminate a significant amount of our outstanding debt and close or relocate 12 unprofitable stores, while still allowing stockholders to maintain a continuing equity interest in our company.

 

After emerging from bankruptcy, we continued to focus on improving our balance sheet and operations by converting additional debt to equity; making changes in management and field personnel; upgrading stores and production plants; expanding the use of eco-friendly solvents and “green” dry cleaning processes; pursuing new store locations and free door-to-door home and office delivery in order to leverage existing production capacity; expanding the number of locations that offer incremental services, such as shoe repair, handbag cleaning and repair, drapery cleaning, and carpet cleaning; expanding our service offerings to include services such as tuxedo and eveningwear rentals in certain locations; and expanding our existing dry cleaning and laundry services related to fire and flood restoration. We now believe that we have a compelling opportunity to expand our position as the largest owner-operator of retail dry cleaning and laundry stores nationwide.  To this end, we recently entered into an agreement to purchase substantially all the assets of a 17-store dry cleaning and commercial laundry operator located in Las Vegas, Nevada (see “Prospectus SummaryRecent DevelopmentsAdvent Cleaners Acquisition”) and are currently negotiating potential acquisitions of other dry cleaning operators across the nation.

 

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Our Operating Plan

 

The dry cleaning industry in the United States is an amalgamation of small independent brands and “mom and pop” retail stores. According to the IBISWorld Industry Report, a majority of dry cleaning companies employ less than five people and over 90% of all dry cleaning companies consist of just one facility. In this context, we believe we have a unique operating platform.  With between five and 25 stores in each of our five primary geographical markets, we believe that our larger operating base provides a strong foundation for future growth.  We have identified the following areas of operational focus to advance this growth:

 

·                  leveraging excess production capacity in our existing markets;

 

·                  promoting “green” dry cleaning processes, which are gentler on fabrics and healthier for our customers and the environment;

 

·                  expanding the number of locations that offer incremental services, such as shoe repair, handbag cleaning and repair, drapery cleaning, and carpet cleaning;

 

·                  expanding our service offerings to include services such as tuxedo and eveningwear rentals in certain locations;

 

·                  expanding our existing dry cleaning and laundry services related to fire and flood restoration; and

 

·                  further developing a customer-focused culture that strengthens our brands.

 

We operate a hub-and-spoke model, utilizing a large centralized processing plant, or “hub,” to provide dry cleaning and laundry services to several smaller company-owned retail stores, or “spokes,” rather than each store having its own equipment and performing its own dry cleaning and laundry. While the implementation varies from market to market, we believe this approach is the best way to (i) ensure consistent production quality, (ii) allow for more efficient equipment maintenance and repairs, and (iii) leverage labor, supplies, and utilities in order to lower production costs. Moreover, the cost to build a hub is quite high, whereas the cost to open new stores (assuming they will be serviced by an existing hub) is quite low. Therefore, once a hub exists and there is excess capacity, we believe the opportunity to add stores is compelling. We currently operate central hubs in Southern California, Virginia and Hawaii.  These central hubs occupy, in the aggregate, approximately 62,500 square feet and service 31 retail stores. We believe that our central hubs have capacity to service, in the aggregate, an additional 60 retail stores plus additional routes.  We believe that adding additional stores and delivery routes will drive operating efficiencies, lower the production cost per unit, and increase profitability. We intend to open “dry” stores for the drop-off and pick-up of garments that do not contain dry cleaning equipment, acquire existing stores and chains that consist primarily of dry stores, and establish new delivery routes in areas surrounding these central hubs in order to make use of this excess capacity.

 

In larger and more geographically spread-out markets, such as Arizona, Central California and Indiana, we operate a modified version of the hub-and-spoke model, where smaller mini-hubs service a few neighboring stores rather than a single hub servicing the entire market. While this approach typically requires more equipment, it is superior when the drive-times are long (i.e., more than 30-40 minutes between the hub and the spoke). We currently operate 16 mini-hubs in Arizona, Central California and Indiana which service, in the aggregate, 39 retail stores. We believe that they have capacity to service an additional 40 retail stores and additional delivery routes, which would drive operating efficiencies, lower the production cost per unit, and increase profitability. We intend to utilize the excess capacity of mini-hubs by opening dry stores, acquiring existing stores and chains that consist primarily of dry stores, and establishing new delivery routes in areas surrounding these mini-hubs.

 

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Our Commitment to Eco-Friendly Production

 

State and federal regulatory agencies have targeted the practices of the dry cleaning industry over the past two decades due to the use of certain solvents in the cleaning process, with perchloroethylene, or perc, being the most widely scrutinized. Of the 73 total locations we lease (70 retail stores and three productions plants), 33 are used for processing clothes and of those locations only four currently use perc (one of which is being converted to eliminate the use of perc by the end of 2014), while the other locations use eco-friendly solvents and “green” dry cleaning processes.  We use a number of eco-friendly solvents including those manufactured by GreenEarth® Cleaning.  We promote our “green” cleaning processes in many of our marketing materials designed to appeal to customers seeking environmentally sensitive dry cleaning options.

 

Our Customer-Focused Culture

 

We strive to promote a customer-focused culture in which customer satisfaction is the paramount objective. While certain aspects of our operations vary from region to region, we nonetheless require that every store or route manager deliver on the basic consumer proposition of providing consistently clean clothes, ready on time, at a great value, delivered with genuinely warm and friendly customer service.  As part of our value proposition, we believe we provide quality and services that surpasses many of our competitors, such as expert stain identification and removal, hand pressing of all garments (as opposed to simply sending them through a steam tunnel), detailed garment inspection with free minor repairs and button replacement, same-day service, e-mail notifications when an order is ready, and free delivery to home or office. We believe that the incremental cost of labor required to provide these additional customer benefits is outweighed by the opportunity to engender customer loyalty and increase referrals.

 

We believe that our core customer proposition of eco-friendly solvents and processes that are not just “green” but also gentler on fabrics and healthier for our customers and the environment, combined with excellent quality, value and service will assist us in attracting customers and improving market share over time.  We have recently begun testing the effectiveness of different methods of advertising and marketing and will continue to aggressively promote our focus on these core customer propositions. As part of our marketing strategy, we recently sought to improve our customer relationships and the positive association of our brands by upgrading our online and social media platforms. We utilize branded websites, third party providers for search-engine-optimization and Facebook pages that keep us in front of customers while also offering garment care tips, contests, and discounts/coupons. We have also enabled “Talk to the Manager” access on our websites for each region, providing customers with direct and anonymous text message access to each store manager, district manager and regional manager. As a result of our daily focus on executing against the most important customer criteria, we believe we now offer an improved customer experience and are now better able to market that experience.

 

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Our Growth Strategy

 

We intend to increase our market share through a combination of organic and strategic growth. We seek to achieve organic growth by increasing sales in our existing stores and also by opening select new stores in order to leverage excess production capacity from existing central hubs or mini-hubs. We also believe that we can increase sales in our existing stores by expanding our service offerings and by promoting our brands more effectively. Since many of our costs, including rent, salaried-labor and delivery are relatively fixed, we believe that incremental sales will improve our profitability.

 

In addition to increasing revenue in existing stores and routes, we plan to open new stores and establish new routes, especially dry stores in areas that can be serviced by one of our existing central hubs or mini-hubs. In certain new markets or trade areas where new housing and retail shopping centers are being developed outside existing service areas, we will also consider establishing new mini-hub type stores, especially if we anticipate being able to leverage that investment by opening several additional stores in the same trade area or geographic region.  Because of their significantly smaller initial investment compared to larger central hubs, we believe that mini-hubs provide excellent flexibility for scaled growth.

 

We also intend to grow through strategic acquisitions, especially in more mature markets and trade areas, where there are fewer new retail centers being developed and where existing competition is already entrenched. We seek to acquire leading operators in attractive markets, but we also plan to be opportunistic as it relates to underperforming operations that we believe have significant potential for improvement. We believe we can offer an intriguing exit alternative to targets that do not otherwise have an attractive exit option, especially upon completing this offering, which will provide cash for acquisitions and improve our access to capital going forward. Since there are currently no other publicly-traded dry cleaning companies, we would be the only company in our industry able to offer equity securities that would allow targets to participate in the appreciation of such securities. In addition, we believe that having publicly-traded securities will enable us to incentivize key employees with equity securities, including stock options, which would be a competitive advantage.

 

We routinely analyze and target markets for development and then screen specific areas based on demographic and company-specific variables to identify local chains for acquisition. We intend to use this approach to cluster stores in specific geographic areas of demand, which we believe will increase brand awareness and improve our operating and marketing efficiencies, especially where we are able to leverage other operating costs associated with our existing central and mini-hubs and regional management structure.

 

Recent Developments

 

Advent Cleaners Acquisition

 

On August 25, 2014, we entered into an agreement to purchase, upon the closing of this offering and subject to other customary closing conditions, substantially all of the assets of Advent Cleaners, LLC, or Advent Cleaners, for $4.0 million in cash, subject to adjustment.  We refer to this potential acquisition of Advent Cleaners as the Advent Cleaners Acquisition.  Upon the closing of the Advent Cleaners Acquisition, we will add 14 dry stores, three mini-hubs with retail operations and a 20,230 square foot central hub, all located in the greater Las Vegas, Nevada area and operated under the brands “Al Phillips” and “Thrift DLux Cleaners.” The acquired assets also include contracts for commercial laundry accounts with some of the largest resorts and hotels in Las Vegas.  We intend to hire substantially all of Advent Cleaners’ employees, including existing managers with significant operating experience in both retail and commercial dry cleaning and laundry.  In addition, we have agreed to enter into, at the closing of the Advent Cleaners Acquisition, a five-year exclusive supply agreement with United Cleaners Supply, LLC to purchase the dry cleaning and laundry supplies used in the Advent Cleaners operations.  This offering will not be consummated if the Advent Cleaners Acquisition cannot be consummated concurrently.  Conversely, the Advent Cleaners Acquisition will not be consummated if this offering cannot be consummated concurrently.  See “Business—Our Proposed Strategic Acquisition” for additional information regarding this proposed acquisition.

 

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Debt Restructuring and Recapitalization

 

On July 23, 2014, we entered into an exchange agreement, or Exchange Agreement, with certain holders of our debt instruments, warrants and rights to purchase common stock to (i) exchange certain of our secured and unsecured notes and loan agreements, under which an aggregate amount of $11,184,164 in principal and interest was outstanding as of August 22, 2014, for an aggregate of         shares of our common stock upon the closing of this offering, based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus; and (ii) exchange warrants and rights to purchase an aggregate of 224,059 shares of our common stock at exercise prices ranging from $       (which is the midpoint of the range set forth on the cover page of this prospectus) to $32.00 per share for an aggregate of 112,032 shares of our common stock upon the closing of this offering (i.e., one share of common stock for each warrant representing the right to purchase two shares of common stock).  We refer to the exchange of this outstanding debt, warrants and rights to purchase shares of our common stock pursuant to the terms of the Exchange Agreement as the Exchange Offer.

 

As a result of the Exchange Offer, upon the closing of this offering and prior to application of the net proceeds of this offering, we expect to have a total of approximately $        in debt outstanding and no warrants or rights to purchase shares of our common stock outstanding (other than warrants to purchase      shares of common stock issued in this offering).  We expect to repay up to $1.0 million of the $        in debt that will be outstanding after the Exchange Offer with the proceeds of this offering.

 

In addition, under the terms of the Exchange Agreement, certain holders of our common stock have agreed to cancel 1,098,445 shares of our common stock, including 871,882 shares of common stock initially issued under the terms of the Reorganization Agreement described below.

 

The closing of the Exchange Agreement is conditioned upon and shall close concurrently with this offering.

 

Risks Associated with Our Business

 

We are subject to a number of risks which you should be aware of before you decide to buy our securities.  In particular, you should consider the following risks, which are discussed more fully in the section entitled “Risk Factors”:

 

·                  We have incurred significant losses, expect continued losses and may never achieve profitability. If we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully achieving our operating plan and expanding our business.

·                  Our independent registered public accounting firm has issued a report on our audited financial statements which raises substantial doubt about our ability to continue as a going concern. This may impair our ability to raise additional financing and adversely affect the price of our common stock.

 

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·                  There can be no assurance that we will be able to generate or secure sufficient funding to support our growth strategy.

·                  Our independent registered public accounting firm has identified material weaknesses in our internal controls for the years ended September 30, 2012 and 2013 that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies.

·                  Our industry is highly competitive.

·                  Our ability to implement our growth strategy may be limited by our ability to consummate acquisitions, and there can be no assurance that future acquisitions, including the Advent Cleaners Acquisition, will have a beneficial effect on our operating results.

·                  Our financial results after the Advent Cleaners Acquisition may differ materially from the unaudited pro forma financial statements included in this prospectus.

·                  Our future results will suffer if we do not effectively manage our expanded operations following the Advent Cleaners Acquisition.

·                  Third parties may terminate or alter existing assigned contracts under the Advent Cleaners Acquisition.

·                  After the Advent Cleaners Acquisition is completed, we may be subject to work stoppages at Advent facilities, which could seriously impact our operations and the profitability of our business.

·                  Competition for acquisitions could adversely affect our ability to continue our growth.

·                  Our long-term success is also dependent on our ability to open new stores and is subject to many unpredictable factors.

·                  We rely on licensed third-party point-of-sale software and systems to manage customer orders and operate our back office management systems. The failure of this software and systems could harm our business

·                  Our business could suffer if we lose key management or are unable to attract and retain the talent required for our business.

·                  If we are unable to attract and retain qualified personnel with dry cleaning service-related experience, our business could suffer.

·                  No independent market studies have been made to confirm the continued demand for our dry cleaning services.

·                  The success of our expansion strategy depends on the continued loyalty of the customers of the acquired stores.

·                  Pricing pressures from existing competitors and an influx of new competitors may have an adverse effect on our operating results.

·                  Many of our competitors and potential competitors could have superior resources, which could place us at a cost and price disadvantage. Thus, we may never realize revenues sufficient to sustain our operations, and we may fail in our business and cease operations.

·                  Changes in the cost of supplies, utilities and other operating costs beyond our control could adversely affect our results of operations.

·                  Our business is seasonal and is also affected by severe weather.

 

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·                  Changes in economic conditions and other unforeseen conditions could materially affect our ability to maintain or increase sales.

·                  Compliance with environmental laws may negatively affect our business.

·                  The effect of changes to healthcare laws in the United States may increase the number of employees who choose to participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our financial results.

·                  If we face labor shortages or increased labor costs, our growth and operating results could be adversely affected.

·                  We may pursue businesses in which we have limited or no experience, including tuxedo and eveningwear rental, and such businesses could fail to generate anticipated returns.

 

Corporate Information

 

We were incorporated in Delaware on October 29, 1997 under the name First Virtual Merger Corporation.  On December 30, 2005, we entered into a reverse merger transaction with U.S. Dry Cleaning Corporation which was incorporated in Delaware on July 19, 2005.  Prior to the reverse merger, we were a shell company with shares of common stock quoted on the OTC Bulletin Board.  We ceased being a shell company on December 30, 2005 upon consummation of the reverse merger.  Subsequently, we changed our name to U.S. Dry Cleaning Services Corporation.  On March 20, 2012, the Securities and Exchange Commission issued an order revoking the registration of our securities under the Securities Exchange Act of 1934, as amended, or Exchange Act, pursuant to Section 12(j) of the Exchange Act as a result of our failure to file annual and quarterly reports with the Securities and Exchange Commission.

 

Our fiscal year end is September 30. Our principal executive offices are located at 20250 Acacia Street, Suite 230, Newport Beach, California. Our telephone number is (949) 734-7310. Our website address is www.usdrycleaning.com.  The information contained on, or that can be accessed through, our website is not a part of this prospectus.  We have included our website address in this prospectus solely as an inactive textual reference.

 

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The Offering

 

Securities offered by us:

 

      shares of common stock and          warrants to purchase         shares of common stock.

 

We are offering           shares of our common stock together with warrants to purchase         shares of our common stock, which will be sold in combination consisting of one share of common stock and one warrant. Although issued together, the shares of common stock and warrants may be transferred separately immediately upon issuance.

 

Each warrant is exercisable for one share of common stock. The warrants are immediately exercisable upon issuance in this public offering at an initial exercise price of 100% of the initial public offering price of one combination in this offering. The warrants will expire on the 60 month anniversary of the date of issuance.

 

The shares of common stock issuable from time to time upon the exercise of the warrants are also being offered pursuant to this prospectus.

 

 

 

Public offering price:

 

$       (the midpoint of the range set forth on the cover page of this prospectus) per combination of one share of common stock and one warrant.

 

 

 

Common stock to be outstanding after the offering

 

         shares

 

 

 

Underwriters’ Over-Allotment Option

 

We have granted the underwriters an option, exercisable within 45 days after the closing of this offering, to purchase up to an additional          shares of common stock and/or up to          additional warrants to purchase up to additional shares of common stock, solely for the purpose of covering over-allotments.

 

 

 

Use of proceeds:

 

We estimate that the net proceeds from the sale of shares of our common stock and warrants to purchase shares of our common stock that we are selling in this offering will be approximately $        million (or approximately $        million if the underwriters’ option to purchase additional shares of common stock and warrants in this offering is exercised in full), based upon an assumed public offering price of $        per combination of one share of common stock and one warrant, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering to fund acquisitions, including $4.0 million for the Advent Cleaners Acquisition, repay up to $1.0 million of existing debt, open new stores and establish new delivery routes, fund capital expenditures at existing stores and production plants, and for general corporate purposes. See “Use of Proceeds” on page 31.

 

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Proposed Symbols:

 

We have applied for listing of our common stock and the warrants sold in this offering on The NASDAQ Capital Market under the symbols “DCLN” and “DCLNW”, respectively. No assurance can be given that such listings will be approved.

 


 

The number of shares of our common stock to be outstanding after this offering is based on:

 

·                  2,685,924 shares of our common stock outstanding on August 22, 2014,

 

·                  the issuance of 351,290 shares of common stock into which all of our Series A Cumulative Convertible Preferred Stock, or Series A Preferred Stock, outstanding as of August 22, 2014, will be automatically converted upon the closing of this offering;

 

·                  the cancellation of 1,098,445 shares of common stock under the terms of the Exchange Agreement upon the closing of this offering;

 

·                  the issuance of       shares of common stock in connection with the Exchange Offer upon the closing of this offering (based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus); and

 

·                  the issuance of an aggregate of        shares of common stock to certain professionals and advisors in connection with our bankruptcy proceedings upon the closing of this offering (based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus).

 

The number of shares of our common stock to be outstanding after this offering excludes as of August 22, 2014:

 

·                  1,250,000 shares of common stock reserved for issuance under the U.S. Dry Cleaning Services Corporation 2014 Omnibus Incentive Plan, or 2014 Plan, of which options to purchase 636,000 shares were outstanding as of August 22, 2014, at an exercise price per share equal to $4.80;

 

·                  21,753 shares of common stock reserved for issuance under a 10% Senior Secured Promissory Note initially issued to Wattles Capital Management in the principal amount of $549,890 that is currently held by Setal 10 Trust, or Setal 10 Note, based on the principal and interest outstanding under the Setal 10 Note on August 22, 2014, which we anticipate repaying in full upon the closing of this offering;

 

·                  an aggregate of           shares of common stock issuable upon exercise of the warrants issued to the public and the warrants issued to the representative of the underwriters in connection with this offering; and

 

·                  assuming the over-allotment option is fully exercised, (i)          shares of common stock, (ii)           shares of common stock issuable upon exercise of warrants and (iii)          shares of common stock issuable upon exercise of the warrants to be issued to the representative of the underwriters in connection with the full exercise of the over-allotment option.

 

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Except as otherwise indicated herein, all information in this prospectus (i) gives effect to a one-for-sixteen reverse stock split of our shares of common stock effective on June 19, 2014, (ii) assumes that the underwriters do not exercise the over-allotment option and (iii) assumes that that the warrants offered hereby are not exercised.

 

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Historical Financial and Operating Data and
Summary Unaudited Pro Forma Data

 

The following table provides a summary of our financial information and does not contain all of the financial information that may be important to you.  Therefore, you should carefully read all of the information in this prospectus, including the respective financial statements of U.S. Dry Cleaning Services Corporation and Advent Cleaners, LLC included elsewhere in this prospectus and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before making a decision to invest in our securities.

 

Advent Cleaners has a fiscal year end of December 31. Included in this filing are the audited financial statements of Advent Cleaners for the years ended December 31, 2013 and 2012, as well as unaudited financial statements for the six months ended June 30, 2014 and 2013. However, for the purposes of this pro forma presentation, the year end of Advent Cleaners has been conformed to that of U.S. Dry Cleaning Services Corporation.

 

The summary statements of operations data for the years ended September 30, 2012 and 2013 have been derived from our audited financial statements included elsewhere in this prospectus. The summary statements of operations data for the nine months ended June 30, 2013 and 2014 and the summary balance sheet data as of June 30, 2014 have been derived from our unaudited financial statements included elsewhere in this prospectus.  Our unaudited financial statements have been prepared on a basis consistent with our audited financial statements included elsewhere in this prospectus. In the opinion of management, our unaudited financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly our results of operations and financial position for such periods and at such date. The historical results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

The summary unaudited pro forma statements of operations data for the years ended September 30, 2012 and 2013 and for the nine months ended June 30, 2014, and the summary unaudited pro forma balance sheet data as of June 30, 2014, are derived from the unaudited pro forma financial statements set forth under “Unaudited Pro Forma Financial Information.” The summary unaudited pro forma statements of operations gives effect to the Advent Cleaners Acquisition as if it had occurred as of the beginning of our fiscal year ended September 30, 2013.  The summary unaudited pro forma balance sheet gives effect to the Advent Cleaners Acquisition and this offering (including the application of the net proceeds thereof) as if it had occurred as of June 30, 2014.

 

The unaudited pro forma financial data are included for informational purposes only and do not purport to represent what our actual financial position or results of operations would have been had the transactions referenced above occurred on the dates indicated. In addition, the pro forma adjustments described herein are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the above transactions on our historical financial data. The unaudited pro forma financial data also do not purport to represent, and may not be indicative of, our results of operations for any future period or our financial position as of any future date. The unaudited pro forma statements of operations do not include adjustments for any revenue or cost saving synergies that may be achievable subsequent to the completion of the Advent Cleaners Acquisition or the costs that may be incurred to achieve those synergies.

 

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U.S. Dry Cleaning Services Corporation

Selected Historical and Unaudited Pro Forma Financial Data

 

 

 

 

 

 

 

Unaudited Pro
Forma

 

 

 

Year Ended September 30,

 

Year Ended
September 30,

 

 

 

2012

 

2013

 

2013

 

Statements of Operations Data:

 

 

 

 

 

 

 

Net Sales

 

$

21,374,671

 

$

21,408,049

 

$

31,273,009

 

Cost of sales (exclusive of depreciation and amortization shown separately below)

 

9,637,552

 

9,360,266

 

14,735,439

 

Gross profit (exclusive of depreciation and amortization shown separately below)

 

11,737,119

 

12,047,783

 

16,537,570

 

Operating expenses:

 

 

 

 

 

 

 

Stores and plant

 

8,428,456

 

8,367,537

 

11,515,178

 

Regional

 

2,464,607

 

2,224,889

 

2,914,742

 

Corporate

 

2,418,539

 

1,725,664

 

1,829,952

 

Depreciation and amortization

 

432,331

 

469,547

 

656,118

 

Operating loss

 

(2,006,814

)

(739,854

)

(378,420

)

Other income (expense), net

 

 

 

 

 

 

 

Interest expense

 

(3,347,182

)

(2,510,495

)

(2,514,094

)

Gain on extinguishment of debt

 

833,873

 

654,935

 

654,935

 

Gain (loss) other

 

13,477

 

895

 

(30,652

)

Other expense net

 

(2,499,832

)

(1,854,665

)

(1,889,811

)

Loss before provision for income taxes

 

(4,506,646

)

(2,594,519

)

(2,268,231

)

Provision for income taxes

 

9,100

 

9,100

 

9,100

 

Net loss

 

$

(4,515,746

)

$

(2,603,619

)

$

(2,277,331

)

Net loss attributable to common stockholders

 

$

(4,515,746

)

$

(2,603,619

)

$

(2,277,331

)

Net loss per share — basic and diluted

 

$

(16.06

)

$

(3.85

)

$

(3.37

)

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic and diluted

 

281,218

 

676,699

 

676,699

 

 

 

 

 

 

 

 

 

Pro forma net loss per share — basic and diluted (unaudited)

 

 

 

$

(3.85

)

$

(3.37

)

 

 

 

 

 

 

 

 

Pro forma weighted average common shares outstanding — basic and diluted (unaudited)

 

 

 

676,699

 

676,699

 

 

 

 

 

 

 

 

 

Other Financial Information:

 

 

 

 

 

 

 

EBITDA (1)

 

$

(1,574,483

)

$

(270,307

)

$

277,698

 

 


(1)         EBITDA, which we define as net income excluding net interest expense, income tax expense, gain on extinguishment of debt, other gain (loss) and depreciation and amortization expense, is a supplemental measure to help management and our investors understand our operating performance.

 

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U.S. Dry Cleaning Services Corporation

Selected Historical and Unaudited Pro Forma Financial Data

 

 

 

 

 

 

 

Unaudited Pro Forma

 

 

 

Nine Months Ended June 30

 

Nine Months Ended
June 30,

 

 

 

2013

 

2014

 

2014

 

Statements of Operations Data:

 

 

 

 

 

 

 

Net Sales

 

$

16,281,848

 

$

15,804,521

 

$

23,483,419

 

Cost of sales (exclusive of depreciation and amortization shown separately below)

 

7,093,772

 

6,798,241

 

10,971,460

 

Gross profit (exclusive of depreciation and amortization shown separately below)

 

9,188,076

 

9,006,280

 

12,511,959

 

Operating expenses:

 

 

 

 

 

 

 

Stores and plant

 

6,223,346

 

6,358,005

 

8,854,703

 

Regional

 

1,702,414

 

1,551,211

 

2,126,504

 

Corporate

 

1,260,095

 

1,579,768

 

1,674,470

 

Depreciation and amortization

 

349,447

 

346,658

 

517,156

 

Operating loss

 

(347,226

)

(829,362

)

(660,874

)

Other income (expense), net

 

 

 

 

 

 

 

Interest expense

 

(1,855,496

)

(1,549,063

)

(1,551,214

)

Gain on extinguishment of debt

 

122,945

 

55,558

 

55,558

 

Gain other

 

855

 

6,007

 

9,507

 

Other income (expense) net

 

(1,731,696

)

(1,487,498

)

(1,486,149

)

Loss before provision for income taxes

 

(2,078,922

)

(2,316,860

)

(2,147,023

)

Provision for income taxes

 

9,100

 

9,100

 

9,100

 

Net loss

 

$

(2,088,022

)

$

(2,325,960

)

$

(2,156,123

)

Series A Cumulative Convertible Preferred Stock Dividends

 

 

(512,103

)

 

Net loss attributable to common stockholders

 

$

(2,088,022

)

$

(2,838,063

)

$

(2,156,123

)

Net loss per share — basic and diluted

 

$

(3.27

)

$

(1.48

)

$

(1.01

)

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic and diluted

 

638,855

 

1,923,490

 

2,134,521

 

 

 

 

 

 

 

 

 

Pro forma net loss per share — basic and diluted (unaudited)

 

 

 

$

(1.09

)

$

(1.01

)

 

 

 

 

 

 

 

 

Pro forma weighted average common shares outstanding — basic and diluted (unaudited)

 

 

 

2,134,521

 

2,134,521

 

 

 

 

 

 

 

 

 

Other Financial Information:

 

 

 

 

 

 

 

EBITDA (1)

 

$

2,221

 

$

(482,704

)

$

(143,718

)

 


(1)         EBITDA, which we define as net income excluding net interest expense, income tax expense, gain on extinguishment of debt, other gain (loss) and depreciation and amortization expense, is a supplemental measure to help management and our investors understand our operating performance. For the nine months ended June 30, 2014, EBITDA includes significant and necessary expenses incurred in connection with our preparation to file a registration statement for our initial public offering, or IPO.  These expenses include $152,941 for audit and review fees of our financial statements, $183,714 for accounting and tax consultants to provide various technical, accounting, and tax advisory services, $45,000 for third party valuation specialists to perform valuations of our company and various complex financial instruments we issued, and $28,143 in other advisory services.

 

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U.S. Dry Cleaning Services Corporation

Selected Historical and Unaudited Pro Forma Financial Data

 

 

 

June 30, 2014

 

 

 

Actual

 

Unaudited
Pro
Forma

 

Balance Sheet Data:

 

 

 

 

 

Cash

 

$

342,167

 

$

342,167

 

Total assets

 

3,810,197

 

8,038,233

 

Related party and other long-term debt net (1)

 

12,528,096

 

12,648,775

 

Other noncurrent liabilities

 

541,226

 

541,226

 

Capital lease obligations

 

48,711

 

48,711

 

Total stockholders’ deficit

 

(13,308,700

)

(12,984,700

)

 


(1)         On July 23, 2014, we entered into the Exchange Agreement with certain holders of our debt instruments, warrants and rights to purchase shares of common stock to, among other things, exchange certain of our secured and unsecured notes and loan agreements, under which an aggregate amount of $11,184,164 in principle and interest was owed as of August 22, 2014, for an aggregate of         shares of our common stock upon the closing of this offering, based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus.  In addition, we intend to repay up to $1,000,000 of existing debt with proceeds from this offering.  See “Use of Proceeds” on page 31.

 

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RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before making your decision to invest in our securities. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition or prospects. If that were to happen, the trading price of our common stock and warrants could decline, and you could lose all or part of your investment.

 

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus. See “Information Regarding Forward-Looking Statements” for information relating to these forward-looking statements.

 

Risks Related to Our Business

 

We have incurred significant losses, expect continued losses and may never achieve profitability. If we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully achieving our operating plan and expanding our business.

 

We have not been profitable and expect continued losses. Historically, we have relied upon cash from financing activities to fund substantially all of the cash requirements of our activities and have incurred significant losses and experienced negative cash flows. As of June 30, 2014, we had an accumulated deficit of $35.9 million.  For our fiscal years ended September 30, 2012 and 2013 and the nine months ended June 30, 2014, we incurred net losses of $4.5 million, $2.6 million and $2.3 million, respectively. We cannot predict when we will become profitable or if we ever will become profitable. We may continue to incur losses for an indeterminate period of time and may never achieve or sustain profitability. Even if we are able to achieve profitability, we may be unable to sustain or increase our profitability on a quarterly or annual basis. An extended period of losses and negative cash flow may prevent us from successfully achieving our operating plan.

 

Our independent registered public accounting firm has issued a report on our audited financial statements which raises substantial doubt about our ability to continue as a going concern. This may impair our ability to raise additional financing and adversely affect the price of our common stock.

 

The report of our independent registered public accounting firm on our audited financial statements for the years ended September 30, 2012 and 2013 includes a paragraph that explains that we have incurred substantial losses and have a net capital deficiency that raises substantial doubt about our ability to continue as a going concern. Reports of independent registered public accounting firms including such doubt about a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This may make it difficult for us to raise additional debt or equity financing necessary to continue our operations. We urge potential investors to review this report before making a decision to invest in our company.

 

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There can be no assurance that we will be able to generate or secure sufficient funding to support our growth strategy.

 

We intend to finance future acquisitions, including the Advent Cleaners Acquisition, and new store openings with cash from operations, the issuance of capital stock, borrowings, and the net proceeds from the sale of debt and/or equity securities, including the sale of securities hereby. If we do not have sufficient cash from operations, funds available under credit facilities and/or the ability to raise cash through the sale of debt and/or equity securities, or cannot issue our capital stock on suitable terms, we will be unable to pursue our growth strategy, which could have a material adverse effect on our ability to increase revenue and net income (or reduce net loss, as applicable), and on our financial condition and ability to sustain our operations.

 

Our independent registered public accounting firm has identified material weaknesses in our internal controls for the years ended September 30, 2012 and 2013 that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies.

 

In connection with the audit of our financial statements for fiscal years 2012 and 2013, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, 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 our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified by our independent registered accounting firm are the following: (i) we have an inadequate segregation of duties consistent with control objectives; (ii) we have inadequate written documentation of internal control policies and procedures; (iii) we have inadequate controls over the identification, assessment and accounting for complex financial instruments and transactions and unusual and non-recurring transactions and (iv) we have ineffective controls over period end financial disclosure and reporting processes resulting in a significant number of post-closing adjustments.

 

Our remediation efforts are still in process and have not yet been completed. Because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. In addition, the remediation steps we have taken, are taking and expect to take may not effectively remediate these material weaknesses, in which case our internal control over financial reporting would continue to be ineffective. We cannot guarantee that we will be able to complete our remedial actions successfully. Even if we are able to complete these actions successfully, these measures may not adequately address our material weaknesses. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting.

 

We will be required to evaluate and disclose changes made to our internal control and procedures on a quarterly basis. As a result of our evaluation of our internal controls and procedures, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid material weaknesses in the future. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently.

 

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If we are unable to adequately remediate the foregoing material weaknesses or comply or continue to comply with the foregoing obligations, it could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the NASDAQ Capital Market and the inability of registered broker-dealers to make a market in our common stock, which could reduce the market price of our common stock. In addition, in the event that we do not adequately remediate these material weaknesses, or if we fail to maintain proper and effective internal controls in future periods, our business, results of operations and financial condition and our ability to run our business effectively could be adversely affected and investors could lose confidence in our financial reporting.

 

Our industry is highly competitive.

 

The dry cleaning industry is highly competitive. We believe there could be as many as 40,000 dry cleaning stores in the United States, and we face intense competition for customers and access to suitable store locations. We will compete with other dry cleaner operators in each of our projected markets. Some of our competitors could have greater financial and marketing resources, market share, and/or name recognition than us. In addition, our proposed business could be affected by fashion trends, the economy, and a reduction in our markets’ population growth and/or financial conditions and habits. There can be no assurance that we will be able to compete successfully with such entities in the future.

 

Pricing pressures from existing competitors and/or an influx of new competitors may have an adverse effect on our operating results.

 

The competition in our market from the incumbent providers of dry cleaning services, especially discount or single price per piece operators, may place downward pressure on prices for our services, which can adversely affect our operating results. In addition, we could face competition from other companies we have not yet identified or which may later enter into our existing operating regions. If we are not able to compete effectively with these industry participants, or if our potential customer base is diluted by an influx of new stores, our operating results would be adversely affected.

 

Many of our competitors and potential competitors could have superior resources, which could place us at a cost and price disadvantage. Thus, we may never realize revenues sufficient to sustain our operations, and we may fail in our business and cease operations.

 

Many of our competitors, including those with franchised operations, and potential competitors may have significant competitive advantages, including greater market presence; name recognition; superior financial, technological and personnel resources; superior services and marketing capabilities; and significantly larger customer bases. As a result, some of our competitors and potential competitors could raise capital at a lower cost than we can, and they may be able to adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the development, marketing, and sale of services than we can. Also, our competitors’ and potential competitors’ greater brand-name recognition may require us to price our services at lower levels in order to win business. Our competitors’ and potential competitors’ financial advantages may give them the ability to reduce their prices for an extended period of time if they so choose.

 

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Our ability to implement our growth strategy may be limited by our ability to consummate acquisitions, and there can be no assurance that future acquisitions, including the Advent Cleaners Acquisition, will have a beneficial effect on our operating results.

 

Our growth strategy includes acquisitions. We will have limited knowledge about the specific operating history, trends, and customer patterns of the dry cleaning stores to be acquired in connection with future acquisitions, including the Advent Cleaners Acquisition. Management will also be relying upon certain representations, warranties, and indemnities made by the sellers with respect to the acquisitions, as well as our own due diligence investigation. There can be no assurance that such representations and warranties will be true and correct or that our due diligence will uncover all material adverse facts relating to the operations and financial condition of the store acquired. Any material misrepresentation could have a material adverse effect on our financial condition and results of operations. Consequently, there can be no assurance that we will make future acquisitions at favorable prices, that acquired stores will perform as well as they had performed historically, or that we will have sufficient information to accurately analyze the markets in which we elect to make acquisitions. Further, while the acquired operations are being integrated into our existing operations, and even thereafter, the acquired operations may not achieve levels of revenue or profitability comparable to our existing operations, or otherwise perform as expected, particularly in the fiscal quarters immediately following the consummation of such transactions.

 

Our financial results after the Advent Cleaners Acquisition may differ materially from the unaudited pro forma financial statements included in this prospectus.

 

The pro forma financial statements contained in this prospectus are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates and may not be an indication of the combined financial condition or results of operations following consummation of the Advent Cleaners Acquisition for several reasons. See the sections entitled “Prospectus Summary—Historical Financial and Operating Data and Summary Unaudited Pro Forma Data” and “Unaudited Pro Forma Financial Information.”  Thus, the actual financial condition and results of operations of the Advent Cleaners Acquisition may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the Advent Cleaners Acquisition. Any potential decline in our financial condition or results of operations may cause significant variations in the stock price of our company after the Advent Cleaners Acquisition. See “Prospectus SummaryRecent DevelopmentsAdvent Cleaners Acquisition.”

 

Our future results will suffer if we do not effectively manage our expanded operations following the Advent Cleaners Acquisition.

 

Following the Advent Cleaners Acquisition, the size of our operations will increase significantly, adding 14 dry stores, three mini-hubs with retail operations and a central processing hub. We will also acquire several large commercial laundry contracts with some of the largest resorts and hotels in Las Vegas, Nevada. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the integration of point of service systems, billing, collections and accounting and associated increased costs and complexities. There can be no assurances that we will realize the expected operating efficiencies, revenue enhancements or other benefits currently anticipated from Advent Cleaners Acquisition.

 

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Third parties may terminate or alter existing assigned contracts under the Advent Cleaners Acquisition.

 

Advent Cleaners has contracts with suppliers, lessors, and other business partners that have “change of control” or similar clauses that may make it difficult for Advent Cleaners to directly assign such contracts to us.  In several instances, we will be required to enter into new contracts with these business partners.  We may seek to obtain consent from these other parties, but if these third party consents cannot be obtained, or we are required to enter into new contracts on unfavorable terms, we may incur unanticipated expenses that have material impact on our future financial results.

 

After the Advent Cleaners Acquisition is completed, we may be subject to work stoppages at Advent facilities, which could seriously impact our operations and the profitability of our business.

 

Currently, of Advent Cleaners’ 235 employees, 130 are members of the Culinary Local 226 labor union, or Local 226 Union, and Advent Cleaners is a party to a collective bargaining agreement with the Local 226 Union, or Advent CBA.  While we do not intend to terminate any of Advent Cleaners’ unionized employees upon the closing of the Advent Cleaners Acquisition, the Advent CBA is not automatically assignable.  Although we intend to enter into a new collective bargaining agreement with the Local 226 Union, we may not be able to enter into a new agreement on terms that are satisfactory to us, if at all.  In addition, the terms of a new collective bargaining agreement could significantly increase our labor costs or negatively affect our ability to increase operational efficiency.

 

Our unionized workers could engage in a strike, work stoppage or other slowdown in the future for any number of reasons, including disputes that may arise from negotiating the new collective bargaining agreement, disputes under collective bargaining agreements with labor unions in the future, or other reasons.  A work stoppage or other disruption at our facilities for any reason (including but not limited to labor disputes, natural or man-made disasters, tight credit markets or other financial distresses) could have a substantial adverse effect on our financial condition and results of operation.

 

Competition for acquisitions could adversely affect our ability to continue our growth.

 

If other companies seek to acquire the same dry cleaning operations that we seek to acquire, acquisition prices would likely increase, resulting in fewer acquisition opportunities, which could have a material adverse effect on our growth.

 

Our long-term success is also dependent on our ability to open new stores and is subject to many unpredictable factors.

 

One of the key means of achieving our organic growth strategy will be through opening new stores and operating those stores on a profitable basis. We intend to develop new stores in our existing markets, especially in geographic regions that can be serviced by our existing hubs or mini-hubs, expand our footprint into adjacent markets and selectively enter into new markets. However, there are numerous factors involved in identifying and securing appropriate sites, including, but not limited to, the identification and availability of suitable locations with the appropriate population demographics, traffic patterns, local retail and business attractions and infrastructure that will drive high levels of customer traffic and store level sales. Further, competition for identified sites is intense, and other dry cleaning operators and retail concepts that compete for those sites may have unit economic models that permit them to bid more aggressively for those sites than we can. Our ability to open stores also depends on other factors, including, negotiating leases with acceptable terms, identifying, hiring and training qualified employees in each local market, and securing required governmental permits in a timely manner.

 

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There is no guarantee that a sufficient number of suitable sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our organic growth plan. We may not be able to successfully develop critical market presence in new geographical markets, as we may be unable to find and secure attractive locations and attract new customers. If we are unable to fully implement our organic growth plans, our business, financial condition and results of operations could be materially adversely affected.

 

The success of our expansion strategy depends on the continued loyalty of the customers of the acquired stores.

 

The success of the dry cleaning stores to be acquired in any acquisition, including the Advent Cleaners Acquisition, depends in large part on our ability to retain customers from the operations we acquire. To the extent that customers have developed loyalty to former owners/operators, such transitions could result in a loss of customers. A significant loss of customers would have a material adverse effect on our financial condition and results of operations.

 

No independent market studies have been made to confirm the continued demand for our dry cleaning services.

 

No independent market studies have been made that confirm the demand for our dry cleaning services. If there is not a sufficient market for our dry cleaning services, we may suffer or fail in our business and cease operations.

 

Changes in the cost of supplies, utilities and other operating costs beyond our control could adversely affect our results of operations.

 

We purchase our supplies, including dry cleaning solvents, wire hangers and packaging materials from several large suppliers and the price for such supplies is subject to change.  Our utility costs fluctuate during certain peak seasons, primarily during prolonged periods of cold in Virginia and Indiana and heat in California and Arizona.  Because we provide competitively priced dry cleaning and laundry services, our ability to pass along commodity price increases to our customers is limited.  Significant increases in gasoline prices could also result in a decrease of customer traffic at our stores and increases in expenses attributed to our delivery routes, each of which could adversely affect our profit margins.

 

If we face labor shortages or increased labor costs, our growth and operating results could be adversely affected.

 

Labor is a primary component in the cost of operating our stores. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in the federal, state or local minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be adversely affected. In addition, our growth depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified management personnel, as well as a sufficient number of other qualified employees, including customer service and equipment maintenance personnel. Difficulty in recruiting employees or high employee turnover in existing stores could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition, some of our employees are paid at rates related to the United States federal minimum wage, and increases in the minimum wage would increase our labor costs. Further, costs associated with workers’ compensation are rising, and these costs may continue to rise in the future. We may be unable to increase our prices in order to pass these increased labor costs on to consumers, in which case our margins would be negatively affected, which could materially adversely affect our business, financial condition and results of operations.

 

We rely on licensed third-party point-of-sale software and systems to manage customer orders and operate our back office management systems.  The failure of this software and systems could harm our business.

 

We rely on point-of-sale software and systems licensed from third-parties to operate our point-of-sale transactions including issuing pick-up and delivery receipts and tracking dry cleaning and laundry inventory while being processed.  A substantial failure of the software and systems could restrict and limit our ability to track orders and fulfill orders in a timely manner.  This could reduce the attractiveness of our services and cause our patrons to visit other dry cleaners. In addition, we rely on this software to transmit data required to coordinate payroll, track sales, generate operating reports to analyze store and regional performance and monitor loss prevention. Disruption in, changes to, or a failure of the software and systems could result in the loss of important data, and increase our expenses.

 

Our business could suffer if we lose key management or are unable to attract and retain the talent required for our business.

 

Our performance is significantly impacted by the efforts and abilities of our senior management team. We are highly dependent upon the members of our management team, including Mr. Alexander Bond, Ms. Kari Minton and Mr. Timothy Stickler, and each of our regional managers.  Our executives have significant regulatory, industry, sales and marketing, operational and/or corporate finance experience. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our business objectives. If we are unable to recruit and retain qualified management personnel in a timely manner our results of operations and financial condition could suffer.

 

If we are unable to attract and retain qualified personnel with dry cleaning service-related experience, our business could suffer.

 

Our current and future success depends in part on our ability to identify, attract, hire, assimilate, train, retain, and motivate professional, highly-skilled technical, managerial, sales, marketing, and customer service personnel with dry cleaning service-related experience. If we fail to attract and retain the necessary managerial, sales and marketing, technical, and customer service personnel, we may not develop a sufficient customer base to adequately develop our proposed operations and our business could suffer or fail.

 

Our business is seasonal and is also affected by severe weather.

 

Our business is seasonal.  Demand for our services, and therefore our sales, is lower during the summer months when customers tend to take more time off work and therefore require less occupation-related dry cleaning and laundry. Our business is also affected by weather, especially severe weather conditions such as hurricanes and tropical storms in Virginia and Hawaii, snow storms in Indiana and high temperatures in California and Arizona.

 

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Changes in economic conditions and other unforeseen conditions could materially affect our ability to maintain or increase sales.

 

The dry cleaning industry depends, in large part, on consumer discretionary spending. The United States in general and the specific markets in which we operate, may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumer discretionary spending. Sales in our stores could decline if consumers are unemployed reducing the demand for dry cleaning services, including uniforms, or choose to reduce the amount they spend on dry cleaning. Negative economic conditions and trends may cause consumers to make long-term changes to their discretionary spending behavior, including the continued adoption of “business-casual” and other workplace changes. In addition, given our geographic concentrations in specific regions of the United States, economic conditions in those particular areas of the country could have a disproportionate impact on our overall results of operations, and regional occurrences such as local strikes, terrorist attacks, increases in energy prices, and natural or man-made disasters could materially adversely affect our business, financial condition and results of operations. If sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential store closures could result from prolonged negative sales, which could materially adversely affect our business, financial condition and results of operations.

 

Compliance with environmental laws may negatively affect our business.

 

We are subject to federal, state and local laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous or toxic substances. Third parties may also make claims against owners or tenants of properties or businesses for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our stores. Environmental conditions relating to releases of hazardous substances at prior, existing or future store sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations.

 

The effect of changes to healthcare laws in the United States may increase the number of employees who choose to participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our financial results.

 

In 2010, the Patient Protection and Affordable Care Act, or PPACA, was signed into law in the United States to require health care coverage for many uninsured individuals and expand coverage to those already insured. The healthcare reform law will require us to offer healthcare benefits to all full-time employees (including full-time hourly employees) that meet certain minimum requirements of coverage and affordability, or face penalties. If we elect to offer such benefits, we may incur substantial additional expense. If we fail to offer such benefits, or the benefits we elect to offer do not meet the applicable requirements, we may incur penalties. The healthcare reform law also requires individuals to obtain coverage or face individual penalties, so employees who are currently eligible but elect not to participate in our healthcare plans may find it more advantageous to do so when such individual mandates take effect. It is also possible that by making changes or failing to make changes in the healthcare plans offered by us, we will become less competitive in the market for our labor. Finally, implementing the requirements of healthcare reform applicable to us, including the requirement to offer affordable, minimum essential coverage to our full time employees beginning in 2015, is likely to impose additional administrative costs.  The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may significantly increase our healthcare coverage costs and could materially adversely affect our business, financial condition and results of operations.

 

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We may pursue businesses in which we have limited or no experience, including tuxedo and eveningwear rental, and such businesses could fail to generate anticipated returns.

 

Several of our competitors incorporate additional businesses into their dry cleaning and laundry operations.  We may pursue similar businesses, and, in particular, are contemplating introducing tuxedo and eveningwear rentals into certain of our retail stores, even though we do not have experience operating such additional businesses.  If we are not able to successfully integrate these additional business opportunities or if the costs associated with such businesses opportunities are greater than we project, our operating results could be adversely affected.

 

Risks Relating to this Offering

 

We may allocate net proceeds from this offering in ways which differ from our estimates based on our current plans and assumptions discussed in the section entitled “Use of Proceeds” and with which you may not agree.

 

The allocation of net proceeds of the offering set forth in the “Use of Proceeds” section below represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, our future revenues and expenditures. The amounts and timing of our actual expenditures will depend on numerous factors, including market conditions, cash generated by our operations, business developments, suitable acquisition opportunities and related rate of growth. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes. Circumstances that may give rise to a change in the use of proceeds and the alternate purposes for which the proceeds may be used are discussed in the section entitled “Use of Proceeds” below. You may not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use our proceeds. As a result, you and other stockholders may not agree with our decisions. See “Use of Proceeds” section for additional information.

 

Future sales by our stockholders may adversely affect our stock price and our ability to raise funds in new stock offerings.

 

Sales of our common stock by our stockholders and option holders following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all.  Of the 2,685,924 shares of common stock outstanding as of August 22, 2014, 1,559,501 shares are not restricted and will be freely tradable without restriction, unless held by our “affiliates.”

 

You will experience immediate and substantial dilution in the book value per share of the common stock you purchase and may experience additional dilution in the future.

 

Because the public offering price is expected to be substantially higher than the book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on an assumed public offering price of $     per combination of one share of common stock and one warrant which is the midpoint of the range set forth on the cover of this prospectus, after giving effect to the sale by us of up to            shares of common stock and attributing no value to the warrants and after deducting underwriter commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $               per share, or         %, at the public offering price, assuming no exercise of the warrants issued in this offering.  Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment. See the section entitled “Dilution” elsewhere in this prospectus for a more detailed discussion of the dilution you will incur if you purchase securities in this offering.

 

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The issuance of warrants in this offering will cause you to experience additional dilution if those warrants are exercised for shares of our common stock.

 

In addition to the shares of common stock we are issuing in this offering, we are also issuing an equal number of warrants. The warrants being issued are exercisable for an equal number of additional shares of common stock.  If the holders of our warrants exercise their warrants, you will experience dilution at the time they exercise warrants. In addition to the warrants we are offering to purchasers in this offering, we are issuing a warrant to the representative of the underwriters in this offering that is exercisable for    % of the shares of common stock sold in this offering, including the shares of common stock sold pursuant to the over-allotment option, if any. If the representative of the underwriters exercises these warrants, you will experience additional dilution. Furthermore, we have granted the representative of the underwriters in this offering the right to purchase additional shares of common stock and warrants from us to cover over-allotments, if any. If the representative of the underwriters exercises this option in whole or in part, you will experience additional dilution.

 

Holders of warrants will have no rights as common stockholders until such holders exercise their warrants and acquire our common stock.

 

Until holders of warrants acquire shares of our common stock upon exercise of the warrants, holders of warrants will have no rights with respect to the shares of our common stock underlying such warrants. Upon exercise of the warrants, the holders will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

 

Risks Relating to Our Common Stock and Warrants

 

An active trading market for our common stock and warrants may not develop, and you may not be able to sell your common stock or warrants at or above the initial public offering price.

 

There was no public market for our common stock or warrants immediately prior to the completion of this offering.  An active trading market for our common stock and warrants may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your common stock or warrants at an attractive price, or at all. The price for our securities in this offering will be determined by negotiations among us and the representative of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock or warrants at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our securities, and it may impair our ability to attract and motivate our employees through equity incentive awards and our ability to acquire other companies by using our securities as consideration.

 

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The market prices of our common stock and warrants may fluctuate substantially.

 

The market prices of our common stock and warrants could be subject to significant fluctuations after this offering. You should consider an investment in our securities to be risky, and you should invest in our securities only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market prices of our common stock and warrants to fluctuate, in addition to the other risks mentioned in this “Risk Factors” section and elsewhere in this prospectus, are:

 

·                  variations in our operating results;

 

·                  sale of our common stock by our stockholders, executives, and directors;

 

·                  sale of our warrants by our warrant holders;

 

·                  volatility and limitations in trading volumes of our shares of common stock and warrants;

 

·                  our ability to obtain financings;

 

·                  our cash position;

 

·                  changes in general economic, political and market conditions in any of the regions in which we conduct our business;

 

·                  changes in industry conditions or perceptions;

 

·                  changes in valuations of similar companies or groups of companies;

 

·                  departures and additions of key personnel;

 

·                  disputes and litigation related to contractual obligations;

 

·                  changes in applicable laws, rules, regulations, or accounting practices and other dynamics; and

 

·                  other events or factors, many of which may be out of our control.

 

Upon the completion of this offering we will have significant “equity overhang” which could adversely affect the market price of our common stock and impair our ability to raise additional capital through the sale of equity securities.

 

Upon completion of this offering,          shares of our common stock will be issuable upon exercise of the warrants issued to investors and the representative of the underwriters in this offering.  The possibility that substantial amounts of our common stock may be issued to and then sold by investors or the perception that such issuances and sales could occur, often called “equity overhang,” could adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. The consummation of the exercise of warrants for common stock would significantly increase the amount of our common stock outstanding and the amount of the equity overhang.

 

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Raising additional capital, including through future sales and issuances of our common stock, the exercise of warrants or the exercise of rights to purchase common stock pursuant to our equity incentive plan could result in additional dilution of the percentage ownership of our stockholders, could cause our share price to fall and could restrict our operations.

 

We expect that significant additional capital will be needed in the future to continue our planned operations, including acquisitions, purchasing of capital equipment, hiring new personnel, and continuing activities as an operating public company. To the extent we seek additional capital through a combination of public and private equity offerings, debt financings and strategic partnerships and alliances, our stockholders may experience substantial dilution. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders may be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt and receivables financings may be coupled with an equity component, such as warrants to purchase shares of our common stock, which could also result in dilution of our existing stockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt and other operating restrictions that could adversely impact our ability to conduct our business. A failure to obtain adequate funds may cause us to curtail certain operational activities, including sales and marketing, in order to reduce costs and sustain the business, and would have a material adverse effect on our business and financial condition.

 

Under our 2014 Plan, we may grant equity awards covering up to an additional 1,250,000 shares of our common stock. As of the date of this offering, we have granted options to purchase up to 636,000 shares of common stock under the 2014 Plan. We plan to register the number of shares issuable upon outstanding awards and available for issuance under our 2014 Plan. Sales of shares issued upon exercise of options or granted under our 2014 Plan may result in material dilution to our existing stockholders, which could cause our share price to fall.

 

Our issuance of shares of preferred stock could adversely affect the market value of our common stock, dilute the voting power of common stockholders and delay or prevent a change of control.

 

Upon the completion of this offering and the conversion of all shares of our Series A Preferred Stock into shares of our common stock, our board of directors will have the authority to cause us to issue, without any further vote or action by the stockholders, up to 6,000,000 shares of preferred stock in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series.

 

The issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price causing economic dilution to the holders of common stock.

 

Further, the issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of our other classes of voting stock either by diluting the voting power of our other classes of voting stock if they vote together as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote even if the action were approved by the holders of our other classes of voting stock. The issuance of shares of preferred stock may also have the effect of delaying, deferring or preventing a change in control of our company without further action by the stockholders, even where stockholders are offered a premium for their shares.

 

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We do not intend to pay cash dividends on our shares of common stock so any returns will be limited to the value of our shares of common stock.

 

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the increase, if any, of our share price.

 

We have applied for listing of our common stock and the warrants issued in this offering on The NASDAQ Capital Market in connection with this offering. There is no guarantee that our common stock and/or warrants will be listed on The NASDAQ Capital Market.

 

We have applied to have our shares of common stock and the warrants we plan to issue in this offering listed for trading on The NASDAQ Capital Market. On the date of this prospectus, we believe that we will satisfy the listing requirements and expect that our common stock and warrants we plan to issue in this offering will be listed on The NASDAQ Capital Market. These listings, however, are not guaranteed. If our application is not approved, we will seek to have our common stock and warrants issued in this offering quoted on the OTC Bulletin Board. Even if such listing is approved, there can be no assurance any broker will be interested in trading our common stock or warrants issued in this offering. Therefore, it may be difficult to sell any shares or warrants you purchase in this offering if you desire or need to sell them. Our lead underwriter, Maxim Group LLC, is not obligated to make a market in our common stock or warrants, and even after making a market, can discontinue market making at any time without notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our common stock or warrants will develop or, if developed, that the market will continue.

 

Due to the speculative nature of warrants, there is no guarantee that it will ever be profitable for holders of the warrants to exercise the warrants.

 

The warrants being offered hereby do not confer any rights of common stock ownership on its holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a formulaic price that is subject to adjustment for a limited period of time. Specifically, commencing on the pricing of this offering when the warrants are issued, holders of the warrants may exercise their right to acquire additional shares of our common stock. In order to do so, they must pay an exercise price equal to 100% of the public offering price in this offering within the 60 months following the date of issuance, after which date any unexercised warrants will expire and have no further value. There can be no assurance that the market price of our common stock will equal or exceed the exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.

 

Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and our management will be required to devote substantial time to compliance matters.

 

As a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act, have created uncertainty for public companies and increased costs and time that boards of directors and management must devote to complying with these rules and regulations. The Sarbanes-Oxley Act and related rules of the Securities and Exchange Commission and The NASDAQ Stock Market regulate corporate governance practices of public companies. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, the reporting requirements, rules, and regulations will make some activities more time-consuming and costly. In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.

 

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Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

 

We are not currently required to comply with the rules of the Securities and Exchange Commission implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded company, we will be required to comply with the Securities and Exchange Commission’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the Securities and Exchange Commission.  At this time, our independent registered public accounting firm is not required to conduct an audit of the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

 

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. As described above, in connection with the audit of our financial statements for fiscal years 2012 and 2013, our independent registered public accounting firm identified four material weaknesses in our internal control over financial reporting.  In addition to the current material weaknesses that have been identified by our independent registered public accounting firm, we or they may identify additional material weaknesses in our internal control over financial reporting that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act.

 

If we identify weaknesses in our internal control over financial reporting, are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the exchange on which our securities are listed, the Securities and Exchange Commission or other regulatory authorities, which could require additional financial and management resources.

 

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Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

 

Provisions in our restated certificate of incorporation and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our board of directors has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to control the size of or fill vacancies on our board of directors. Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future events, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

·                  our ability to generate or secure sufficient funding to support our growth strategy;

 

·                  our ability to identify accretive acquisitions and close and assimilate acquired dry cleaning and laundry operations;

 

·                  the effect of certain exercises or conversions of certain securities may have on us;

 

·                  future sales of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;

 

·                  our ability to compete effectively;

 

·                  regulatory compliance costs; and

 

·                  the other matters described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.”

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section beginning on page 15, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

You should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of        shares of our common stock and            warrants in this offering will be approximately $        million, assuming a public offering price of $       per combination of one share of common stock and one warrant, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.  If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from this offering will be approximately $       million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

A $1.00 increase or decrease in the assumed public offering price of $        per combination of one share of common stock and one warrant would increase or decrease the net proceeds from this offering by approximately $         million, assuming that the number of shares and warrants offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of $1.0 million in the amount of securities offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions.

 

We currently intend to use $4.0 million of the net proceeds from the offering to acquire Advent Cleaners, up to $1.0 million of the net proceeds from this offering to repay existing debt, including debt owed under the Setal 10 Note and under a loan agreement with the Taylor Family Trust and the Wilson Family Trust, or Taylor Family Trust Note.  After applying the proceeds of this offering as intended, we will have $           in debt outstanding.  We currently intend to use the remaining net proceeds from this offering, together with our existing cash resources to fund additional acquisitions, open new stores and establish new delivery routes, fund capital expenditures at several of our stores and production plants, and for working capital and other general corporate purposes.

 

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including, among other things, the cash generated by our operations and the rate of growth, if any, of our business.  As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds.

 

Although it is difficult to predict future liquidity requirements, we believe that the net proceeds from this offering and our existing cash, together with interest thereon, will be sufficient to fund our operations through 2015.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments, certificates of deposit, and direct or guaranteed obligations of the U.S. government.

 

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DILUTION

 

If you purchase securities in this offering, your interest will be diluted immediately to the extent of the difference between the public offering price of $       per share of common stock and the as adjusted net tangible book value per share of our common stock immediately following this offering.

 

Our net tangible book value as of June 30, 2014 was $(13,602,700), or $(5.06) per share. Net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of June 30, 2014.

 

Net tangible book value dilution per share of common stock to new investors represents the difference between the amount per share paid by purchasers in this offering and the as adjusted net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of            shares of common stock in this offering at a public offering price of $           per share of common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriter commissions and estimated offering expenses, our as adjusted net tangible book value as of June 30, 2014 would have been $        million, or $       per share. This represents an immediate increase in net tangible book value of $        per share to existing stockholders and an immediate dilution in net tangible book value of $        per share to purchasers of shares in this offering, as illustrated in the following table:

 

Public offering price per share

 

$

 

 

Net tangible book value per share as of June 30, 2014

 

$

(5.06

)

Increase in net tangible book value per share attributable to new investors

 

$

 

 

Adjusted net tangible book value per share as of June 30, 2014, after giving effect to the offering

 

$

 

 

Dilution per share to new investors in the offering

 

$

 

 

 

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Table of Contents

 

DIVIDEND POLICY

 

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness. Therefore, we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors, and will depend upon our results of operations, financial condition, capital requirements and other factors including contractual obligations that our board of directors deems relevant.

 

CAPITALIZATION

 

The following table sets forth our cash and our capitalization as of June 30, 2014:

 

·                  on an actual basis;

 

·                  on a pro forma basis after giving effect to the automatic conversion of all our outstanding Series A Preferred Stock into 351,290 shares of common stock upon the closing of this offering as if such conversion had occurred on June 30, 2014; and

 

·                  on a pro forma, as adjusted basis after giving effect to the following:

 

·                  the effect of the pro forma adjustments;

 

·                  the sale of           shares of common stock and            warrants in this offering at the assumed initial public offering price of  $                 per combination of one share of common stock and one warrant, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;

 

·                  the payment of $4.0 million for the purchase consideration of the Advent Cleaners Acquisition;

 

·                  the cancellation of 1,098,445 shares of common stock under the terms of the Exchange Agreement upon the closing of this offering;

 

·                  the cancellation of $       in debt in connection with the Exchange Offer upon the closing of this offering;

 

·                  the issuance of          shares of common stock in connection with the Exchange Offer upon the closing of this offering (based upon an assumed public offering price for our common stock of $       per share, which is the mid-point of the range indicated on the front cover of this prospectus); and

 

·                  the issuance of an aggregate of         shares of common stock to certain professionals and advisors in connection with our bankruptcy proceedings (based upon an assumed public offering price for our common stock of $       per share, which is the mid-point of the range indicated on the front cover of this prospectus).

 

The pro forma information below is only for illustrative purposes and our capitalization following the completion of this offering will be adjusted based on the actual offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Use of Proceeds” above as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and financial statements and the related notes appearing elsewhere in this prospectus.

 

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Table of Contents

 

 

 

As of June 30, 2014
(Unaudited)

 

 

 

Actual

 

Pro Forma

 

Pro Forma,
As Adjusted

 

 

 

 

 

 

 

 

 

Cash

 

$

342,167

 

$

342,167

 

$

 

 

 

 

 

 

 

 

 

 

Related party and other long-term debt, net

 

12,528,096

 

12,528,096

 

 

 

Capital lease obligations

 

48,711

 

48,711

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value: 6,000,000 authorized; 6,000,000 authorized pro forma and pro forma, as adjusted; no shares issued or outstanding, pro forma and pro forma, as adjusted.

 

 

 

 

 

Series A cumulative convertible preferred stock, $0.001 par value: 5,800,000 authorized, 5,620,514 issued and outstanding at June 30, 2014; no shares authorized, issued or outstanding, pro forma and pro forma, as adjusted.

 

324,000

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

Common stock, $0.001 par value: 30,000,000 shares authorized, 2,685,924 shares issued and outstanding at June 30, 2014; 30,000,000 authorized,              issued and outstanding, pro forma; and 30,000,000 authorized,              shares issued and outstanding, pro forma, as adjusted

 

2,686

 

3,037

 

 

 

Additional paid-in capital

 

22,570,264

 

22,893,913

 

 

 

Accumulated deficit

 

(35,881,650

)

(35,881,650

)

 

 

Total stockholder’s deficit

 

(13,308,700

)

(12,984,700

)

 

 

Total capitalization

 

$

(407,893

)

$

(407,893

)

 

 

 

The above discussion and table do not include the following:

 

·                  1,250,000 shares of common stock reserved for issuance under the 2014 Plan, of which options to purchase 636,000 shares were outstanding as of August 22, 2014, at an exercise price of $4.80 per share;

 

·                  21,753 shares of common stock reserved for issuance under the Setal 10 Note, based on the principal and interest outstanding under the Setal 10 Note on August 22, 2014 which we anticipate repaying in full upon the closing of this offering;

 

·                  an aggregate of         shares of common stock issuable upon exercise of the warrants issued to the public and warrants issued to the representative of the underwriters in connection with this offering; and

 

·                  assuming the over-allotment option is fully exercised, (i)          shares of common stock, (ii)           shares of common stock issuable upon exercise of warrants and (iii)          shares of common stock issuable upon exercise of the warrants to be issued to the representative of the underwriters in connection with the full exercise of the over-allotment option.

 

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Table of Contents

 

UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

The following unaudited pro forma financial data for the year ended September 30, 2013, as of, and for the nine months ended June 30, 2014 are based upon the respective financial statements of U.S. Dry Cleaning Services Corporation and Advent Cleaners, LLC. Advent Cleaners has a fiscal year end of December 31. Included in this filing are the audited financial statements of Advent Cleaners for the years ended December 31, 2013 and 2012, as well as unaudited financial statements for the six months ended June 30, 2014 and 2013. However, for the purposes of this pro forma presentation, the year end of Advent Cleaners has been conformed to that of U.S. Dry Cleaning Services Corporation.

 

The pro forma balance sheet presented is the unaudited balance sheet as of June 30, 2014. The pro forma statement of operations for the year ended September 30, 2013 includes the U.S. Dry Cleaning Services Corporation results derived from the audited statement of operations for  the year ended September 30, 2013 and the Advent Cleaners, LLC unaudited statement of operations for the twelve months from October 1, 2012 to September 30, 2013. The pro forma statement of operations for the nine months ended June 30, 2014 includes the unaudited statement of operations of U.S. Dry Cleaning Services Corporation and Advent Cleaners, LLC for the nine month period from October 1, 2013 to June 30, 2014. The unaudited pro forma statement of operations data for the nine months ended June 30, 2014 give effect to the Advent Cleaners Acquisition, this offering and the application of the net proceeds thereof as if they had each occurred as of the beginning of our fiscal year ended September 30, 2013.

 

The unaudited pro forma financial data are included for informational purposes only and do not purport to represent what our actual financial position or results of operations would have been had the transactions referenced above occurred on the dates indicated. In addition, the pro forma adjustments described herein are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the above transactions on our historical financial data. The unaudited pro forma financial data also do not purport to represent, and may not be indicative of, our results of operations for any future period or our financial position as of any future date.

 

The acquisition price for the Advent Cleaners Acquisition will be paid entirely in cash. The following unaudited pro forma financial data are based upon the initial public offer price of $     per combination of one share of common stock and one warrant, which is the midpoint of the range set forth on the cover page of this prospectus.

 

We plan to account for the Advent Cleaners Acquisition as a business combination using the acquisition method in accordance with ASC 805—“Business Combinations” (ASC 805). In accordance with ASC 805, the purchase consideration is required to be allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values. If the purchase consideration exceeds the fair value of the assets acquired, net of liabilities assumed, the excess will be recognized as goodwill. Alternatively, if the fair value of the assets acquired, net of liabilities assumed, exceeds the purchase consideration, the difference will be recorded as a gain on bargain acquisition. We have engaged an independent third party valuation firm to assist management in estimating the fair value of the assets and liabilities acquired. The identifiable intangible assets that meet the separability criteria of ASC 805 include contractual customer relationships, trade names and non-compete agreement. The valuation methodology being used for the contractual customer relationships is the Multi-Period Excess Earnings Method taking into consideration the contributory asset charges and probability of contract renewal. The Al Phillips and Thrift DLux trade names are being valued using a Relief-from-Royalty method with the former having a longer tenure and branding presence in the market. The methodology being used for the non-compete agreement with the seller is based on a Differential Discounted Cash Flow analysis for with and without competition scenarios. An assessment of competition is a key driver in this analysis and is typically developed based on a qualitative assessment of likelihood of competition by the seller. As we continue the formal valuation process, other intangible assets that meet the separability criteria of ASC 805 may be identified and allocated a portion of the consideration which would decrease the residual recorded as goodwill.

 

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Table of Contents

 

With respect to the preliminary fair value and other adjustments related to the Advent Cleaners Acquisition, the unaudited pro forma financial data have been prepared using the acquisition method in accordance with ASC 805, as if the Advent Cleaners Acquisition had been completed as of October 1, 2012 for the purposes of the unaudited pro forma statements of operations, and as of June 30, 2014 for the purposes of the unaudited pro forma balance sheet. The allocation of the purchase consideration as reflected in the unaudited pro forma financial data is based upon management’s internally developed estimates of the fair value of the assets acquired and liabilities assumed as if the Advent Cleaners Acquisition had been completed as of the above dates. This allocation of the purchase consideration depends upon certain estimates and assumptions, all of which are preliminary and have been made solely for the purpose of developing the unaudited pro forma financial data. The final purchase price allocations will be based upon the fair values as of the actual closing date of the Advent Cleaners Acquisition, at which time the final allocation of the purchase consideration will be determined. The final purchase price allocation may be different than the estimated allocation reflected in the accompanying pro forma financial data, and those differences may be material.

 

The unaudited pro forma statements of operations do not include adjustments for any revenue or cost saving synergies that may be achievable subsequent to the completion of the Advent Cleaners Acquisition or the costs that may be incurred to achieve those synergies.

 

The following unaudited pro forma statements of operations should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the respective financial statements of U.S. Dry Cleaning Services Corporation and Advent Cleaners, LLC, in each case included elsewhere in this prospectus.

 

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Table of Contents

 

U.S. DRY CLEANING SERVICES CORPORATION

UNAUDITED PRO FORMA BALANCE SHEET

AS OF JUNE 30, 2014

 

 

 

Historical

 

Advent

 

 

 

 

 

 

 

U.S. Dry
Cleaning
Services
Corp.

 

Advent
Cleaners,
LLC (1)

 

Cleaners, LLC
Preliminary
Acquisition
Adjustments

 

Offering
Adjustments

 

Pro Forma

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

342,167

 

$

210,224

 

$

(210,224

)(2)

$

 

$

342,167

 

Accounts receivable trade, net

 

822,215

 

580,222

 

(580,222

)(2)

 

822,215

 

Prepaids and other current assets

 

699,921

 

158,159

 

 

 

858,080

 

Total current assets

 

1,864,303

 

948,605

 

(790,446

)

 

2,022,462

 

Property, machinery and equipment, net

 

1,051,477

 

573,699

 

 

 

1,625,176

 

Intangible assets

 

618,000

 

 

1,620,000

(5)

 

2,238,000

 

Goodwill

 

 

 

1,813,340

(5)

 

1,813,340

 

Deposits and other assets

 

276,417

 

62,838

 

 

 

339,255

 

Total assets

 

$

3,810,197

 

$

1,585,142

 

$

2,642,894

 

$

 

$

8,038,233

 

LIABILITIES, SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK AND STOCKHOLERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,165,338

 

$

211,220

 

$

(211,220

)(2)

$

 

$

1,165,338

 

Accrued liabilities

 

1,768,467

 

126,675

 

(126,675

)(2)

 

1,768,467

 

Current portion of related party and other long-term debt, net

 

1,188,107

 

47,906

 

 

(8)

1,236,013

 

Deferred revenue

 

203,925

 

 

107,357

(3)

 

 

311,282

 

Capital lease obligations - current

 

37,348

 

6,768

 

(6,768

)(2)

 

37,348

 

Purchase consideration payable

 

 

 

4,000,000

(6)

 

4,000,000

 

Accrued income taxes

 

220,225

 

 

 

 

220,225

 

Total current liabilities

 

4,583,410

 

392,569

 

3,762,694

 

 

8,738,673

 

Related party and other long-term debt, net

 

11,339,989

 

61,065

 

11,708

(3)

(8)

11,412,762

 

Deferred rent

 

318,909

 

 

 

 

318,909

 

Capital lease obligations - noncurrent

 

11,363

 

 

 

 

 

 

11,363

 

Other noncurrent liabilities

 

541,226

 

 

 

 

541,226

 

Total liabilities

 

16,794,897

 

453,634

 

3,774,402

 

 

21,022,933

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A cumulative convertible preferred stock, par value $0.001

 

324,000

 

 

 

 

 

(324,000

)(7)

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $0.001

 

2,686

 

 

 

351

(7)(8)

3,037

 

Additional paid-in capital

 

22,570,264

 

1,131,508

 

(1,131,508

)(4)

323,649

(7)

22,893,913

 

Accumulated deficit

 

(35,881,650

)

 

 

 

(35,881,650

)

Total stockholders’ equity (deficit)

 

(13,308,700

)

1,131,508

 

(1,131,508

)

324,000

 

(12,984,700

)

Total liabilities, Series A cumulative convertible preferred stock and stockholders’ equity (deficit)

 

$

3,810,197

 

$

1,585,142

 

$

2,642,894

 

$

 

$

8,038,233

 

 

See notes to unaudited pro forma balance sheet.

 

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Table of Contents

 


Notes to unaudited pro forma balance sheet

 

(1) On August 25, 2014, we entered into an asset purchase agreement with Advent Cleaners, LLC and the owner of such entity, pursuant to which we have agreed to purchase, upon the closing of this offering and subject to other customary closing conditions, substantially all of the assets of Advent Cleaners. The purchase consideration for the Advent Cleaners Acquisition is $4,000,000 plus the assumption of specified liabilities related to the acquired assets and will be paid entirely in cash. See “Business—Our Proposed Strategic Acquisition” below for additional information regarding the Advent Cleaners Acquisition, including the calculation of the acquisition price.

 

(a)              We expect that the Advent Cleaners Acquisition will occur concurrently with the closing of this offering, and we expect to use a portion of the proceeds from this offering to fund the cash purchase price for this acquisition.

 

(b)              The amounts represent pro forma adjustments relating to the assets acquired and liabilities to be assumed pursuant to the Advent Cleaners Acquisition at the acquisition date based on a preliminary purchase price allocation as follows:

 

 

 

Fair Value
Based on
Preliminary
Purchase Price
Allocation

 

Consideration:

 

 

 

Cash, subject to adjustment

 

$

4,000,000

 

 

 

 

 

Recognized amounts of assets acquired and liabilities assumed as of the acquisition date:

 

 

 

Prepaid expenses and other current assets

 

158,159

 

Property, machinery and equipment

 

573,699

 

Deposits and other noncurrent assets

 

62,838

 

Intangible assets

 

1,620,000

 

Goodwill

 

1,813,340

 

Total assets acquired at preliminary fair value

 

4,228,036

 

Liabilities assumed at preliminary fair value

 

228,036

 

 

(2)              Represents assets and liabilities specifically excluded in the Advent Cleaners asset purchase agreement.

(3)              Represents deferred revenue and other liabilities to be assumed upon completion of the Advent Cleaners Acquisition.

(4)              Elimination of Advent Cleaners’ predecessor equity balance to be recorded at close of the Advent Cleaners acquisition.

(5)              Preliminary excess of purchase consideration over the fair value of net assets acquired. This excess is subject to adjustment upon completion of the Advent Cleaners Acquisitions purchase price allocation based on an independent valuation to be performed for all assets acquired and liabilities assumed in accordance with ASC 805, Business Combinations. Management is in the process of obtaining and performing these purchase price allocation subject to the completion of this offering and the successful close of the Advent Cleaners Acquisition.

(6)              Total purchase consideration to payable in cash upon the closing of the Advent Cleaners Acquisition and with the proceeds from this offering.

(7)              Gives effect to the automatic conversion of all our outstanding Series A cumulative convertible preferred stock into an aggregate of 351,290 shares of common stock at $0.001 par value upon the closing of this offering as if such conversion had occurred on June 30, 2014.

 

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Table of Contents

 

(8)           Gives effect to:

 

·                  The sale of                 shares of common stock and warrants in this offering at the assumed initial public offering price of $      per combination of one share of common stock and one warrant, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated; underwriting discounts and commissions and estimate offering expenses payable by us.

·                  The cancellation of 1,098,445 shares of common stock under the terms of the Exchange Agreement upon the closing of this offering;

·                  The cancellation of $    in debt in connection with the Exchange Offer upon the closing of this offering;

·                  The issuance of       shares of common stock in connection with the Exchange Offer upon the closing of this offering (based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus); and

·                  The issuance of an aggregate of        shares of common stock to certain professionals and advisors in connection with our bankruptcy proceedings upon the closing of this offering (based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus).

 

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Table of Contents

 

U.S. DRY CLEANING SERVICES CORPORATION
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED SEPTEMBER 30, 2013

 

 

 

Historical

 

Advent

 

 

 

 

 

 

 

U.S. Dry
Cleaning
Services
Corp.

 

Advent
Cleaners,
LLC

 

Cleaners, LLC
Preliminary
Acquisition
Adjustments

 

Offering
Adjustments

 

Pro Forma

 

Net Sales

 

$

21,408,049

 

$

9,864,960

 

$

 

$

 

$

31,273,009

 

Cost of sales (exclusive of depreciation and amortization shown separately below)

 

9,360,266

 

5,375,173

 

 

 

14,735,439

 

Gross profit (exclusive of depreciation and amortization shown separately below)

 

12,047,783

 

4,489,787

 

 

 

16,537,570

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Stores and plant

 

8,367,537

 

3,147,641

 

 

 

11,515,178

 

Regional

 

2,224,889

 

689,853

 

 

 

2,914,742

 

Corporate

 

1,725,664

 

357,757

 

(253,469

)(1)

(2)

1,829,952

 

Depreciation and amortization

 

469,547

 

186,571

 

 

 

656,118

 

Operating income (loss)

 

(739,854

)

107,965

 

253,469

 

 

(378,420

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,510,495

)

(3,599

)

 

(3)

(2,514,094

)

Gain on extinguishment of debt

 

654,935

 

 

 

 

654,935

 

Gain (loss) other

 

895

 

(31,547

)

 

 

(30,652

)

Other income (expense) net

 

(1,854,665

)

(35,146

)

 

 

(1,889,811

)

Income (loss) before provision for income taxes

 

(2,594,519

)

72,819

 

253,469

 

 

(2,268,231

)

Provision for income taxes

 

9,100

 

 

 

 

9,100

 

Net income (loss)

 

$

(2,603,619

)

$

72,819

 

$

253,469

 

$

 

$

(2,277,331

)

Net income (loss) attributable to common stockholders

 

$

(2,603,619

)

$

72,819

 

$

253,469

 

$

 

$

(2,277,331

)

Net income (loss) per share - basic and diluted

 

$

(3.85

)

$

 

$

 

$

 

$

(3.37

)

Weighted average shares outstanding - basic and diluted

 

676,699

 

 

 

 

676,699

 

Pro forma net income (loss) per share basic and diluted (unaudited)

 

$

(3.85

)

 

 

 

 

 

 

$

(3.37

)

Pro forma weighted average common shares outstanding basic and diluted (unaudited)

 

676,699

 

 

 

 

676,699

 

Other Financial Information

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

(270,307

)

$

294,536

 

$

253,469

(2)(4)

$

 

$

277,698

 

 

See notes to unaudited pro forma statements of operations.

 

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Table of Contents

 

U.S. DRY CLEANING SERVICES CORPORATION

UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2014

 

 

 

Historical

 

Advent
Cleaners, LLC

 

 

 

 

 

 

 

U.S. Dry
Cleaning
Services Corp.

 

Advent Cleaners,
LLC

 

Preliminary
Acquisition
Adjustments

 

Offering
Adjustments

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

15,804,521

 

$

7,678,898

 

$

 

$

 

$

23,483,419

 

Cost of sales (exclusive of depreciation and amortization shown separately below)

 

6,798,241

 

4,173,219

 

 

 

10,971,460

 

Gross profit(exclusive of depreciation and amortization shown separately below)

 

9,006,280

 

3,505,679

 

 

 

12,511,959

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Stores and plant

 

6,358,005

 

2,496,698

 

 

 

8,854,703

 

Regional

 

1,551,211

 

575,293

 

 

 

2,126,504

 

Corporate

 

1,579,768

 

285,947

 

(191,245

)(1)

(2)

1,674,470

 

Depreciation and amortization

 

346,658

 

170,498

 

 

 

517,156

 

Operating loss

 

(829,362

)

(22,757

)

191,245

 

 

(660,874

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,549,063

)

(2,151

)

 

(3)

(1,551,214

)

Gain on extinguishment of debt

 

55,558

 

 

 

 

55,558

 

Gain (loss) other

 

6,007

 

3,500

 

 

 

9,507

 

Other income (expense) net

 

(1,487,498

)

1,349

 

 

 

(1,486,149

)

Loss before provision for income taxes

 

(2,316,860

)

(21,408

)

191,245

 

 

(2,147,023

)

Provision for income taxes

 

9,100

 

 

 

 

9,100

 

Net Loss

 

$

(2,325,960

)

$

(21,408

)

$

191,245

 

$

 

$

(2,156,123

)

 

 

 

 

 

 

 

 

 

 

 

 

Series A Cumulative Convertible Preferred Stock Dividends

 

(512,103

)

 

 

512,103

 

 

Net loss attributable to common stockholders

 

$

(2,838,063

)

$

(21,408

)

$

191,245

 

$

512,103

 

$

(2,156,123

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(1.48

)

 

 

 

 

 

 

$

(1.01

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

1,923,490

 

 

 

 

 

211,031

 

2,134,521

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net loss per share basic and diluted (unaudited)

 

$

(1.09

)

 

 

 

 

$

2.43

 

$

(1.01

)

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma weighted average common shares outstanding basic and diluted (unaudited)

 

2,134,521

 

 

 

211,031

 

2,134,521

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Information

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

(482,704

)

$

147,741

 

$

191,245

(2)(4)

$

 

$

(143,718

)

 

See notes to unaudited pro forma statements of operations.

 

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Notes to Unaudited Pro Forma Statements of Operations

 

(1)         Adjusts out the salary and related direct expenses incurred for the majority shareholder of Advent Cleaners. These expenses will neither continue nor be replaced at, and subsequent to, the close of the Advent Cleaners Acquisition.

(2)         Gives effect to amortization expense of definite-lived intangible assets acquired upon the completion of the Advent Cleaners Acquisition.

(3)         Gives effect to the elimination of interest expense upon the exchange of certain of our secured and unsecured notes and loan agreements upon the closing of this offering under the terms of the Exchange Agreement.

(4)         EBITDA, which we define as net income excluding net interest expense, income tax expense, gain on extinguishment of debt, other gain (loss) and depreciation and amortization expense, is a supplemental measure to help management and our investors understand our operating performance. For the nine months ended June 30, 2014, EBITDA includes significant and necessary expenses incurred in connection with our preparation to file a registration statement for our initial public offering, or IPO.  These expenses include $152,941 for audit and review fees of our financial statements, $183,714 for accounting and tax consultants to provide various technical, accounting, and tax advisory services, $45,000 for third party valuation specialists to perform valuations of our company and various complex financial instruments we issued, and $28,143 in other advisory services.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes.  In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” beginning on page 15.

 

Overview

 

We believe we are the largest owner-operator of dry cleaning and laundry stores in the United States, with 70 stores and three production plants located in Arizona, Central California, Southern California, Hawaii, Indiana and Virginia.

 

We established our business through several acquisitions completed between 2005 and 2008. We financed each of these acquisitions using cash raised through the sale of debt instruments with relatively short maturities.  However, given the financial crisis and the associated difficulties with raising capital in late 2008, we were unable to repay or restructure our debt obligations. As a result, we filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. On September 23, 2011, the Bankruptcy Court approved our Bankruptcy Plan, which enabled us to eliminate a significant amount of our outstanding debt and close or relocate 12 unprofitable stores, while still allowing stockholders to maintain a continuing equity interest in our company.

 

After emerging from bankruptcy, we continued to focus on improving our balance sheet and operations by converting additional debt to equity; making changes in management and field personnel; upgrading production plants and expanding the use of environmentally-sensitive equipment and processes; pursuing opportunities to leverage existing production capacity; and expanding our service offerings. We now believe that we have a compelling opportunity to expand our position as the largest owner-operator of retail dry cleaning and laundry stores nationwide.

 

We believe we have a unique operating platform which will provide the foundation for growth and consolidation in the fragmented dry cleaning industry.  We have identified the following areas of operational focus to advance this growth:

 

·                  leveraging excess production capacity in our existing markets;

 

·                  promoting “green” dry cleaning processes, which are gentler on fabrics and healthier for our customers and the environment;

 

·                  expanding the number of locations that offer incremental services, such as shoe repair, handbag cleaning and repair, drapery cleaning, and carpet cleaning;

 

·                  expanding our service offerings to include services such as tuxedo and eveningwear rentals in certain locations;

 

·                  expanding existing dry cleaning and laundry services related to fire and flood restoration; and

 

·                  further developing a customer-focused culture that strengthens our brands.

 

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We operate a hub-and-spoke model, utilizing a large centralized processing plant, or “hub,” to provide dry cleaning and laundry services to several smaller company-owned retail stores, or “spokes,” rather than each store having its own equipment and performing its own dry cleaning and laundry. While the implementation varies from market to market, we believe this approach is the best way to (i) ensure consistent production quality, (ii) allow for more efficient equipment maintenance and repairs, and (iii) leverage labor, supplies, and utilities in order to lower production costs. We currently operate central hubs in Southern California, Virginia and Hawaii.

 

In larger and more geographically spread-out markets, such as Arizona, Central California and Indiana, we operate a modified version of the hub-and-spoke model, where smaller mini-hubs service a few neighboring stores rather than a single hub servicing the entire market. We currently operate 16 mini-hubs in Arizona, Central California and Indiana which, in the aggregate, service 39 retail stores.

 

State and federal regulatory agencies have targeted the practices of the dry cleaning industry over the past two decades due to the use of certain solvents in the cleaning process, with perc being the most widely scrutinized. Of the 73 total locations we lease, 33 are used for processing clothes and of those locations only four currently use perc, while the other locations use eco-friendly “green” solvents and dry cleaning processes.  We are in the process of eliminating the use of perc at one of these four locations by the end of 2014.  We use a number of eco-friendly solvents including those manufactured by GreenEarth Cleaning.  We promote our “green” cleaning products in many of our marketing materials designed to appeal to customers seeking eco-friendly dry cleaning options.

 

We intend to increase our market share through a combination of organic and strategic growth. We seek to achieve organic growth through a combination of increasing sales in our existing stores and also by opening select new stores. We believe we can increase sales in our existing stores by expanding our service offerings and by promoting our brands more effectively.

 

We also intend to grow through strategic acquisitions, especially in more mature markets and trade areas, where there are fewer new retail centers being developed and where existing competition is already entrenched. We seek to acquire leading operators in attractive markets, but we also plan to be opportunistic as it relates to underperforming operations that we believe have significant potential for improvement.

 

Consistent with our growth strategy, on August 25, 2014, we entered into an agreement to purchase, upon the closing of this offering and subject to other customary closing conditions, substantially all of the assets of Advent Cleaners.  Upon the closing of the Advent Cleaners Acquisition, we will add 14 dry stores, three mini-hubs with retail operations and a 20,230 square foot central hub, all located in the greater Las Vegas, Nevada area and operated under the brands “Al Phillips” and “Thrift DLux Cleaners.” The acquired assets also include contracts for commercial laundry accounts with some of the largest resorts and hotels in Las Vegas.

 

Components of Operating Results

 

The following is a description of some of the components used in determining our results of operations:

 

Net Sales. Net sales is comprised of total gross sales from dry cleaning, laundry, alterations, and other ancillary services such as shoe repair, fire restoration, and drapery cleaning, less any refunds, discounts, and cash payouts or store credits given for damage claims, including any claims or store credits given in the case of a dry cleaning or laundry garment that is damaged while in our care.

 

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Cost of Sales (exclusive of depreciation and amortization shown separately below). Cost of sales includes production supplies, such as dry cleaning solvent, laundry detergent, hangers, plastic or “poly” bags, and outside services such as shoe repair performed by a third party, as well as all labor associated with production and customer service (but excluding any labor associated with delivery, maintenance and repairs, and regional supervision).

 

Stores and Plant Expenses. Stores and plant expenses include occupancy expense (e.g., rent, common area maintenance, and real estate taxes), utilities, including telephone and data, employee benefits such as paid time off and medical insurance, workers’ comp insurance, delivery labor, gasoline, and vehicle licensing fees, repair and maintenance of production equipment and store leasehold improvements, and credit card processing fees.

 

Regional Expenses. Regional expenses include payroll associated with regional supervision, marketing and advertising, rent and other occupancy expenses associated with regional offices, property and casualty insurance, licenses, and personal property taxes.

 

Corporate Expenses. Corporate expenses include all payroll and benefits for employees who are not located in or working in a region, including our Chief Executive Officer, Chief Financial Officer and General Counsel, rent and other occupancy expenses for our corporate office, professional fees including for accounting and legal services, banking fees, and Directors & Officers liability insurance.

 

Depreciation and Amortization Expenses. Depreciation and amortization expense includes depreciation and amortization of all of our assets, including leasehold improvements, at the stores, regional and corporate headquarters

 

Results of Operations

 

Comparison of the Nine Months Ended June 30, 2014 and the Nine Months Ended June 30, 2013

 

Net Sales. Net sales for the quarter ended June 30, 2014 were $15,804,521, as compared to $16,281,848 in for the nine months ended June 30, 2013, a decrease of $477,327, or 2.9%. This decrease was primarily attributable to a decrease in retail sales which was caused by extreme winter weather in two of our markets.

 

Cost of Sales (exclusive of depreciation and amortization shown separately below).  Cost of sales was $6,798,241 for the first nine months of fiscal 2014, as compared to $7,093,772 for the first nine months of fiscal 2013, a decrease of $300,531, or 4.2%.  This decrease was primarily attributable to lower payroll and supplies, driven primarily by the lower sales volume.

 

Gross Profit (exclusive of depreciation and amortization shown separately below). Gross profit was $9,006,280 for the first nine months of fiscal 2014, as compared to $9,188,076 in the first nine months of fiscal 2013, a decrease of $181,796, or 2.0%.  This decrease was primarily attributable to the 2.9% decline in sales, partially offset by the 4.2% reduction to cost of sales. Gross profit (exclusive of depreciation and amortization shown separately below) as a percentage of net sales improved slightly, to 56.9% for the current year period, from 56.4% in the prior year.

 

Stores and Plant Expenses. Stores and plant expenses during the first nine months of fiscal 2014 were $6,358,005, compared to $6,223,346 for the first nine months of fiscal 2013, an increase of $134,659, or 2.2%.  This increase was primarily attributable to higher utility costs, especially in markets impacted by severe winter weather, and higher workers’ compensation expenses.

 

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Regional Expenses. Regional expenses were $1,551,211 for first nine months of fiscal 2014, as compared to $1,702,414 for the first nine months of fiscal 2013, a decrease of $151,203, or 8.9%. This decrease was primarily attributable to reductions in payroll-related expenses.

 

Corporate Expenses. Corporate expenses for the first nine months of fiscal 2014 were $1,579,768, as compared to $1,260,095 in the first nine months of fiscal 2013, an increase of $319,673, or 25.4%.  The increase is attributable to significant and necessary expenses incurred in connection with our preparation to file a registration statement for our IPO.  These expenses include $152,941 for audit and review fees of our financial statements, $183,714 for accounting and tax consultants to provide various technical, accounting, and tax advisory services, $45,000 for third party valuation specialists to perform valuations of our company and various complex financial instruments, and $28,143 in other advisory services. These types of expenses were either not incurred or were insignificant during the nine months ended June 30, 2013.  These increases were partially offset by a reduction in corporate payroll expenses.

 

Depreciation and Amortization Expenses. Depreciation and amortization expense was $346,658 during the first nine months of fiscal 2014, as compared to $349,447 in the first nine months of fiscal 2013, essentially flat on a year over year basis.

 

Interest Expense. Interest expense during the first nine months of fiscal 2014 was $1,549,063, compared to $1,855,496 for the first nine months of 2013, a decrease of $306,433, or 16.5%.  This decrease was primarily attributable to reduction in overall debt levels as a result of the terms of a Reorganization Agreement we entered into with several existing creditors in January 2014.

 

Gain on Extinguishment of Debt: During the first nine months of 2014 we reported a gain on extinguishment of debt of $55,558, as compared to $122,945 in the first nine months of 2013, resulting from the retirement of certain debt instruments during these periods.  In connection with the Reorganization Agreement described below, the $9,100,000 in aggregate principal debt extinguishment of the Subordinated Convertible Debentures (described below) resulted in a gain for $10,240,860 which was recorded in additional paid-in capital since that gain was, in substance, a capital contribution from our related party note holders.

 

Provision for Income Taxes. We have recorded a nominal provision for state minimum income taxes and penalties for the for the nine months ended June 30, 2013 and 2014, included in our accrued income taxes on the balance sheet.  Due to a full valuation allowance against our deferred tax assets, no provision for income tax benefit has been recorded for any period presented. Furthermore, due to the losses we have generated for the year ended September 30, 2013 and the losses we expect to generate for the year ending September 30, 2014, our unaudited annual effective income tax rate applied for the nine months ended June 30, 2013 and 2014 is (0.4%).

 

Comparison of the Year Ended September 30, 2013 and the Year Ended September 30, 2012

 

Net Sales. Net sales for fiscal 2013 were $21,408,049 as compared to $21,374,671 in fiscal 2012, an increase of 0.2%. The increase was primarily attributable to an increase in sales for stores operated by us for more than a year.

 

Cost of Sales (exclusive of depreciation and amortization shown separately below). Cost of sales was $9,360,266 for fiscal 2013, as compared to $9,637,552 in fiscal 2012, a decrease of $277,286, or 2.9%.  This decrease was primarily attributable to lower payroll and production supplies expense resulting from our efforts to improve operational efficiency.

 

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Gross Profit (exclusive of depreciation and amortization shown separately below). Gross profit was $12,047,783 for fiscal 2013, as compared to $11,737,119 in fiscal 2012, an increase of $310,664, or 2.6%.  The increase was primarily attributable to lower expense for dry cleaning labor and production supplies. Gross profit (exclusive of depreciation and amortization shown separately below) as a percentage of net sales improved to 56.3% in fiscal 2013 from 54.9% in fiscal 2012.

 

Stores and Plant Expenses. Stores and plant expenses decreased slightly to $8,367,537 in 2013, as compared to $8,428,456 in 2012, a decrease of $60,919, or 0.7%. The decrease was primarily attributable to lower maintenance and repair expenses, partially offset by higher occupancy related costs.

 

Regional Expenses. Regional expenses were $2,224,889 for fiscal 2013, as compared to $2,464,607 for fiscal 2012, a decrease of $239,718, or 9.7%. This decrease was primarily attributable to reductions in marketing and payroll-related expenses.

 

Corporate Expenses. Corporate expenses were $1,725,664 in fiscal 2013, as compared to $2,418,539 in fiscal 2012, a decrease of $692,875, or 28.6%. This decrease was primarily attributable to reductions in payroll-related costs, professional fees, and occupancy-related costs.

 

Depreciation and Amortization Expense. Depreciation and amortization expense was $469,547 in fiscal 2013, as compared to $432,331 in fiscal 2012, a decrease of $37,216 or 8.6%. The largely flat year over year expense reflects a modest level of new capital expenditures relative to existing assets reaching the end of their depreciable lives.

 

Interest Expense. Interest expense was $2,510,495 in fiscal 2013, as compared to $3,347,182 in fiscal 2012, a decrease of $836,687, or 25.0%.  The decrease was primarily attributable to concessions reached with holders of certain debt instruments resulting in a decrease in the effective interest rate.

 

Gain on extinguishment of debt. Gain on extinguishment of debt was $654,935 in fiscal 2013, as compared to $833,873 in fiscal 2012, a decrease of $178,938, or 21.5%. The gain is the result of the retirement of certain debt instruments during these periods.

 

Gain (loss)Other: Other gain on assets was $895 for the year ended June 2013, as compared to $13,477 for the comparable period in 2012.

 

Provision for Income Taxes. We have recorded a nominal provision for state minimum income taxes and penalties for the years ended September 30, 2012 and 2013, included in our accrued income taxes on the balance sheet.  Due to a full valuation allowance against our deferred tax assets, no provision for income tax benefit has been recorded for either period and our annual effective income tax rate was (0.2%) and (0.4%) for 2012 and 2013, respectively.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

During the year ended September 30, 2013 and the nine months ended June 30, 2014, we funded our operations primarily with the net proceeds from debt financing and term loans with related party creditors of $546,447 and $1,765,443, respectively.  As of September 30, 2013, we had a working capital deficit of $2.9 million as compared to a working capital deficit of $2.7 million at June 30, 2014. At September 30, 2013 and June 30, 2014 we had an accumulated deficit of $33,555,690 and $35,881,650, respectively, and cash of $82,635 and $342,167, respectively.

 

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Our available capital resources at June 30, 2014 consisted of $342,167 in cash.  We expect that our future available capital resources will consist primarily of cash on hand, debt or other form of financing, if any is available, and cash generated from our business, if any.

 

Credit Facilities

 

On September 23, 2011 and September 27, 2011, as part of our exit financing under our Bankruptcy Plan, we sold and issued a series of 10% Senior Secured Original Issue Discount Convertible Debentures, or Senior Convertible Debentures, originally due September 23, 2013, to seven accredited investors in the aggregate principal amount of $5,720,000. The Senior Convertible Debentures were issued at a $518,000 discount, or approximately 9%.  We were originally obligated to pay interest on the aggregate unconverted and outstanding principal of the Senior Convertible Debentures at the rate of 10% per annum, payable quarterly on the last day of each calendar quarter beginning with the quarter ended September 30, 2012. The Senior Convertible Debentures were amended on September 27, 2012 to extend the maturity date from September 23, 2013 to March 31, 2015 and for all accrued interest on the Senior Convertible Debentures to be paid at the new maturity date (March 31, 2015) together with principal in cash, eliminating periodic interest payments under the Senior Convertible Debentures.  On March 20, 2014, the Senior Convertible Debentures were amended again to extend the maturity date to July 31, 2015. All principal and accrued but unpaid interest under the Senior Convertible Debentures may be converted, at the election of the holder, into shares of our common stock at a conversion price equal to $32.00 per share, and the repayment of all obligations under the Senior Convertible Debentures is secured by all of our assets other than those used in our Arizona and Riverside operations.  As of June 30, 2014, $7,304,122 in principal and accrued interest was outstanding under the Senior Convertible Debentures. Under the terms of the Exchange Offer, the Senior Convertible Debentures will be exchanged for          shares of common stock and will be retired upon the closing of this offering.

 

On February 23, 2012, we sold and issued a 10% Senior Secured Promissory Note, due March 31, 2015, to Wattles Capital Management, or WCM, in the principal amount of $549,890, or WCM Note.  We issued the WCM Note with an original issue discount of 10%.   As a result, net proceeds to us equaled $499,000.  On September 9, 2013, Setal 10 Trust purchased the WCM Note and all its rights and obligations under the WCM Note.  The WCM Note in the hands of Setal 10 is referred to in this prospectus as the Setal 10 Note.  The Setal 10 Note has an amended maturity date of July 31, 2015, with no cash coupon, and accrues interest 10% per annum, all due at maturity. All principal and accrued but unpaid interest under the Setal 10 Note is convertible, at the election of the holder, into the shares of our common stock at a conversion price equal to $32.00 per share, and the repayment of all obligations under the Setal 10 Note is secured by all of our assets, except for those used in our Arizona and Riverside operations. As of June 30, 2014, the principal and accrued but unpaid interest payable on the Setal 10 Note was $686,905.  We expect that all amounts owed under the Setal 10 Note will be paid upon the closing of this offering.

 

On August 22, 2012, we sold and issued a 10% Senior Secured Promissory Note, due March 31, 2015, to Setal 9 Trust, or Setal 9, in the principal amount of $550,000, or Setal 9 Note. We issued the Setal 9 Note with an original issue discount of 9%. As a result, net proceeds to us equaled $500,000. The Setal 9 Note has no cash coupon, and interest accrues on all unconverted and outstanding principal at 10% per annum, all due on maturity.  On March 20, 2014, the Setal 9 Note was amended to extend the maturity date to July 31, 2015.  All principal and accrued but unpaid interest under the Setal 9 Note is convertible, at the election of the holder, into the shares of our common stock at a conversion price equal to $32.00 per share, and the repayment of all obligations under the Setal 9 Note is secured by all of our assets, except for those used in our Arizona and Riverside operations. As of June 30, 2014 an aggregate of $649,745 in principal and accrued interest was outstanding under the Setal 9 Note. Under the terms of the Exchange Offer, the Setal 9 Note will be exchanged for          shares of common stock and will be retired upon the closing of this offering.

 

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On August 22, 2012, we sold and issued a Working Capital Secured Note to Lester E. Taylor Jr. & Diane M. Taylor as Trustees of the Taylor Family Trust and Clyde Wilson & Anita Wilson as Trustees of the Wilson Family Trust, or Working Capital Note, in the principal amount of $200,400.  Interest on the Working Capital Note accrued at 14% per annum. This note was subsequently rolled into the Riverside Loan (as described below) and retired.

 

On November 6, 2012, we entered into a Loan and Security Agreement with Setal 8 Trust, or Setal 8, under which Setal 8 provided a term loan of $100,000 secured by the assets used in our Arizona operation, or Arizona Loan.  We paid interest on the Arizona Loan at 22% per annum, comprised of 10% interest compounded monthly and monthly cash payments of 1% of the original amount (e.g., $1,000 per month on a $100,000 advance). The Arizona Loan was amended on January 17, 2014 to extend the maturity to January 17, 2019 and reduce the interest to 18% per annum, with 9% compounded monthly and monthly cash payments of 0.75% of the original amount. As of June 30, 2014 an aggregate of $118,298 in principal and accrued interest was outstanding under the Arizona Loan. Under the terms of the Exchange Offer, the Arizona Loan will be exchanged for          shares of common stock and will be retired upon the closing of this offering.

 

On January 3, 2013, we entered into a Loan and Security Agreement with Setal 8 under which Setal 8 agreed to provide a term loan of up to $500,000 secured by the assets used in our Riverside operation, or Riverside Loan. We used $211,500 of the proceeds of the Riverside Loan to repay and retire the Working Capital Note. We paid interest on the Riverside Loan at 22% per annum, comprised of 10% interest compounded monthly and monthly cash payments of 1% of the original amount.  The Riverside Loan was amended on January 17, 2014 to extend the maturity to January 17, 2019 and reduce the interest to 18% per annum, with 9% compounded monthly and monthly cash payments of 0.75% of the original amount. As of June 30, 2014 an aggregate of $347,026 in principal and accrued interest was outstanding under the Riverside Loan. Under the terms of the Exchange Offer, the Riverside Loan will be exchanged for          shares of common stock and will be retired upon the closing of this offering.

 

On March 21, 2013, we entered into a Loan Agreement with Setal 10, under which Setal 10 agreed to provide an unsecured term loan of up to $500,000, or Setal 10 Unsecured Loan.  We paid interest on the Setal 10 Unsecured Loan at 20% per annum, comprised of 10% interest compounded monthly and monthly cash payments of .8333% of the original amount. We paid off the principal and accrued but unpaid interest on the Setal 10 Trust Loan in the amount of $528,142 with proceeds from the Setal 11 Loan.

 

On August 16, 2013, we entered into a Loan and Security Agreement with Park Place Services, or Park Place, under which Park Place agreed to provide a term loan of up to $400,000 secured by a blanket lien on our assets, or Park Place Loan. We paid interest on the Park Place Loan at 22% per annum, comprised of 10% interest compounded monthly and monthly cash payments of 1% of the original amount. On January 17, 2014, we paid off the principal and accrued but unpaid interest on the Park Place Loan in the amount of $418,206 with proceeds from the Setal 11 Loan.

 

On January 17, 2014, we entered into a Loan and Security Agreement, or Setal 11 Loan, with Setal 11, LLC, a California limited liability company, or Setal 11, under which Setal 11 agreed to provide one or more term loans of newly-committed funds in an aggregate principal amount of not less than $2,395,496, or Initial Commitment Amount, and no more than $4,000,000. On January 20, 2014, at the closing, Setal 11 advanced us $1,395,496, or Initial Advance under the Setal 11 Loan. We used $995,496 of the proceeds of this advance to repay certain outstanding indebtedness and the remaining $400,000 to fund our working capital requirements. Interest accrues on advances at 18% per annum, with 9% compounded monthly and monthly cash payments of 0.75% on the original amount.  The maturity date of the Setal 11 Loan is January 17, 2019.  We also pay a “commitment fee” of 6% per annum on the difference between the Initial Commitment Amount and amounts advanced, including the Initial Advance.  Repayment of all obligations under the Setal 11 Loan is secured by all of our assets.  On February 24, 2014, we borrowed an additional $200,000 under this credit facility.  As of June 30, 2014, an aggregate of $2,496,178 in principal and accrued interest was outstanding under the Setal 11 Loan.  We currently have no additional availability under this credit facility unless Setal 11 elects to increase the Initial Commitment Amount.  Under the terms of the Exchange Offer, the Setal 11 Loan will be exchanged for          shares of common stock and will be retired upon the closing of this offering.

 

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On June 30, 2014, we entered into a loan agreement with the Taylor Family Trust and with Wilson Family Trust, or Taylor Family Trust Note, under which these lenders agreed to provide one or more term loans of newly-committed funds.  There is no minimum commitment amount and any advances shall be at the sole discretion of the lenders.  Mr. Taylor is the trustee of the Taylor Family Trust.  We received an initial advance of $150,000, plus an additional $250,000 advanced in August 2014.  Interest accrues on advances at 18% per annum, with 9% compounded monthly and monthly cash payments of 0.75% on the original amount.  The maturity date of the Taylor Family Trust Note is July 31, 2015.  Repayment of all obligations under the Taylor Family Trust Note is secured by all of our assets.  We expect that $       owed under the Taylor Family Trust Note will be paid upon the closing of this offering.

 

Reorganization Agreement

 

Effective as of January 17, 2014 we entered into a reorganization agreement with several of our existing creditors, or Reorganization Agreement.  Under the terms of the Reorganization Agreement, the parties agreed to, among other things, (i) enter into an intercreditor agreement to establish the priority of liens on our assets used to secure certain of our debt obligations and to establish the same priority with respect to any distribution of our assets in connection with any dissolution, winding up, liquidation or reorganization of our company and (ii) amend other existing debt instruments to make certain material terms, including the maturity date and interest payments, match those of the Setal 11 Loan. Under the terms of the Reorganization Agreement, holders of our 10% Subordinated Secured Convertible Debentures, or Subordinated Convertible Debentures, in the aggregate principal amount of $9,100,000, agreed to exchange all of the outstanding principal and accrued and unpaid interest under their Subordinated Convertible Debentures for (i) an aggregate of 5,620,514 shares of our Series A Preferred Stock, at an exchange price of $32.00 per share and (ii) an aggregate of 1,328,913 shares of our common stock. Further, under the Reorganization Agreement we agreed to issue an aggregate of 442,969 shares of our common stock to Setal 11 in connection with Setal 11’s commitment of capital under the Setal 11 Loan. We also confirmed our obligation to issue 354,391 shares of our common stock to our senior management pursuant to individual restricted stock purchase agreements at fair market value on the date in which we created the obligation to issues such shares. In addition, we agreed to purchase and fund a $5,000,000 ten-year term life insurance policy for Alex Bond, our Chief Executive Officer, with us named as the sole beneficiary.  As of August 22, 2014, we were in the process of obtaining this policy.

 

Exchange Agreement

 

On July 23, 2014, we entered into the Exchange Agreement with certain holders of our debt instruments under which certain of our secured and unsecured notes and loan agreements will be exchanged for shares of our common stock and retired upon the closing of this offering.  Under the terms of the Exchange Agreement, the number of shares of common stock to be issued in exchange for certain of our certain of our secured and unsecured notes and loan agreements is to be calculated by dividing (a) depending upon the instrument, the outstanding amount of principal or the outstanding amount of principal and interest under such debt instrument on April 30, 2014 by (b) the offering price of a share of common stock in this offering.  The closing of the Exchange Agreement is conditioned upon and shall close concurrently with this offering.

 

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Under the terms of the Exchange Agreement, certain of our secured and unsecured notes and loan agreements, under which an aggregate amount of $11,184,164 in principal and in interest was outstanding as of August 22, 2014, will be exchanged for an aggregate of         shares of our common stock (based upon an assumed public offering price for our common stock of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus) and retired upon the closing of this offering.  As a result of the Exchange Offer, upon the closing of this offering, we expect to have a total of approximately $        in debt outstanding, of which we expect to repay up to $1.0 million with the proceeds of this offering.

 

Cash Flow

 

The following table sets forth the significant sources and uses of cash for the periods set forth below:

 

 

 

Nine Months Ended June 30,

 

 

 

2014

 

2013

 

Net Cash Provided By (Used In)

 

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

$

(1,279,608

)

$

(128,678

)

Investing Activities

 

$

(226,303

)

$

(178,737

)

Financing Activities

 

$

1,765,443

 

$

290,140

 

Net Increase (Decrease) In Cash

 

$

259,532

 

$

(17,275

)

 

Net cash used in operating activities:

 

Net cash used in operating activities for the nine months ended June 30, 2014 was $1,279,608, as compared to $128,678 for the nine months ended June 30, 2013, an increase of $1,150,930.  This increase was due primarily to a decrease in accrued interest due to the exchange of the Subordinated Convertible Debentures for a combination of Series A preferred stock and common stock discussed above, decrease in accounts payable, accrued and other liabilities, an increase in prepaids and other current assets, and the increase in net loss, partially offset by an increase in amortization of discount on debt.

 

Net cash used in investing activities:

 

Net cash used in investing activities was $226,303 for the nine months ended June 30, 2014, as compared to $178,737 for the nine months ended June 30, 2013, an increase of $47,566.  This increase was due to increased investment in machinery and equipment to operate our business.

 

Net cash provided by financing activities:

 

Net cash provided by financing activities was $1,765,443 for the nine months ended June 30, 2014, as compared to $290,140 for the nine months ended June 30, 2013, an increase of $1,475,303.  This increase was due primarily to an increase in our long-term debt in connection with the Setal 11 Loan proceeds from the Reorganization Agreement discussed above, net of repayments of debt we made in the same nine month period.

 

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Non-GAAP Financial Measures

 

We use EBITDA as a supplemental measure to help management and our investors understand our operating performance. EBITDA should not be considered an alternative to, or more meaningful than, GAAP measures such as net income and net cash provided by operating activities.  EBITDA excludes depreciation and amortization, income taxes, gain on extinguishment of debt, and other gain (loss) and does not reflect any cash requirements for the replacement of the assets being depreciated and amortized, which assets will often have to be replaced in the future. Further, EBITDA does not reflect the impact of cash dividends, capital expenditures and other cash commitments from time to time as described in more detail elsewhere in this prospectus, and it does not represent how much discretionary cash we have available for other purposes. Nonetheless, EBITDA is a key measure used by us, and we believe by investors. EBITDA, as calculated, may not be comparable to a similarly titled measure reported by other companies.

 

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A reconciliation of EBITDA to GAAP net income (loss) is calculated as follows (in thousands):

 

 

 

Year Ended September 30, 2013

 

Nine Months Ended June 30, 2014
Unaudited

 

 

 

U.S. Dry
Cleaning
Services
Corp.

 

Advent
Cleaners,
LLC

 

Advent
Cleaners,
LLC
Preliminary
Acquisition
Adjustments
(1)

 

Unaudited
Pro Forma

 

U.S. Dry
Cleaning
Services
Corp.

 

Advent
Cleaners,
LLC

 

Advent
Cleaners,
LLC
Preliminary
Acquisition
Adjustments
(1)

 

Pro Forma

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,603,619

)

$

72,819

 

$

253,469

 

$

(2,277,331

)

$

(2,325,960

)

$

(21,408

)

$

191,245

 

$

(2,156,123

)

Income tax expense

 

9,100

 

 

 

 

9,100

 

9,100

 

 

 

 

9,100

 

Interest expense

 

2,510,495

 

3,599

 

 

 

2,514,094

 

1,549,063

 

2,151

 

 

 

1,551,214

 

Gain on extinguishment of debt

 

(654,935

)

 

 

 

(654,935

)

(55,558

)

 

 

 

(55,558

)

(Gain) loss other

 

(895

)

31,547

 

 

 

30,652

 

(6,007

)

(3,500

)

 

 

(9,507

)

Depreciation and amortization

 

469,547

 

186,571

 

 

 

656,118

 

346,658

 

170,498

 

 

 

517,156

 

EBITDA (2)

 

$

(270,307

)

$

294,536

 

$

253,469

 

$

277,698

 

$

(482,704

)

$

147,741

 

$

191,245

 

$

(143,718

)

 


(1)             Adjusts out the salary and related direct expenses incurred for the majority shareholder of Advent Cleaners. These expenses will neither continue nor be replaced at, and or subsequent to, the close of the acquisition of Advent Cleaners.

 

(2)             EBITDA for the nine months ended June 30, 2014, EBITDA includes significant and necessary expenses incurred in connection with our preparation to file a registration statement for our IPO.  These expenses include $152,941 for audit and review fees of our financial statements, $183,714 for accounting and tax consultants to provide various technical, accounting, and tax advisory services, $45,000 for third party valuation specialists to perform valuations of our company and various complex financial instruments, and $28,143 in other advisory services.

 

Future Capital Requirements

 

We believe that the net proceeds from this offering, together with our existing cash will enable us to fund our operating expenses and capital expenditure requirements through 2015.  We intend to use $4.0 million of the net proceeds from this offering to acquire Advent Cleaners, $         of the net proceeds from this offering to pay all amounts owed under the Setal 10 Note described above and up to $         of the net proceeds of this offering to pay amounts due under the Taylor Family Trust Note described above.  After applying the proceeds of this offering as intended, we will have $         in debt outstanding.  We intend to devote the remaining net proceeds from this offering, together with our existing cash resources to fund additional acquisitions, open new stores and establish new delivery routes, fund capital expenditures at several of our stores and production plants, and for working capital and other general corporate purposes.

 

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Until such time, if ever, as we can generate positive operating cash flows, we may finance our cash needs through a combination of equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

 

Critical Accounting Policies and Estimates

 

To prepare the financial statements in conformity with accounting principles generally accepted in the United States, management is required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, we provide estimates regarding the collectability of accounts receivable, useful lives and the recoverability of long-lived assets, the valuations of warrants, restricted stock grants, debt and preferred stock, as well as the deferred tax asset valuation allowance. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which forms the basis for making judgments about the carrying values of assets and liabilities.  Actual results could differ materially from those estimates.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customers’ credit worthiness.  We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based on specific customer collection issues that have been identified. The allowance for doubtful accounts is maintained at a level that, in our opinion, is adequate to absorb potential losses related to account receivables and is based upon our continuous evaluation of the collectability of outstanding balances. Our evaluation takes into consideration such factors as past bad debt experience, economic conditions and information about specific receivables. We also consider the age and composition of the outstanding amounts in determining their net realizable value. The allowance is based on estimates, and ultimate losses may vary from current estimates.  As adjustments to these estimates become necessary, they are reported in the statements of operations in the periods that they become known. The allowance is increased by bad debt provisions charged to bad debt expense in operating expense and reduced by direct write-offs, net of recoveries.

 

We experience claims for items damaged during processing, adjustments in resolution of customer disputes, and promotional discounts, all of which are recorded as incurred. Such charges average about one percent of gross revenue.  Sales refunds or discounts apply to retail and commercial sales.  Sales are reported net of all adjustments, refunds and discounts.

 

Revenue Recognition

 

We recognize revenue when four basic criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the fees are fixed or determinable and collectability is reasonably assured.  An arrangement exists when a customer work order is created.  For walk-in and pickup-and-delivery-type retail customers, the service is completed typically within three business days or less.  Therefore, we defer revenues for services that have not yet been completed as services in process, generally consisting of work orders created within the last three business days of the month.  We record services in process, included in our prepaids and other current assets, and the corresponding deferred revenue liability on our balance sheet since we have an obligation to perform the service and are liable for the customer’s garment as the services are being performed.  Once service is complete, we recognize the revenue and record the related account receivable.  Collectability is reasonably assured as the customer cannot pick up their garments without paying for the amount due.  For commercial customers, collectability is reasonably assured under the contractual and credit limits established by us with our customers.  For commercial customers, revenue is not recorded until we deliver the cleaned garments to the customer.  We also have certain prepaid cards for commercial customers.  Cash pre-payments are deferred and recognized as revenue when the customers use those cards as payment for dry cleaning services rendered.

 

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Property, Machinery and Equipment

 

Property, machinery and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives as follows:

 

Delivery equipment and other vehicles

3-5 years

Store furniture and equipment

7 years

Office furniture and equipment

5 years

Uniforms

3 years

Machinery and equipment

7 years

Leasehold improvements

Shorter of 3-10 years or life of underlying lease

 

The cost of normal maintenance and repairs is expensed as incurred. Significant capital expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected in current operations.

 

Long-lived Assets

 

We assess the impairment of long-lived assets, which consist primarily of property, machinery and equipment, whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events or changes in circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future results of operations, a change in the extent or manner in which an asset is utilized, significant declines in the estimated fair value of the overall business enterprise for a sustained period, shifts in technology, changes in our operating model or strategy and competitive forces.

 

If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. If we determine that an impairment charge is needed, the charge will be recorded as asset impairment in the statements of operations. We have not recorded any impairment of our long-lived assets for any of the periods presented in this prospectus.

 

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Indefinite Lived Intangible Asset

 

Trade name, our only indefinite-lived intangible asset, is not amortized but instead is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired.  We measure and record an impairment loss for the excess of the carrying value of the asset over its fair value.  This asset has an indefinite useful life and is evaluated annually for impairment using qualitative factors or indicators to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired.  We performed our annual impairment tests and, while the recurring losses are an indicator, based on the mix of qualitative and quantitative factors considered, we determined it was more likely than not the intangible asset was not impaired as of any of the periods presented in the financial statements.

 

Classification of Series A Preferred Stock

 

Our Series A Preferred Stock is nonredeemable and it does not have a specific date on which it can be redeemed.  However, as the holders of our Series A Preferred Stock include Setal 1, LLC, Setal 2, LLC, Setal 3, LLC, Setal 4, LLC, Setal 5, LLC and Setal 6, LLC, Setal 7, LLC, Setal 8, Trust, Setal 9 Trust, Setal 10 Trust, Setal 11, LLC, Park Place Services and Lester E. Taylor, Jr., all of whom we refer to as the Setal Entities, who control the company through their majority ownership interest in our company and control of our current board of directors with majority seats, the Series A Preferred Stock and related dividends, upon a voluntary conversion to common stock, may be redeemed in cash or other assets by events not solely within our control, which includes liquidation of the Series A Preferred Stock without liquidating other securities, such as our common stock, to pay holders of our Series A Preferred Stock.  Therefore, we have presented our Series A Preferred Stock outside of stockholders’ deficit in the mezzanine section of the June 30, 2014 balance sheet.

 

Internal Control Over Financial Reporting

 

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of the effectiveness of our internal control over financial reporting. However, in connection with the audit of our financial statements for the years ended September 30, 2012 and 2013, our independent registered public accounting firm identified several material weaknesses in our internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, 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 our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified by our independent registered public accounting firm include (i) inadequate segregation of duties consistent with control objectives; (ii) inadequate written documentation of internal control policies and procedures; (iii) inadequate controls over the identification, assessment and accounting for complex financial instruments and transactions, non recurring and unusual transactions; and (iv) ineffective controls over period end financial disclosure and reporting processes resulting in a significant number of post-closing adjustments.

 

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment for purposes of expressing an opinion on our internal control over financial reporting. It is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies or weaknesses may have been identified.

 

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We are in the process of implementing a number of measures designed to improve our internal control over financial reporting to remediate these material weaknesses. To remediate these material weaknesses, we have hired a new Chief Financial Officer and intend to hire additional finance and accounting personnel, which significantly increases our finance and accounting team’s experience in United States GAAP and financial reporting for publicly traded companies. In addition, we expect to retain consultants to advise us on making further improvements to our internal controls related to these accounting areas. We believe that these additional resources will enable us to broaden the scope and quality of our controls relating to the oversight and review of financial statements and reconciliations and our application of relevant accounting policies.  However, these remediation efforts are still in process and have not yet been completed. Because of these material weaknesses, there is heightened risk that a material misstatement of our annual or quarterly financial statements will not be prevented or detected. In addition, the remediation steps we have taken, are taking and expect to take may not effectively remediate these material weaknesses, in which case our internal control over financial reporting would continue to be ineffective. We cannot guarantee that we will be able to complete our remedial actions successfully. Even if we are able to complete these actions successfully, these measures may not adequately address our material weaknesses. In addition, it is possible that we will discover additional material weaknesses in our internal control over financial reporting. See “Risk Factors.”

 

Upon the completion of this offering, we will be required to disclose changes made in our internal control and procedures on a quarterly basis. In addition, our management will have to evaluate the effectiveness of our internal control over financial reporting beginning the year following our first annual report required to be filed with the Securities and Exchange Commission. At such time, our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is adverse in the event that such firm is not satisfied with the level at which our controls are documented, designed, operated or reviewed. As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid material weaknesses in the future. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Recent Accounting Pronouncements

 

In June 2014, the FASB issued Accounting Standard Update, or ASU, 2014-12, “Compensation - Stock Compensation (Topic 718):  Accounting for Shared Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”.  ASU 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.  We are assessing the impact, if any, to our financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.  This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This guidance is effective for fiscal years and interim periods beginning after December 15, 2016.  Early adoption is not permitted.  We expect to adopt this guidance when effective.  We are currently evaluating the impact of the pending adoption of ASU 2014-09 on our financial statements.

 

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In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740)”, which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.  ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  We plan to adopt this guidance during our quarter ending December 31, 2014 and are assessing the impact, if any, to our financial statements.

 

In July 2012, the FASB issued ASU 2012-02, “Goodwill and Other - Testing Indefinite-Lived Intangible Assets for Impairment”, which provides companies the option to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary.  ASU 2012-02 prescribes an entity to perform a quantitative impairment test if qualitative factors indicate that it is more likely than not that its indefinite-lived intangible assets are impaired.  The qualitative factors are similar to the guidance established for goodwill impairment testing and include identifying and assessing events and circumstances that would most significantly impact, individually or in the aggregate, the carrying value of the indefinite-lived intangible assets.  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  We adopted this new standard on October 1, 2012, and the adoption did not have any impact on our financial position or results of operations.

 

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BUSINESS

 

Overview

 

We believe that we are the largest owner-operator of dry cleaning and laundry stores in the United States.  We currently operate 70 retail dry cleaning and laundry stores and three production plants in the following locations: 11 stores and one production plant in Virginia, 25 stores in Indiana, five stores and one production plant in Southern California, 12 stores in Central California, 15 stores and one production plant in Hawaii, and two stores in Arizona.

 

Since our inception in 2005 as a Delaware corporation, our business has grown primarily through the acquisition of several dry cleaning chains. We have acquired the following operations:

 

·                  In 2005, we acquired Young Laundry & Dry Cleaning in Hawaii and Roadrunner Cleaners in California.

 

·                  In February 2007, we acquired Boston Cleaners in California.

 

·                  In 2008, we acquired the following companies:

 

·                  Martinizing Cleaners in California,

·                  Regency Cleaners, with stores in both California and Arizona,

·                  Zoots Cleaners in Virginia,

·                  Caesars $3.93 Cleaners in Hawaii, and

·                  Tuchman Cleaners in Indiana.

 

We financed each of these acquisitions using cash raised through the sale of debt instruments with relatively short maturities.  Our intention was to repay these debt obligations by raising capital in the public markets.  However, due to the financial crisis and the associated difficulties with raising capital in late 2008, we began to experience significant financial constraints and were unable to raise sufficient capital through the sale of our equity to repay our debt obligations.

 

As a result of our inability to meet these debt obligations, we filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California in an effort to restructure our indebtedness. We continued to operate our dry cleaning stores during the pendency of the bankruptcy proceedings.  On September 23, 2011, the Bankruptcy Court approved our Bankruptcy Plan which provided for the elimination of a significant amount of our outstanding debt and allowed us to close or relocate 12 of our unprofitable dry cleaning stores. In addition, our Bankruptcy Plan provided for all of our stockholders to maintain a continuing equity interest in our company upon its effectiveness.

 

Since completing our reorganization, we believe that we have a compelling opportunity to continue to expand our position as the largest owner-operator of dry cleaning and laundry stores nationwide through growth in the large and fragmented dry cleaning industry.

 

In order to capitalize upon this opportunity, we have taken numerous steps to improve our balance sheet, obtain additional working capital, invest in our production equipment, vehicles and retail stores, modernize our marketing efforts, and enhance our operating focus.  Specifically, we converted additional debt to equity, made changes in management and field personnel, upgraded stores and production plants, expanded the use of eco-friendly solvents and “green” dry cleaning processes, pursued new store locations and free door-to-door home and office delivery in order to leverage existing production capacity, and expanded our product offerings.

 

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Our Operating Plan

 

To ensure that our current operations provide a solid foundation upon which we can build a growing and successful national business, we have identified the following areas of operational focus:

 

·                  leveraging excess production capacity in our existing markets;

 

·                  promoting “green” dry cleaning processes, which are gentler on fabrics and healthier for our customers and the environment;

 

·                  expanding the number of locations that offer incremental services, such as shoe repair, handbag cleaning and repair, drapery cleaning, and carpet cleaning;

 

·                  expanding our service offerings to include services such as tuxedo and eveningwear rentals in certain locations;

 

·                  expanding our existing dry cleaning and laundry services related to fire and flood restoration; and

 

·                  further developing a customer-focused culture that strengthens our brands.

 

Leveraging Excess Production Capacity

 

We operate a hub-and-spoke model, utilizing a large centralized processing plant, or “hub,” to provide dry cleaning and laundry services to several smaller company-owned retail stores, or “spokes.” The existence of a central production plant allows us to operate much smaller stores that serve as drop off and pick up locations. Because these stores have no production equipment, they are not subject to the same environmental risks as the other stores or plants where laundry is processed.  This makes them much more attractive to landlords.  In addition, because there is no production, these stores are often able to operate with a single employee each shift, which allows these stores to be profitable even with relatively low revenue.

 

While the implementation varies from market to market, we believe this approach is the best way to (i) ensure consistent production quality, (ii) allow for more efficient equipment maintenance and repairs, and (iii) leverage labor, supplies, and utilities in order to lower production costs. Moreover, the cost to build a hub is quite high, whereas the cost to open new stores (assuming they will be serviced by an existing hub) is relatively low in comparison. Therefore, once a hub exists and there is excess capacity, we believe the opportunity to add additional stores becomes a compelling proposition.

 

We believe that the markets where we currently employ our hub-and-spoke model are well suited for this method of operation.  These markets possess some or all of the following desirable requirements:

 

·                  ample high-income population within a small geographic area with a high demand for services and a low threshold of competition;

 

·                  a traffic infrastructure allowing for the ease of transportation between stores and our production facilities, and for our home delivery drivers; and

 

·                  numerous high-traffic retail shopping centers where we can lease smaller stores.

 

We currently operate central hubs in Southern California, Virginia and Hawaii.  These central hubs occupy, in the aggregate, approximately 62,500 square feet and service 31 retail stores and several delivery routes. We believe that our central hubs have capacity to service, in the aggregate, an additional 60 retail stores plus additional delivery routes.  We believe that adding additional stores and delivery routes will drive operating efficiencies, lower the production cost per unit, and increase profitability. We intend to open “dry” stores, for the drop-off and pick-up of garments that do not contain dry cleaning equipment, acquire existing stores and chains that consist primarily of dry stores, and establish new delivery routes in areas surrounding these central hubs in order to make use of this excess capacity.

 

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In larger and more geographically spread-out markets, such as Arizona, Central California and Indiana, we operate a modified version of the hub-and-spoke model, where smaller mini-hubs service a few neighboring stores rather than a single hub servicing the entire market. While this approach typically requires more equipment, it is superior in areas where the drive-times are long (i.e., more than 30-40 minutes between the hub and the spoke). We currently operate 16 mini-hubs in Arizona, Central California and Indiana which, in the aggregate, service 39 retail stores. We believe that these mini-hubs have capacity to service an additional 40 retail stores and additional delivery routes, which would drive operating efficiencies, lower the production cost per unit, and increase profitability. We also intend to utilize the excess capacity of mini-hubs by opening dry stores, acquiring existing stores and chains that consist primarily of dry stores, and establishing new delivery routes in areas surrounding these mini-hubs.

 

We believe the capital intensity of the hub-and-spoke model is one of our competitive advantages, as smaller operators generally do not have the capital and management expertise needed to develop and operate a central hub that is efficient and in compliance with all applicable regulations.  We have already made substantial investments in our central hubs and our production equipment to improve their efficiency and compliance with regulations.

 

Eco-Friendly Focus

 

State and federal regulatory agencies have targeted the practices of the dry cleaning industry over the past two decades due to the use of certain solvents in the cleaning process, with perc being the most widely scrutinized. Of the 73 total locations we lease (70 retail stores and three productions plants), 33 are used for processing clothes and of those locations only four currently use perc (of which one is being converted this year to eliminate the use of perc), while the other locations use eco-friendly solvents and “green” dry cleaning processes.  We are in the process of eliminating the use of perc at one of these four locations by the end of 2014.  We use a number of eco-friendly solvents including those manufactured by GreenEarth Cleaning.  We promote our “green” cleaning products in many of our marketing materials designed to appeal to customers seeking eco-friendly dry cleaning options.

 

Furthering A Customer-Focused Culture & Promoting Our Brands

 

We strive to promote a company-wide culture in which customer satisfaction is the paramount objective. While certain aspects of our operations vary from region to region, we nonetheless require that every store or route manager deliver on the basic consumer proposition of providing consistently clean clothes, ready on time, at a great value, delivered with genuinely warm and friendly customer service. As part of our value proposition, we believe we provide quality and services that surpasses many our competitors, such as expert stain identification and removal, hand pressing of all garments (as opposed to simply sending them through a steam tunnel), detailed garment inspection with free minor repairs and button replacement, same-day service, e-mail notifications when an order is ready, and free delivery to home or office. We believe that the incremental cost of labor required to provide these additional customer benefits is outweighed by the opportunity to engender customer loyalty and increase referrals.

 

We believe that our core customer proposition of eco-friendly solvents and processes that are not just “green” but also gentler on fabrics and healthier for our customers and the environment, combined with excellent quality, value and service will assist us in attracting customers and improving market share over time.  We have recently begun testing the effectiveness of different methods of advertising and marketing and will continue to aggressively promote our focus on these core customer propositions.  As part of our marketing strategy, we recently sought to improve our customer relationships and the positive association of our brands by upgrading our online and social media platforms.  We utilize branded websites, third party providers for search-engine-optimization and Facebook pages that keep us in front of customers while also offering garment care tips, contests, and discounts/coupons. We have also enabled “Talk to the Manager” access on our websites for each region, providing customers with direct and anonymous text message access to each store manager, district manager and regional manager.  As a result of our daily focus on executing against the most important customer criteria, we believe we now offer an improved customer experience and are now better able to market that experience.

 

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Our Growth Strategy

 

While we believe that we are currently the largest single owner-operator of retail dry cleaning and laundry stores in the United States. The IBISWorld Industry Report projected that revenues in the United States dry cleaning market would reach approximately $9.0 billion in 2013.  Our market share in this market is less than 0.3%, which leaves significant room for future growth. We intend to increase our market share through a combination of organic and strategic growth.

 

Organic Growth. We seek to achieve organic growth by increasing sales in our existing stores and also by opening select new stores in order to leverage excess production capacity from existing central hubs or mini-hubs. We believe we can increase sales in our existing stores by expanding our service offerings, and by promoting our brands more effectively. Since many of our costs, including rent, salaried-labor and delivery are relatively fixed, we believe that incremental sales will improve our profitability.

 

In addition to increasing revenue in existing stores and routes, we plan to open new stores and establish new routes, especially dry stores and delivery routes in areas that can be serviced by one of our existing central hubs or mini-hubs. In certain new markets or trade areas where new housing and retail shopping centers are being developed outside existing service areas, we will also consider establishing new mini-hub type stores, especially if we anticipate being able to leverage that investment by opening several additional stores in the same trade area or geographic region.  Because of their significantly smaller