usdrycleaning_10qsb-033108.htm

10QSB 1 usdrycleaning_10qsb-033108.htm US DRY CLEANING CORP. usdrycleaning_10qsb-033108.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB

QUARTERLY REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2008

US DRY CLEANING CORPORATION

(Exact name of registrant as specified in its chapter)

Delaware	000-23305	77-0357037
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

4040 MacArthur Blvd Suite 305

Newport Beach, CA 92660

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (760) 322-7447

( Former name or former address, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: [ X ] Yes [ ] No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): [X] Yes [ ] No

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 26,656,019 common shares as of April 28, 2008.

Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	1

Item 2:	Management’s Discussion and Analysis	2

Item 3:	Controls and Procedures	9
PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	10

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	10

Item 3:	Defaults Upon Senior Securities	10

Item 4:	Submission of Matters to a Vote of Security Holders	10

Item 5:	Other Information	10

Item 6:	Exhibits	10

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

Our unaudited condensed consolidated financial statements included in this Form 10-QSB are as follows:

(a)	Unaudited Condensed Consolidated Balance Sheet as of March 31, 2008	F-1

(b)	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2008 and 2007	F-2

(c)	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007	F-3

(d)	Notes to Unaudited Condensed Consolidated Financial Statements	F-4

Page 1

US DRY CLEANING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2008

(UNAUDITED)

ASSETS

Current Assets
Cash	$	477,534
Accounts receivable, net		462,027
Deferred acquisition costs		101,978
Prepaid expenses and other current assets		379,098
Total Current Assets		1,420,637
Property and Equipment, net		3,624,597
Non-Current Assets
Deposits		283,909
Goodwill		10,022,111
Intangible assets, net		1,004,359
Total Non-Current Assets		11,310,379
Total	$	16,355,613

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	2,030,271
Accrued liabilities		1,420,843
Capital lease obligations		194,353
Notes payable		1,208,323
Convertible notes payable		475,000
Total Current Liabilities		5,328,790
Long Term Liabilities
Capital lease obligations, net of current portion		213,613
Notes payable, net of current portion		1,116,732
Convertible notes payable, net of current portion		7,834,158
Total Long Term Liabilities		9,164,503
Total Liabilities		14,493,293

Stockholders' Equity
Convertible preferred stock; par value $0.001 per share;
20,000,000 authorized shares;
1,200,000 shares issued and none outstanding; liquidation preference of $2.40 per share		-
Common stock; par value $0.001 per share;
50,000,000 Series B authorized shares; none issued and outstanding		-
Common stock; par value $0.001 per share;
100,000,000 authorized shares; 25,835,419 shares issued and outstanding		25,835
Additional paid-in capital		26,497,921
Stockholder receivable		(766,280	)
Accumulated deficit		(23,895,156	)
Total Stockholders' Equity		1,862,320
Total Liabilities and Stockholders' Equity	$	16,355,613

See accompanying notes to condensed consolidated financial statements.

Page F-1

US DRY CLEANING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

	THREE MONTHS						SIX MONTHS
	2008			2007			2008			2007
Net Sales	$	2,875,509		$	2,025,918		$	5,246,332		$	3,627,328

Cost of Sales		(1,328,963	)		(1,014,097	)		(2,509,710	)		(1,862,640	)


Gross Profit		1,546,546			1,011,821			2,736,622			1,764,688

Operating Expenses
Delivery expenses		195,158			167,984			395,460			332,345
Store expenses		1,079,275			503,476			1,856,308			902,753
Selling expenses		189,025			159,863			350,346			311,337
Administrative expenses		2,352,931			1,547,342			3,863,157			2,923,221
Depreciation and amortization expense		111,142			72,562			207,367			149,856
Other		7,103			-			17,033			-
Total Operating Expenses		3,934,634			2,451,227			6,689,671			4,619,512

Operating Loss		(2,388,088	)		(1,439,406	)		(3,953,049	)		(2,854,824	)

Other Income (Expense)
Gain on extinguishment of debt		-			-			423,798			-
Interest expense		(258,220	)		(518,901	)		(575,477	)		(611,143	)
Other expenses		(32,743	)		(292,372	)		(434,056	)		(323,070	)
Total Other Expenses		(290,963	)		(811,273	)		(585,735	)		(934,213	)

Loss before provisions for income taxes		(2,679,051	)		(2,250,679	)		(4,538,784	)		(3,789,037	)
Provision for income taxes		-			-			-			-
Net Loss	$	(2,679,051	)	$	(2,250,679	)	$	(4,538,784	)	$	(3,789,037	)

Basic and diluted loss per common share	$	(0.15	)	$	(0.13	)	$	(0.23	)	$	(0.22	)

Basic and diluted weighted average number
of common shares outstanding		18,168,336			17,084,019			19,616,683			17,179,220

See accompanying notes to condensed consolidated financial statements.

Page F-2

US DRY CLEANING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)


	2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,538,784	)	$	(3,789,037	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		205,981			149,856
Amortization of deferred financing costs and consulting fees		16,250			209,000
Bad debt expense		39,755			4,675
Equity instruments issued for compensation and services		19,224			416,070
Gain on debt extinguishment		(423,798	)		-
Amortization of debt discounts		541,062			330,429
Changes in operating assets and liabilities:
Accounts receivable		(21,986	)		123,164
Prepaid expenses and other current assets		(204,887	)		30,916
Other assets		-			(51,686	)
Deposits		(135,952	)		-
Accounts payable and accrued expenses		619,228			989,284
Liquidated damages		-			(71,250	)
Net cash used in operating activities		(3,883,907	)		(1,658,579	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(981,565	)		(116,346	)
Deferred acquisition costs		458,468			(634,223	)
Acquired goodwill and intangibles		(2,060,663	)		-
Cash of acquired companies		-			1,767
Net cash used in investing activities		(2,588,760	)		(748,802	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable		800,000			225,768
Proceeds from issuance of convertible notes payable		5,457,600			1,800,000
Repayments on notes payable		(183,907	)		(247,014	)
Repayments on convertible notes payable		(100,000	)		-
Deferred financing costs		(590,860	)		-
Repayments on capital lease obligation		(125,647	)		(86,437	)
Proceeds from issuance of common stock		570,650			-
Repayment on line of credit		(500,000	)		-
Deferred equity raising cost		-			(357,830	)
Net cash provided by financing activities		5,327,836			1,334,487

Net decrease in cash		(1,139,830	)		(1,072,894	)
Cash at beginning of year		1,617,364			1,414,456
Cash at end of year	$	477,534		$	341,562

Cash paid during the year for:
Interest	$	67,680		$	76,586

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt discount on convertible notes issued with common stock	$	-		$	1,478,714
Capital lease additions	$	44,040		$	-
Assumed note payable in conjunction business acquisition	$	2,447,000			-
Shares issued in conjunction with business acquisition	$	1,657,000			-
Conversion of note payable to convertible note	$	200,000			-
Conversion of debt to common stock	$	356,000			-
Debt discount on convertible notes issued with warrants	$	791,974			-

See accompanying notes to condensed consolidated financial statements.

Page F-3

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

The Company

US Dry Cleaning Corporation (“USDC”, “we”, or “us”) is a retail service provider of laundry and dry cleaning services consisting of fifty-six retail locations (“stores”) and three processing plants. The Company’s operations are located in Honolulu, Hawaii, Southern California, Central California, and the mid-east coast.

During the quarter ended March 31, 2008, the Company completed the business acquisitions of Team Enterprises, Inc. and affiliates (“Team”) and Zoots Corporation (“Zoots”) (see Note 7).

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements and the notes hereto should be read in conjunction with the financial statements, accounting policies and notes thereto included in the Company’s audited consolidated financial statements on Form 10-KSB, as amended, for the fiscal year ended September 30, 2007 filed with the SEC. In the opinion of management, all adjustments necessary to present fairly, in accordance with GAAP, the Company’s financial position as of March 31, 2008, and the results of operations and cash flows for the interim periods presented have been made. Such adjustments consist only of normal recurring adjustments. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has recurring losses from operations; negative cash flow from operating activities of approximately $3,884,000 for the six months ended March 31, 2008; negative working capital of approximately $3,908,000 and an accumulated deficit of approximately $23,895,000 at March 31, 2008. The Company’s business plan calls for various business acquisitions, which will require substantial additional capital. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company intends to fund operations through debt financing transactions. In connection with such efforts, the Company completed a $4,193,000 debt financing during the quarter ended December 31, 2007 and additional debt and equity financings of $7,848,000 during the quarter ended March 31, 2008 (see Note 3). However, such financing transactions may be insufficient to fund planned acquisitions, capital expenditures, working capital and other cash requirements for the next year. Therefore, the Company will be required to seek additional funds to finance its long-term operations. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

The accompanying condensed consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Page F-4

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of USDC and its wholly-owned subsidiaries, Steam Press Holdings, Inc. (“Steam Press”), Coachella Valley Retail, LLC (“CVR”), Cleaners Club, Inc. (“CCI”), USDC Fresno, Inc. (“Fresno”), and USDC Portsmouth, Inc. (“Portsmouth”). All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include the realization of long-lived assets, the valuation allowance on deferred tax assets, the allowance for doubtful accounts receivable, and the purchase price allocations for business acquisitions. Actual results could differ from those estimates.

Business Segments

The Company currently operates in one segment, that being the laundry and dry cleaning business and is geographically concentrated in Hawaii, Virginia, and California.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition. The Company faces risks and uncertainties relating to its ability to successfully implement its business strategy. Among other things, these risks include the ability to develop and sustain revenue growth; managing the expansion of its operations; competition; attracting and retaining qualified personnel; maintaining and developing new strategic relationships; and the ability to anticipate and adapt to the changing markets and any changes in government or environmental regulations. Therefore, the Company is subject to the risks of delays and potential business failure.

The dry cleaning industry has been a target for environmental regulation during the past two decades due to the use of certain solvents in the cleaning process. In 2002, air quality officials in Southern California approved a gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning solvent, by 2020. Under this regulation, which went into effect January 1, 2003, any new dry cleaning business or facility that adds a machine must also add a non-Perc machine. While existing dry cleaners can continue to operate one Perc machine until 2020, by November 2007 all dry cleaners using Perc must utilize state-of-the-art pollution controls to reduce Perc emissions. The Company believes that it is successfully integrating the new dry cleaning processes.

Page F-5

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Risks and Uncertainties (continued)

Management feels that domestic media have generally sensationalized the perceived hazards of Perc to operators, clients and the environment in general. Perc is a volatile, yet non-flammable, substance that requires precautions and proper handling. However, it has proven safe, effective and completely manageable for years and the Company anticipates that its centralized operations and improvements in all facets of the business will further improve the safety for employees, clients and the environment. The Company will continue to utilize Perc where permitted on a limited interim basis to assure an orderly transition. To the extent that additional investment for environmental compliance may be necessary, the Company does not anticipate any significant financial impact. The Company believes that it complies in all material respects with all relevant rules and regulations pertaining to the use of chemical agents. In the opinion of management, the Company complies in all material respects with all known federal, state, and local legislation pertaining to the use of all chemical agents and will endeavor to ensure that the entire organization proactively remains in compliance with all such statutes and regulations in the future.

Other Concentrations

The financial instrument that potentially exposes the Company to a concentration of credit risk principally consists of cash. The Company deposits its cash with high credit financial institutions in the United States of America. At March 31, 2008, the Company’s cash balances were in excess of the Federal Deposit Insurance Corporation limit by approximately $754,000.

The Company’s credit risk with respect to the accounts receivable is limited due to the credit worthiness of customers and the fact that most of accounts receivable consists of large commercial customers. The Company also performs periodic reviews of collectibility and provides an allowance for doubtful accounts receivable when necessary. Management considers the allowance for doubtful accounts receivable at March 31, 2008 of approximately $39,000 to be adequate.

Loss Per Share

Under Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," basic loss per common share is computed by dividing the loss applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per common share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of warrants (using the treasury stock method) and the conversion of the convertible preferred stock and convertible debt (using the if-converted method). At March 31, 2008, 7,487,953 convertible securities and 4,471,626 options and warrants to purchase common stock were excluded from the calculation of diluted loss per share because they were anti-dilutive. At March 31, 2007, 2,215,000 convertible securities and 432,432 options and warrants to purchase common stock were excluded from the calculation of diluted loss per share because they were anti-dilutive.

Reclassification

Certain reclassifications have been made to the March 31, 2007 condensed consolidated financial statements to conform to the March 31, 2008 presentations.

Revenue Recognition

The Company recognizes revenue on retail laundry and dry cleaning services when the services have been provided and the earnings process is complete. For “walk-in” retail customers, when an order is complete and ready for customer pick-up, the sale and related account receivable are recorded. For commercial customers, the sale is not recorded until the Company delivers the cleaned garments.

Page F-6

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Significant Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, ”Accounting for Income Taxes.” FIN No. 48 prescribes a more-likely-than-not recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken (or expected to be taken) in an income tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The requirement to assess the need for a valuation allowance on net deferred tax assets is not affected by FIN No. 48. This pronouncement was effective October 1, 2007 for the Company and the adoption of FIN 48 did not have a significant impact on the Company’s consolidated financial statements.

In September 2007, the FASB issued SFAS No.157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not require any new fair value measurements. The guidance in SFAS No. 157 applies to derivatives and other financial instruments measured at estimated fair value under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and related pronouncements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management does not expect the adoption of SFAS No. 157 to have a significant effect on the Company’s financial position or results of operation.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” This standard permits an entity to measure many financial instruments and certain other items at estimated fair value. Most of the provisions of SFAS No. 159 are elective; however, the amendment to SFAS No. 115 (“Accounting for Certain Investments in Debt and Equity Securities”) applies to all entities that own trading and available-for-sale securities. The fair value option created by SFAS No. 159 permits an entity to measure eligible items at fair value as of specified election dates. Among others, eligible items exclude (1) financial instruments classified (partially or in total) as permanent or temporary stockholders’ equity (such as a convertible debt security with a non-contingent beneficial conversion feature) and (2) investments in subsidiaries and interests in variable interest entities that must be consolidated. A for-profit business entity will be required to report unrealized gains and losses on items for which the fair value option has been elected in its statements of operations at each subsequent reporting date. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (i) makes that choice in the first 120 days of that year, (ii) has not yet issued financial statements for any interim period of such year, and (iii) elects to apply the provisions of SFAS No. 157 (“Fair Value Measurements”). The adoption of SFAS No. 159 is not expected to have a significant impact on future financial statements.

On December 4, 2007, the FASB issued SFAS No. 141 (R), “Business Combinations.” SFAS No. 141(R) will significantly change the accounting for business combinations such that an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific items, including:

·	Acquisition costs will be generally expensed as incurred;

·	Noncontrolling interests (formerly known as “minority interests” – see SFAS No. 160 discussion below) will be valued at fair value at the acquisition date;

·	Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

·	In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

·	Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

·	Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

Page F-7

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Significant Recent Accounting Pronouncements (continued)

SFAS No. 141(R) also includes a substantial number of new disclosure requirements and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS No. 141(R) is not expected to have a significant impact on future financial statements Also, on December 4, 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51." SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Like SFAS No. 141(R) discussed above, earlier adoption is prohibited. The Company is evaluating what effect such statement will have on its future financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

3. NOTES PAYABLE

During the six months ended March 31, 2008, the Company completed the closing of a private placement of 10% senior secured convertible notes (the “Notes”) to accredited investors, receiving net cash of approximately $2,740,000. Each Note was issued at a price equal to 90% of its principal amount. The Notes mature two years after the date of their issuance and bear interest at 10% per annum, payable quarterly in arrears in cash. Investors may convert their Notes into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $2.50 per share, subject to adjustment under customary circumstances. The Notes will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions. At March 31, 2008, the balance outstanding on the notes was approximately $4,327,000, net of discount, and was included in convertible notes payable in the accompanying condensed consolidated balance sheet.

During fiscal year 2007, the Company accepted subscriptions from accredited investors for $2,250,000 of its Series A Convertible Debentures. The debentures were sold with a built-in thirty percent (30%) rate of return. For each $100,000 paid to the Company, a total of $130,000 is due to the holder. Additionally, upon issuance, the Company issued 16,666 shares of common stock to the note holder for each $100,000 subscription. The debentures mature in one year from the date issued with no interest. The principal amount of the debentures may be converted into common stock of the Company at a fixed conversion rate of $3.00 per share at the holder’s option at any time. The principal amount of the debentures is secured by all of the Company’s assets and those of its operating subsidiaries, including an assignment of its leasehold interests in its retail facilities. Pursuant to a registration rights agreement, the Company is obligated to register or to file a registration statement for all of the common stock that may be issued upon conversion of the debentures, within 270 days from closing on a “best efforts” basis. Broker or underwriting fees or commissions to be paid in connection with the offer and sale was a maximum of 10% of cash received. The Company recorded $1,800,000 in cash proceeds; debt conversion of $200,000 and a stockholder note receivable of $250,000. Accordingly, 374,985 shares of common stock were issued. During the six months ended March 31, 2008, approximately $50,000 of Series A Convertible Debt holder converted their debt to common stock and approximately $1,660,000 of Series A Convertible Debt holders converted their debt to the newly issued above Notes. The debt to debt conversion resulted in debt extinguishment accounting under Accounting Principles Board ("APB") No. 26, “Early Extinguishment of Debt,” and Emerging Issues Task Force ("EITF") Issue No. 96-19, “Debtor’s Accounting for a modification or Exchange of Debt Instruments,” and accordingly, the Company recorded a gain on extinguishment of approximately $424,000 in the accompanying condensed consolidated statement of operations for the six months ended March 31, 2008. At March 31, 2008, balance outstanding on the Series A Convertible Debentures was $475,000 and the obligation was in default. Such amount was included in the convertible notes payable in the accompanying condensed consolidated balance sheet.

Page F-8

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

3. NOTES PAYABLE (continued)

On February 12, 2008, the Company issued a conventional convertible debt instrument in connection with the Team acquisition for $1,728,360 which is secured by certain assets of the company and includes first year interest of $144,000. The debt instrument matures two years after the date of issuance and bears interest at 12% per annum, payable in arrears in cash at maturity date. The holder may convert the debt instrument into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $0.75 per share, subject to adjustment under customary circumstances. The debt instrument will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions. In connection with this agreement, the Company signed a warrant agreement as disclosed in the options and warrants section below. At March 31, 2008, the balance outstanding was approximately $865,000, net of discount, and was included in convertible notes payable in the accompanying condensed consolidated balance sheet.

On February 14, 2008, the Company issued a conventional convertible debt instrument in connection with the Team acquisition (see Note 7), for $1,635,540 which is secured by certain assets of the Company. The debt instrument matures two years after the date of issuance and bears interest at 10% per annum, payable in arrears in cash at maturity date. The holder may convert the debt instrument into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $2.50 per share, subject to adjustment under customary circumstances. The debt instrument will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions. At March 31, 2008, the balance outstanding was approximately $1,479,000, net of discounts, and was included in convertible notes payable in the accompanying condensed consolidated balance sheet.

During February 2008, the Company entered into an eighteen month lease agreement with an unrelated party in the amount of $800,000 that bears interest at 14% per annum. The first monthly payment of approximately $25,000 is due on March 12, 2009 and a final payment of $781,894 is due at the end of the lease term. The obligation of the Company under this lease agreement is secured by certain equipment of the Company.

On March 12, 2008, the Company issued a conventional convertible debt instrument in connection with the Zoots acquisition (see Note 7), for $1,725,000 which is secured by certain assets of the Company. The debt instrument matures eighteen months after the date of issuance and bears interest at 12% per annum with interest only payments of $17,250. The holder may convert the debt instrument into shares of the Company’s common stock at any time and from time to time on or before the maturity date, at a conversion price of $0.75 per share, subject to adjustment under customary circumstances. The debt instrument will automatically convert into shares of the Company’s common stock at the conversion price, if the closing bid price for the common stock has traded at more than $5.00 per share for a period of 20 consecutive trading days, provided that, throughout this period, the common stock has been trading on a national securities exchange or NASDAQ and such conversion shares have been fully registered for resale and are not subject to any lock-up provisions. In connection with this agreement, the Company signed a warrant agreement as disclosed in the options and warrants section below. At March 31, 2008, the balance outstanding was approximately $1,163,000, net of discount, and was included in convertible note payable in the accompanying condensed consolidated balance sheet.

On March 24, 2008, the Company entered into a debt agreement in connection with the acquisition of Zoots Corporation (see Note 7) for $975,000 at interest rate of 10% per annum, which matures on September 24, 2008 and secured by certain assets of the Company. The interest payment shall be payable in arrears at the end of each two-month period from the date of the note.

The Company has a line of credit with a financial institution in the maximum amount of $1,100,000 and bearing interest at 7.15%. All outstanding borrowings were fully paid off during the quarter ended March 31, 2008.

Various other debt obligation totaling approximately $550,000 which consisted of approximately $213,000 to related parties was outstanding at March 31, 2008 was included in notes payable in the accompanying condensed consolidated balance sheet.

4. RELATED PARTY MATTERS

The Company rents office space located at 125 E. Tahquitz Canyon Way in Palm Springs, California on a month-to-month basis from Transactional Marketing Partners, a company owned by former director Earl Greenburg. The rent is $2,200 per month all inclusive.

Page F-9

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

5. EQUITY TRANSACTIONS

Common Stock

During the three months ended December 31, 2006, the Company issued 125,000 shares of its restricted common stock to the Company’s Chief Financial Officer as a bonus for past services valued at $231,250 based on the estimated fair market value of the Company’s common stock of $1.85 per share. Expenses related to this transaction have been included in administrative expenses in the accompanying condensed consolidated statement of operations.

During the three months ended December 31, 2006, the Company issued 80,000 shares of restricted common stock to directors for past services valued at $148,000 based on the estimated fair market value of the Company’s common stock of $1.85 per share. Expenses related to this transaction have been included in administrative expenses in the accompanying condensed consolidated statement of operations.

During the three months ended December 31, 2006, the Company, pursuant to a consultant agreement, issued 150,000 shares of its restricted common stock in exchange for certain consulting services provided to the Company, which was valued at $37,500 based on the value of the services provided. Expenses related to this transaction have been included in professional fees in the accompanying condensed consolidated statement of operations.

During the six months ended March 31, 2007, the Company, pursuant to the terms of the Series A Convertible Debentures as disclosed in Note 3 above, issued 374,985 shares of restricted common stock valued at $803,714 using Black-Scholes pricing model.

During the three months ended March 31, 2007, the Company issued 780,000 shares of restricted common stock with an estimated fair market value of $1.85 per share pursuant to an agreement of merger in connection with the acquisition of Cleaners Club Inc.

During the quarter ended December 31, 2007, the Company issued 242,308 shares of its restricted common stock for conversion of $315,000 in Series A convertible debentures.

During the three months ended March 31, 2008, the Company, pursuant to a warrant agreement, issued 434,210 shares of its restricted common stock upon exercise of cashless warrants.

During the three months ended March 31, 2008, the Company issued 500,000 shares of its restricted common stock and is currently being held in escrow as collateral to certain note payable (see Note 3).

In connection with the acquisition of Team as discussed in Note 7, the Company issued 2,044,667 shares of its restricted common stock in exchange for certain assets and liabilities of Team valued at $0.86 per share (stock price at closing date) less an 8% marketability discount having total net value of approximately $1,613,000.

During the three months ended March 31, 2008, the Company issued 792,376 shares of its restricted common stock at prices ranging from $0.60 and $0.75 per share to various investors for cash proceeds totaling $570,650.

During the three months ended March 31, 2008, the Company issued 71,429 shares of its restricted common stock as part a $50,000 conversion of the Series A Convertible Note at a modified conversion rate of $0.70 per share. The initial conversion price was $3.00 per share as discussed in Note 3 above. The change in terms was considered to be not significant.

During the three months ended March 31, 2008, the Company issued 24,331 shares of its restricted common stock in exchange for certain professional services provided to the Company which was valued at $19,224 based on the value of the services provided. Expenses related to this transaction have been included in professional services in the accompanying condensed consolidated statement of operations.

The transactions described in this paragraph constituted an exempt offering under Section 4(2) of the Securities Act.

Page F-10

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

5. EQUITY TRANSACTIONS (continued)

Options and Warrants

During the quarter ended December 31, 2006, the Company issued 500,000 warrants to an investment banking firm for services directly related to an equity fund raising transaction. Such warrants have an exercise price of $0.25, are exercisable for five (5) years from the effective date, and contain net issuance, anti-dilution provisions for split adjustments and “piggyback” registration rights. The Company did not record any expense related to the fair value of the warrants since the issuance was payment for equity fund raising services.

During the quarter ended March 31, 2007, the Company issued 100,000 warrants to a consultant for professional services at an exercise price of $3.50. The fair value of the transaction using Black-Scholes pricing model of $65,000 was recorded as deferred consulting fees and presented as an offset to additional paid-in capital. Such amount is being amortized to expense over the two year term of the consulting agreement.

During the quarter ended March 31, 2007, the Company issued 50,000 warrants to a consultant for professional services in conjunction with the recent acquisition at an exercise price of $3.50. The Company included the fair value of the warrants using Black-Scholes pricing model in the amount of $32,250 as part of the purchase price consideration for Cleaners Club acquisition (See Note 8).

During the quarter ended March 31, 2007, the Company granted 400,000 options (outside of a stock option plan) to seller of CCI in accordance with the related employment agreement with the Company at exercise prices ranging from $3.50 to $10.00 per share. The Company included the fair value of the options using Black-Scholes pricing model in the amount of $171,000 as part of the purchase price consideration for Cleaners Club acquisition.

For the transaction noted above where fair market value of common stock, options and warrants was calculated using Black-Scholes pricing model, the following assumptions were used: risk free interest rate of 4.5%, estimated volatility of 55%, expected life of 5 years unless otherwise stated, and no expected dividend yield.

During the quarter ended December 31, 2007, there was no significant activity in options and warrants.

During the quarter ended March 31, 2008, the Company issued 1,545,000 warrants to investors of conventional convertible debt instruments as discussed in Note 3 in accordance with warrant agreements at an exercise price of $0.75. The Company included the fair value of the warrants using Black-Scholes pricing model as part of the debt discount netted against the face value of the debt instrument. The following assumptions were used to calculate the fair value of the warrants: risk free interest rate 1.82%, estimated volatility of 55%, expected life of 5 years.

During the quarter ended March 31, 2008, there were no options granted.

6. COMMITMENTS AND CONTINGENCIES

Legal Matters

From time to time, the Company may be involved in various claims, lawsuits and disputes with third parties, actions involving allegations of discrimination or breach of contract incidental to the ordinary operations of the business. The Company is not currently involved in any litigation which management believes could have a material adverse effect on the Company's financial position or results of operations.

Leases

The Company leases corporate office space in Newport Beach, California for approximately $4,500 per month expiring in November 2009. Additionally, the Company assumed various operating leases as a result of the acquisitions of Team and Zoots (see Note 7).

Page F-11

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

7. ACQUISITIONS

Team Enterprises, Inc. and Affiliates

On February 14, 2008, the Company completed the acquisition of certain assets and liabilities of Team in a purchase business combination by issuing 2,044,667 shares of its restricted common stock, paying cash of $1,572,000, issuing senior debt of $1,472,000, and the assumption of $44,000 in liabilities. Team consisted of four corporations made up of nineteen retail store locations. All such entities were under common control and ownership prior to the purchase. The Company also assumed various operating leases with minimum payments as follows for the fiscal years ending September 30.

2008 (6 months)	$	258,000
2009		445,000
2010		318,000
2011		204,000
2012		133,000
Thereafter		82,000
	$	1,440,000

In order to measure and allocate the purchase price of the Team business acquisition, the Company engaged a third-party valuation firm to estimate the fair value of the assets acquired and liabilities assumed. The purchase price and purchase price allocation are summarized as follows:

Cash	$	1,572,000
Restricted common stock issued ($0.86 per share less 8% marketability discount)		1,613,000
10% Senior Convertible Debt		1,472,000
Acquisition costs incurred by the Company		605,000
Liabilities assumed by the Company		44,000
Total purchase consideration		5,306,000

Allocated to:

Property and equipment		700,000
Prepaid expenses and deposits		101,000
Noncompete agreement		470,000
Trademark portfolio		60,000
Liabilities assumed		(44,000	)

Excess of purchase price over allocation to identifiable assets and liabilities (goodwill)	$	4,019,000

The principal reason that the Company agreed to pay a purchase price for Team in excess of its recorded net assets was to acquire an established revenue stream.

Page F-12

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

7. ACQUISITIONS (Continued)

Zoots Corporation

On March 24, 2008, the Company completed the acquisition of certain assets of Zoots Corporation (“Zoots”) in a purchase business combination with the payment of cash of $765,000 and the issuance of a short-term note payable for $975,000. The assets acquired consist of eleven retail store locations and a centralized processing plant. As discussed above in Note 3, in order to finance the acquisition, the Company issued a secured convertible note in the initial principal amount of $1,725,000 to Setal 2, LLC, which is secured by a first priority lien over all of Zoots assets acquired. The Company also assumed various non-cancellable operating leases with minimum payments as follows for the fiscal years ending September 30.

2008	$	389,000
2009		778,000
2010		528,000
2011		330,000
2012		195,000
Thereafter		150,000
	$	2,370,000

The purchase price and purchase price allocation are preliminary pending completion of a third party valuation report and can be summarized as follows:

Cash	$	765,000
Security deposits and other		163,000
Acquisition costs incurred by the Company		88,000
Short-term note payable		975,000
Total purchase consideration		1,991,000

Allocated to:

Property and equipment		1,186,000
Security deposits and other		163,000

Excess of purchase price over allocation to identifiable assets and liabilities (goodwill)	$	642,000

The principal reason that the Company agreed to pay a purchase price for Zoots in excess of its recorded net assets was to acquire an established revenue stream. Such excess is expected to be allocated entirely to goodwill in the final purchase price allocation.

Page F-13

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

7. ACQUISITIONS (Continued)

Certain pro forma financial information of the Company is presented below, based on the assumption that the two acquisitions above occurred at the beginning of the earliest period presented.

	Consolidated Pro Forma Financial Information (unaudited) (in thousands)
	Three Months Ended						Six Months Ended
	March 31, 2008			March 31, 2007			March 31, 2008			March 31, 2007

Net Sales	$	5,059		$	6,134		$	10,434		$	10,375

Net Loss	$	(3,312	)	$	(2,523	)	$	(5,929	)	$	(4,964	)

Basic and diluted loss per common share	$	(0.16	)	$	(0.13	)	$	(0.27	)	$	(0.26	)

Page F-14

US DRY CLEANING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND 2007

(UNAUDITED)

8. SUBSEQUENT EVENTS

Effective April 28, 2008, in connection with her appointment as the Company’s new Chief Operating Officer, the Company entered into an employment agreement with Deborah Rechnitz for a twenty-month term. The employment agreement provides for a base annual salary of $240,000. Furthermore, Ms. Rechnitz currently has option agreements covering 150,000 shares. The Company agreed to issue Ms Rechnitz fully vested options to purchase 250,000 shares of the Company’s common stock, which options will be evidenced by a stock option agreement approved by the Board of Directors. The first 100,000 options shall be exercisable at $2.00 per share. The next 100,000 shall be exercisable at $3.00 per share. The final 50,000 shall be exercisable at $4.00 per share. The options shall lapse five years after their granting.

Page F-15

Item 2: Management’s Discussion and Analysis

Forward-Looking Statements

Certain statements made herein and in other public filings and releases by the Company contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainty. These forward-looking statements may include, but are not limited to, future capital expenditures, acquisitions (including the amount and nature thereof), future sales, earnings, margins, costs, number and costs of store openings, demand for clothing, market trends in the retail clothing business, inflation and various economic and business trends. Forward-looking statements may be made by management orally or in writing, including, but not limited to, Management's Discussion and Analysis or Plan of Operation section and other sections of our filings with the SEC under the Exchange Act and the Securities Act.

Actual results and trends in the future may differ materially depending on a variety of factors including, but not limited to, domestic economic activity and inflation, our successful execution of internal operating plans and new store and new market expansion plans, performance issues with key suppliers, severe weather, and legal proceedings. Future results will also be dependent upon our ability to continue to identify and complete successful expansions and penetrations into existing and new markets and our ability to integrate such expansions with our existing operations.

Description of Business

The Company

US Dry Cleaning Corporation (“USDC”) was formed in July 2005 and completed a “reverse merger” with a public shell company in December 2005. In August 2005, USDC purchased Steam Press Holdings, Inc. (“Steam Press”), and Coachella Valley Retail, LLC (“CVR”), respectively, in stock-for-stock type transactions. The Company subsequently completed acquisitions of Cleaners Club, Inc. (“CCI”) in February 2007, Team Enterprises, Inc. and Affiliates (“USDC Fresno”) in February 2008, and certain assets of Zoots Corporation (“USDC Portsmouth”) in March 2008. USDC, Steam Press, CVR, CCI, USDC Fresno, and USDC Portsmouth are hereinafter collectively referred to as the “Company.”

Steam Press does business as Young Laundry & Dry Cleaning (“Young”) in Honolulu, Hawaii. Young was founded in 1902 and operates thirteen retail laundry and dry cleaning stores, in addition to providing hotel and other commercial laundry and dry cleaning services. CVR was founded in 2004 and operates two retail laundry and dry cleaning stores under several names in the Palm Springs, California area. CCI owns and operates eleven retail stores and a centralized processing plant in the Riverside, California area. USDC Fresno owns and operates nineteen retail stores in the Fresno, California area and USDC Portsmouth owns and operates eleven retail stores and a centralized processing plant in the Portsmouth, Virginia area.

Competition

The Company operates in an industry that is subject to intense competition. A handful of markets are dominated by large, well-capitalized operators who have implemented a model similar to USDC’s vision: serving multiple locations with centralized, large capacity production facilities. Smaller players are finding it more difficult to retain market share due to higher overall operating costs and constraints. The Company believes that its strategy of centralized operations, consolidation, and public corporate structure is unique in the dry cleaning industry. However, there can be no assurance that other enterprises will not seek to acquire a significant number of dry cleaning operations in markets in which the Company currently operates or will prospectively operate.

Page 2

Other Risks and Uncertainties

The dry cleaning industry has been a target for environmental regulation during the past two decades due to the use of certain solvents in the cleaning process. For example, in 2002, air quality officials in Southern California approved a gradual phase out of Perchloroethylene (“Perc”), the most common dry cleaning solvent, by 2020. Under this regulation, which went into effect January 1, 2003, any new dry cleaning business or facility that adds a machine must also add a non-Perc machine. While existing dry cleaners can continue to operate one Perc machine until 2020, by November 2007 all dry cleaners using Perc must utilize state-of-the-art pollution controls to reduce Perc emissions. The Company believes that it has successfully integrated the new dry cleaning processes.

Major Customers

At March 31, 2008 and 2007, one customer accounted for approximately 12% and 15% of gross accounts receivable, respectively. For the three months ended March 31, 2007, one customer accounted for approximately 11% of net sales. For the three months ended March 31, 2008 no customer accounted for more than 10% of net sales.

Business Acquisitions

On February 15, 2007, 100% of CCI’s authorized, issued and outstanding common stock was acquired in a merger with USDC. The acquired shares were converted into 780,000 shares of $0.001 par value common stock of USDC immediately prior to the merger. The Company’s management has estimated the fair value of the 780,000 common shares given at $1.85 per share (the estimated fair value of the Company’s common stock) for a stock purchase price consideration of $1,443,000. Additionally, the Company issued fully vested stock options valued at approximately $203,000, cash of $100,000 and incurred approximately $282,000 in acquisition related costs for a total purchase price consideration of approximately $2,028,000.

On February 14, 2008, the Company completed the acquisition of certain assets and liabilities of Team in a purchase business combination by issuing 2,044,667 shares of its restricted common stock, paying cash of $1,572,000, issuing senior debt of $1,472,000, and the assumption of $44,000 in liabilities. Team consists of four corporations made up of nineteen retail store locations. All such entities were under common control and ownership prior to the purchase.

On March 24, 2008, the Company completed the acquisition of certain assets of Zoots in a purchase business combination with the payment of cash of $765,000 and the issuance of a short-term note payable for $975,000. The assets acquired consist of eleven retail store locations and a centralized processing plant. As discussed above in Note 3, in order to finance the acquisition, the Company issued a secured convertible note in the initial principal amount of $1,725,000 to Setal 2, LLC, which is secured by a first priority lien over all of Zoots assets acquired.

Page 3

Results of Operations for the Three Months Ended March 31, 2008 and 2007

Revenues

Net sales are approximately $2,876,000 for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 of approximately $2,026,000. This reflects an increase of approximately $850,000 or 42% increase in revenues. The increase consisted of approximately $180,000 from existing operations and $670,000 from our recent acquisitions.

Cost of Sales

Our cost of sales is approximately $1,329,000 for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 of approximately $1,014,000, an increase of approximately $315,000. Cost of sales as a percentage to revenues is 46% and 50% for the three months ended March 31, 2008 and 2007, respectively. Our cost of sales consists of supplies, labor and facilities to process laundry and dry cleaning products. The increase in cost of sales was a result from our recent acquisitions.

Gross Profit

Gross profit increased approximately $535,000 to approximately $1,547,000 for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 of approximately $1,012,000. Gross profit as a percentage of revenue increased by 4% from 50% for the three months ended March 31, 2007, to 54% for the three months ended March 31, 2008.

Operating Expenses

Operating expenses for the three months ended March 31, 2008 are approximately $3,935,000 compared to the three months ended March 31, 2007 of approximately $2,451,000, an increase of approximately $1,484,000.

Our delivery, store and selling expenses for the three months ended March 31, 2008 were approximately $1,463,000 compared to the three months ended March 31, 2007 of approximately $831,000. These expenses are primarily related to store rents and delivery costs. The increase of $632,000 is primarily attributable to additional stores acquired.

Our administrative expenses for the three months ended March 31, 2008 were approximately $2,353,000 compared to the three months ended March 31, 2007 of approximately $1,547,000, an increase of approximately $806,000. These expenses are primarily related to management, legal and professional fees related to our recent acquisition.

Net Results of Operations

Our operating loss was approximately $2,388,000 for the three months ended March 31, 2008 and approximately $1,439,000 for the three months ended March 31, 2007.

Other Expenses

Interest expense for the three months ended March 31, 2008 was approximately $258,000 compared to approximately $518,000 for the three months ended March 31, 2007, a decrease of approximately $260,000. This is related to the amortization of debt discounts against convertible notes payable issued in December 2006 in which no such expenses were incurred during the six months ended March 31, 2008.

Net Results

We are reporting a net loss of approximately $2,679,000 or $0.15 per common share for the three months ended March 31, 2008 compared to a net loss of approximately $2,251,000 or $0.13 per common share for the three months ended March 31, 2007. This includes legal, audit, consulting and administrative expenses directly related towards capitalization of the Company.

Results of Operations for the Six Months Ended March 31, 2008 and 2007

Revenues

Net sales were approximately $5,246,000 for the six months ended March 31, 2008 compared to the six months ended March 31, 2007 of approximately $3,627,000, an increase of approximately $1,619,000. This reflects a 44% increase in revenues. The increase consisted of approximately $1,529,000 from existing operations and approximately $2,098,000 from our recent acquisitions.

Cost of Sales

Our cost of sales is approximately $2,510,000 for the six months ended March 31, 2008 an increase of approximately $647,000 compared to the six months ended March 31, 2007 of approximately $1,863,000. Cost of sales as a percentage to revenues is 47% and 51% for the six months ended March 31, 2008 and 2007, respectively. Our cost of sales consists of supplies, labor and facilities to process laundry and dry cleaning products. The increase in cost of sales was a result from our recent acquisition.

Page 4

Gross Profit

Gross profit increased approximately $972,000 to approximately $2,737,000 for the six months ended March 31, 2008 compared to the six months ended March 31, 2007 of approximately $1,765,000. Gross profit as a percentage of revenue increased 3% or 52% and 49% for the six months ended March 31, 2008 and 2007, respectively.

Operating Expenses

Operating expenses for the six months ended March 31, 2008 are approximately $6,690,000 compared to the six months ended March 31, 2007 of approximately $4,620,000, an increase of approximately $2,070,000.

Our delivery, store and selling expenses for the six months ended March 31, 2008 were approximately $2,602,000 compared to the six months ended March 31, 2007 of approximately $1,546,000. These expenses are primarily related to store rents and delivery costs. The increase of $1,056,000 is primarily attributable to additional stores acquired.

Our administrative expenses for the six months ended March 31, 2008 were approximately $3,863,000 compared to the six months ended March 31, 2007 of approximately $2,923,000, an increase of approximately $940,000. These expenses are primarily related to management and professional fees. Our management costs are directly related to supporting a public company and legal fees related to our recent acquisition.

Net Results of Operations

Our operating loss is approximately $3,953,000 for the six months ended March 31, 2008 and approximately $2,855,000 for the six months ended March 31, 2007.

Other Expenses

Interest expense for the six months ended March 31, 2008 was approximately $575,000 compared to approximately $611,000 for the six months ended March 31, 2007. This is related to the amortization of debt discounts against convertible notes payable issued in December 2006 in which no such expenses were incurred during the six months ended March 31, 2008.

Net Results

We are reporting a net loss of approximately $4,539,000 or $0.23 per common share for the six months ended March 31, 2008 compared to a net loss of approximately $3,789,000 or $0.22 per common share for the six months ended March 31, 2007. This includes legal, audit, consulting and administrative expenses directly related to our recent acquisition.

Page 5

Liquidity and Capital Resources

Total assets increased by approximately $5,009,000 from $11,346,000 as of March 31, 2007 to $16,355,000 as of March 31, 2008. The increase is primarily due to an increase in goodwill of approximately $2,473,000 related to our recent acquisition; property and equipment of approximately $2,053,000; and intangible assets of $650,000.

Total liabilities increased by approximately $8,177,000 from approximately $6,316,000 as of March 31, 2007 to approximately $14,493,000 as of March 31, 2008. This is primarily due to an increase in convertible notes payable of approximately $6,342,000; increase in accounts payable of approximately $962,000.

Our operating activities used approximately $3,884,000 in cash during the six months ended March 31, 2008. Our net loss of approximately $4,539,000 was the primary component of our negative operating cash flow. This net loss was offset by a number of non-cash items totaling approximately $398,000. These include depreciation, amortization, bad debt expense and the issuance of stock for compensation and services and debt discount amortization in addition to the growth in payables of approximately $619,000. Operating activities used approximately $1,659,000 in cash during the six months ended March 31, 2007. Our net loss of approximately $3,789,000 was the primary component of our negative operating cash flow. This net loss was offset by a number of non-cash items totaling approximately $1,110,000. These include depreciation, amortization, bad debt expense, issuance of stock for compensation and services and debt discount amortization in addition to the growth in accounts payable and other expenses of approximately $949,000.

Cash used in investing activities during the six months ended March 31, 2008 consisted of approximately $2,589,000 used primarily for the recent acquisitions totaling approximately $3,042,000, offset by a decrease in deferred acquisition cost of $458,000 as compared to approximately $748,000 for the six months ended March 31, 2007 primarily for the deferred acquisition cost for the projects in process.

Cash flows from financing activities were approximately $5,328,000 for the six months ended March 31, 2008 which primarily consisted of approximately $5,458,000 in net proceeds from the issuance of convertible debentures; $571,000 in proceeds from issuance of common stock; and issuance of notes payable of approximately $800,000; offset by repayments on notes payable, capital leases and prepaid financing costs of approximately $1,500,000. Cash flows from financing activities were approximately $1,334,000 for the six months ended March 31, 2007 which primarily consisted of approximately $1,800,000 proceeds from issuance of convertible notes payable offset by $605,000 of repayments on notes payable and deferred equity raising cost.

We have a working capital deficit of approximately $3,908,000 as of March 31, 2008. To meet our current working capital requirements, the Company completed a $4,193,000 debt financing during the quarter ended December 31, 2007 and additional debt and equity financings of $7,848,000, during the quarter ended March 31, 2008. However, such financing transactions may be insufficient to fund planned acquisitions, capital expenditures, working capital and other cash requirements.

Going Concern Considerations

The condensed consolidated financial statements included elsewhere herein have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has recurring losses from operations; negative cash flow from operating activities of approximately $3,884,000 for the six months ended March 31, 2008; and negative working capital of approximately $3,908,000 and an accumulated deficit of approximately $23,895,000 at March 31, 2008. The Company’s business plan calls for various business acquisitions, which will require substantial additional capital. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company intends to fund operations through debt financing transactions. In connection with such efforts, the Company completed a $4,193,000 debt financing during the quarter ended December 31, 2007 and additional debt financings of $7,848,000 during the quarter ended March 31, 2008. However, such financing transactions may be insufficient to fund planned acquisitions, capital expenditures, working capital and other cash requirements for the next year. Therefore, the Company will be required to seek additional funds to finance its long-term operations. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

The Company’s capital requirements depend on numerous factors, including the rate of market acceptance of the Company’s services, the Company’s ability to service its customers, the Company’s ability to maintain and expand its customer base, the level of resources required to expand the Company’s marketing and sales organization, and other factors. The Company intends to fund operations through debt and/or equity financing transactions. However, such financing transactions may not be sufficient to fund its planned acquisitions, capital expenditures, working capital, and other cash requirements for the next twelve months.

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Off Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, do not engage in trading activities involving non-exchange traded contracts, and are not a party to any transaction with persons or entities that derive benefits, except as disclosed herein, from their non-independent relationships with us.

Inflation

We believe that inflation generally causes an increase in sales prices with an offsetting unfavorable effect on the cost of products and services sold and other operating expenses. Accordingly, with the possible exception of the impact on interest rates, we believe that inflation will have no significant effect on our results of operations or financial condition.

Critical Accounting Policies

To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, 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 for estimates regarding the collectability of accounts receivable, the recoverability of long-lived assets, as well as our 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 form the basis for making judgments about the carrying values of assets and liabilities. Future financial results could differ materially from current financial results.

Long-Lived Assets

We assess the impairment of long-lived assets, including goodwill, annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held for use is based on expectations of future undiscounted cash flows from the related operations, and when circumstances dictate, we adjust the asset to the extent that the carrying value exceeds the estimated fair value of the asset. Our judgments related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge, which would result in decreased net income (or increased net loss) and reduce the carrying value of these assets.

Goodwill and Intangible Assets

Statement of Financial Accounting standard (“SFAS”) No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001, addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for upon their acquisition and after they have been initially recognized in the financial statements. SFAS No. 142 requires that goodwill and identifiable intangible assets that have indefinite lives not be amortized but rather be tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their estimated useful lives.

SFAS No. 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. In addition, SFAS No. 142 expands the disclosure requirements about intangible assets in the years subsequent to their acquisition. Impairment losses for goodwill and indefinite-life intangible assets that arise due to the initial application of SFAS No. 142 are to be reported as a change in accounting principle.

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Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No 104, “Revenue Recognition” (“SAB 104”). SAB 104 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. The Company recognizes revenue on retail laundry and dry cleaning services when the services are deemed to have been provided. For “walk-in and pickup-and-delivery” type retail customers, the order is deemed to have been completed when the work-order ticket is created and the sale and related account receivable are recorded. For commercial customers, the sale is not recorded until the Company delivers the cleaned garments to the commercial customer. Generally, the Company delivers the cleaned garments to commercial customers the same day they are dropped off (same-day service).

Deferred Tax Assets

Deferred tax assets are recorded net of a valuation allowance. The valuation allowance reduces the carrying amount of deferred tax assets to an amount the Company’s management believes is more likely than not realizable. In making the determination, projections of taxable income (if any), past operating results, and tax planning strategies are considered.

Purchase Price Allocations for Acquisitions

The allocation of the purchase price for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their respective estimated fair values. We reached our conclusions regarding the estimated fair values assigned to such assets based upon the following factors:

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Item 3: Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2008. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2008, our disclosure controls and procedures are not effective.

The ineffective disclosure controls and procedures are material weakness. The Company intends to address these matters by establishing effective controls over the period-end closing and financial reporting processes. This will require the addition of personnel and the creation of closing protocols for the Company and its subsidiaries as well as the consolidation o all subsidiaries.

We plan on remediating the material weaknesses by implementation of new financial reporting systems throughout our operations; adoption of uniform internal controls; and the addition of management personnel to monitor daily organizational activities which will ensure that information is being gathered, reviewed and disclosed at all levels of our company and reported timely in various reports filed or submitted under the Exchange Act.

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of internal control also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, internal control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

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PART II - OTHER INFORMATION

Item 1: Legal Proceedings

From time to time, the Company may be involved in various claims, lawsuits, or disputes with third-parties incidental to the normal operations of the business. The Company is not currently involved in any such litigation. Furthermore, the Company is not aware of any proceeding that a governmental authority is contemplating.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended December 31, 2007, the Company issued 242,308 shares of its restricted common stock for conversion of $315,000 in Series A convertible debentures.

During the three months ended March 31, 2008, the Company, pursuant to a warrant agreement, issued 434,210 shares of its restricted common stock upon exercise of cashless warrants.

Item 3: Defaults upon Senior Securities

None

Item 4: Submission of Matters to a Vote of Security Holders

None

Item 5: Other Information

None

Item 6: Exhibits

Exhibit No.	Description

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	U.S. DRY CLEANING CORPORATION


Date: May 20, 2008	By: /S/ ROBERT Y. LEE
	Robert Y. Lee Chief Executive Officer


	By: /S/ F. KIM COX
	F. Kim Cox Chief Financial Officer

EXHIBIT INDEX


Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.