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EXCEL - IDEA: XBRL DOCUMENT - U-SWIRL, INC.Financial_Report.xls
EX-31.1 - EXH 31-1 CERTIFICATION - U-SWIRL, INC.exh31-1_certification.htm
EX-32.1 - EXH 32-1 CERTIFICATION - U-SWIRL, INC.exh32-1_certification.htm
 


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
[x]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2013

[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from                                                                                      to                      

Commission file number 0-53130


U-SWIRL, INC.
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)
43-2092180
 (IRS Employer
Identification No.)

1175 American Pacific, Suite C, Henderson, Nevada 89074
(Address of principal executive offices)                   (Zip Code)

(702) 586-8700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   [x]Yes[  ]No

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.
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [x]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 15,307,776 shares of Common Stock, $0.001 par value, as of January 20, 2014

 
 

 

 U-SWIRL, INC.
 CONSOLIDATED BALANCE SHEETS
             
   
November 30, 2013
   
February 28, 2013
 
 ASSETS
 
Unaudited
       
             
Current assets
           
Cash
  $ 556,053     $ 358,527  
Accounts receivable, net
    182,758       113,681  
Accounts receivable, related party
    10,629       8,597  
Inventory
    75,307       98,511  
Prepaid expenses
    131,383       24,592  
Total current assets
    956,130       603,908  
                 
Leasehold improvements, property and equipment, net
    1,901,317       2,235,716  
                 
Other assets
               
Deposits
    39,452       39,086  
Franchise rights
    800,000       800,000  
Other assets
    34,576       39,153  
Total other assets
    874,028       878,239  
                 
Total assets
  $ 3,731,475     $ 3,717,863  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 604,633     $ 653,161  
Accounts payable, related party
    145,325       11,792  
Current portion of long-term debt, related party
    107,168       -  
Total current liabilities
    857,126       664,953  
                 
Deferred rent
    75,931       126,792  
Deferred revenue
    286,389       296,500  
Deferred revenue, related party
    30,000       30,000  
Notes payable, related party
    541,743       906,579  
Total liabilities
    1,791,189       2,024,824  
                 
Stockholders' equity
               
Preferred stock; $0.001 par value; 25,000,000 shares
         
authorized, no shares issued and outstanding
    -       -  
Common stock; $0.001 par value; 100,000,000 shares
         
    authorized, 15,189,588 and 14,402,088 shares issued
         
and outstanding, respectively
    15,190       14,402  
Common stock payable
    106       750  
Prepaid equity-based compensation
    (79,864 )     (94,399 )
Additional paid-in capital
    9,144,424       9,042,111  
Accumulated deficit
    (7,139,570 )     (7,269,825 )
Total stockholders' equity
  $ 1,940,286     $ 1,693,039  
 
The accompanying notes are an integral part of these financial statements.
 
 
 
2

 
 
 U-SWIRL, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 UNAUDITED
                         
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
November 30, 2013
   
November 30, 2012
   
November 30, 2013
   
November 30, 2012
 
                         
Revenues
                       
 Cafe sales, net of discounts
  $ 742,377     $ 487,216     $ 3,374,099     $ 1,877,288  
 Franchise royalties and fees
    297,121       118,493       1,075,265       419,817  
Total revenues
    1,039,498       605,709       4,449,364       2,297,105  
                                 
Cafe operating costs
                               
 Food, beverage and packaging costs
    277,008       164,775       1,106,674       608,960  
 Labor and related expenses
    256,127       129,950       874,976       426,237  
 Occupancy and related expenses
    202,777       116,352       683,404       343,355  
Marketing and advertising
    73,511       18,610       162,265       57,249  
General and administrative
    372,740       245,113       1,198,870       856,910  
Depreciation and amortization
    61,318       77,574       272,266       231,114  
Total costs and expenses
    1,243,481       752,374       4,298,455       2,523,825  
Income (loss) from operations
    (203,983 )     (146,665 )     150,909       (226,720 )
                                 
Interest income
    -       439       -       774  
Interest expense
    6,367       (555 )     (20,654 )     (726 )
                                 
Income (loss) from continuing operations before income
  taxes
    (197,616 )     (146,781 )     130,255       (226,672 )
Provision for income taxes
    -       -       -       -  
Net income (loss)
  $ (197,616 )   $ (146,781 )   $ 130,255     $ (226,672 )
                                 
Net earnings (loss) per common share, basic and diluted
  $ (0.01 )   $ (0.03 )   $ 0.01     $ (0.05 )
                                 
Weighted average common shares outstanding,
                               
 basic and diluted
    15,393,297       4,966,990       14,730,088       4,933,796  

The accompanying notes are an integral part of these financial statements.

 
 
3

 

 U-SWIRL, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 UNAUDITED
             
   
For the Nine Months Ended
 
   
November 30, 2013
   
November 30, 2012
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ 130,255     $ (226,672 )
  Adjustments to reconcile net income (loss) to net cash provided
         
by operating activities:
               
Depreciation and amortization
    317,021       231,114  
Loss on disposition of café assets
    355,245       -  
Gain on retirement of non-recourse debt, related party
    (420,991 )     -  
Accrued interest on notes payable, related party
    41,645       -  
Amortization of prepaid stock-based compensation
    14,535       -  
Issuance of common stock as compensation
    -       23,100  
Amortization of stock-based compensation
    38,977       87,557  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (69,077 )     55,953  
Inventory
    23,204       10,127  
Prepaid expenses
    (106,791 )     (3,169 )
Deposits
    (366 )     (70,470 )
Accounts payable and accrued liabilities
    (48,528 )     34,446  
Accounts payable, related party
    133,533       -  
Deferred rent
    (50,861 )     (62,821 )
Deferred revenue
    (10,111 )     (95,000 )
Net cash provided by operating activities
    347,690       (15,835 )
                 
Cash flows from investing activities:
               
Accounts receivable, related party
    (2,032 )     (2,311 )
Purchases of property and equipment
    (337,867 )     (6,406 )
Decrease in other assets
    4,577       4,576  
Net cash (used in) provided by investing activities
    (335,322 )     (4,141 )
                 
Cash flows from financing activities:
               
Payments on capital lease obligation
    -       (3,650 )
Proceeds from notes payable, related party
    126,170       -  
Repayments on notes payable, related party
    (4,492 )     -  
Proceeds from issuance of common stock
    63,480       -  
Net cash provided by (used in) financing activities
    185,158       (3,650 )
                 
Net change in cash
    197,526       (23,626 )
                 
Cash, beginning of period
    358,527       215,136  
                 
Cash, end of period
  $ 556,053     $ 191,510  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 118     $ 726  
Income tax paid
  $ -     $ -  
  Disposition of café assets in connection with café closings   $ 400,000     $ -  
  Forgiveness of non-recourse debt in connection with café closings   $ (400,000   $ -  

The accompanying notes are an integral part of these financial statements.

 
 
4

 
 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
1.
DESCRIPTION OF BUSINESS

U-Swirl, Inc. was incorporated in the state of Nevada on November 14, 2005 and its wholly-owned subsidiary, U-Swirl International, Inc. (“USI”) was incorporated in the state of Nevada on September 4, 2008 (collectively referred to as the “Company”).

In September 2008, the Company acquired the worldwide rights to the U-Swirl Frozen YogurtTM concept.  The U-Swirl concept allows guests a broad choice in frozen yogurt by providing an assortment of non-fat and low-fat flavors, including tart, traditional and no sugar-added options and numerous toppings, including seasonal fresh fruit, sauces, candy and granola. Guests serve themselves and pay by the ounce instead of by the cup size.

In January 2013, the Company entered into agreements to acquire Aspen Leaf Yogurt café assets, consisting of leasehold improvements, property and equipment, for six Aspen Leaf Yogurt cafés and the franchise rights to Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. (“RMCF”) in exchange for a 60% controlling ownership interest in the Company, a warrant that allows RMCF to maintain its pro rata ownership interest if existing stock options and/or warrants are exercised, and notes payable totaling $900,000 (the “Rocky Mountain Transaction”).

As a result of the change in control occurring in connection with the aforementioned transactions, the Company has been deemed to have been acquired by RMCF. Following the Rocky Mountain Transaction, the Company retained a significant minority interest of the issued and outstanding common stock. Due to the significant minority interest, the fair value increments and decrements have not been included in the accompanying financial statements. As the accounting acquirer, RMCF will consolidate the Company’s results of operations in its financial statements.

In October 2013, the Company acquired the franchise rights to nine self-serve frozen yogurt cafés and license agreements to two self-serve frozen yogurt cafés from Josie’s Frozen Yogurt, LLC.  Subsequent to closing the transaction, a Josie's franchisee closed one café.  In November 2013, the Company closed four of its under-performing company-owned Aspen Leaf Yogurt cafés.  As of November 30, 2013 the Company had the following locations:

 
Number of locations
 
U-Swirl
Aspen Leaf
Josie’s
Yogurtini
Total
Company-owned cafés
6
2
-
-
8
Franchised cafés
31
9
10
27
77
Total
37
11
10
27
85

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information.

These unaudited interim financial statements should be read in conjunction with the Company’s Transition Report on Form 10-K for the two-month transition period ended February 28, 2013, which contains audited financial statements and notes thereto covering that period.

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting.  Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.  It is management's
 
 
5

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED
 
opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation.  The interim results for the nine months ended November 30, 2013 are not necessarily indicative of results for the full fiscal year.

Year-End - Effective January 14, 2013, the Company’s Board of Directors adopted a fiscal year ending on the last day of February.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Cash - The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of acquisition to be cash equivalents.  There were no cash equivalents at November 30, 2013 or February 28, 2013.

Accounts Receivable - During the normal course of business, the Company extends credit to its franchisees for inventory, supplies and fees.  The Company monitors its exposure to losses on accounts receivable and maintains an allowance for potential losses or adjustments.  The Company reserves an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customer accounts, and the overall market and economic conditions of its customers.  Past due accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due.

Inventory - Inventories consisting of food, beverages, and supplies are stated at the lower of cost or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred.  The Company did not incur significant charges to cost of sales for spoilage during the periods ended November 30, 2013 and February 28, 2013.

Prepaid Expenses - Prepaid expenses include costs incurred for prepaid rents, insurance, professional fees and deferred offering costs.  The Company capitalizes certain costs associated with the offering of its stock and adjusts the deferred cost to offset offering proceeds upon closing of the offering or expenses the costs upon abandonment of the offering.

Leasehold Improvements, Property and Equipment - Leasehold improvements, property and equipment are stated at cost less accumulated depreciation.  Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized.  The cost of repairs and maintenance is expensed as incurred.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets.  Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected as a gain or loss from operations.

The estimated useful lives are:

Café equipment
7 years
Signage
7 years
Furniture and fixtures
7 years
Computer equipment
5 years
Vehicles
5 years
Leasehold improvements
10 years
 
 
6

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
Company-owned cafés currently under development are accounted for as construction-in-process. Construction-in-process is recorded at acquisition cost, including leasehold improvements, equipment expenditures, professional fees and interest expenses capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-process is transferred to the appropriate asset group. As of November 30, 2013 and February 28, 2013, the Company did not have any construction-in-process.

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of leasehold improvements, property and equipment or whether the remaining balance of property and equipment should be evaluated for possible impairment.  Based on its evaluation, the Company has determined that no impairment exists as of November 30, 2013. 

Deposits - Deposits consist of security deposits for multiple locations and a sales tax deposit held with the state of Nevada.

Franchise Rights - The Company tests franchise rights for impairment annually, and more frequently if impairment indicators are present. Recoverability of the franchise rights is evaluated through comparison of the fair value of each of its reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its franchise rights, an impairment loss is recognized. Based on its evaluation, the Company has determined that no impairment exists as of November 30, 2013. 

Deferred Rent - Rent expense for company-owned leases, which provide for escalating rents over the terms of the leases, is recorded on a straight-line basis over the lease terms.  The lease terms began when the Company had the right to control the use of the property, which was before rent payments were actually due under the leases.  

The difference between the rent expense and the actual amount payable under the terms of the leases is recorded as a leasehold improvement asset and deferred rent liability on the balance sheets and as both an investing activity and a component of operating activities on the statements of cash flows.  

Revenue Recognition Policy - The Company recognizes revenue once pervasive evidence that an agreement exists; the product has been rendered; the fee is fixed and determinable; and collection of the amount due is reasonably assured.

Revenue from company-owned café sales is recognized when food and beverage products are sold.  Café sales are reported net of sales discounts.

Revenue earned as a franchisor is derived from cafés in the Company’s worldwide territory and includes initial franchise fees and royalties.  Initial franchise fee revenue from a the sale of a franchise is recognized when the Company has substantially performed or satisfied all of its material obligations relating to the sale up through the point at which the franchisee is able to open the franchised café, and the Company has no intention of refunding the entire initial franchise fee or forgiving an unpaid note for the entire initial franchise fee.  Substantial performance has occurred when the Company has (a) performed substantially all of its initial services required by the franchise agreement, such as providing to the franchisee (1) a copy of the Operations Manual; (2) assistance in site selection and selection of suppliers of equipment, furnishings, and food; (3) lease review and comments about the lease; and (4) the initial training course to one or two franchisee representatives; and (b) completed all of its other material pre-opening obligations.  The Company defers revenue from the initial franchise fee until (a) commencement of operations by the franchisee; or (b) if the franchisee does not open the franchised café, (1) the date on which all pre-opening services and obligations of the Company are substantially complete, or (2) an earlier date on which the franchisee has abandoned its efforts to proceed with the franchise operations, and in either situation, the franchisee is not entitled to, and is not given, a refund of
 
 
7

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED
 
the initial franchise fee.  Royalties ranging from three to five percent of net café sales are recognized in the period in which they are earned.

Rebates received from purveyors that supply products to the Company’s franchisees are included in franchise royalties and fees. Rebates related to company-owned cafés are offset against café operating costs.  Product rebates are recognized in the period in which they are earned.

The Company also recognizes a marketing and promotion fee ranging from one to three percent of net café sales which are included in franchise royalties and fees.

Marketing and Advertising Expense - The Company engages in local and regional marketing efforts by distributing advertisements, coupons and marketing materials as well as sponsoring local and regional events.   The Company recognizes marketing and advertising expense as incurred.  

Share-based Compensation Expense - The Company recognizes all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
 
Share-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period.

When computing fair value of share-based compensation, the Company considers the following variables:

·    
The expected option term is computed using the “simplified” method.

·    
The expected volatility is based on the historical volatility of its common stock using the daily quoted closing trading prices.

·    
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

·    
The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.

·    
The forfeiture rate is based on the historical forfeiture rate for its unvested stock options.

Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.

Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
 
 
8

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the statements of operations.

Based on its evaluation, the Company does not believe it will not have an income tax liability as of the end of its current fiscal year.

Earnings (Loss) per Share - Basic earnings (loss) per share exclude any dilutive effects of options, warrants and convertible securities.  Basic earnings (loss) per share is computed using the weighted-average number of outstanding common stock during the applicable period.  Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period.  

Fair Value of Financial Instruments - The Company’s financial instruments consist of cash, accounts receivable, accounts payable, and notes payable. The recorded values of these instruments approximate fair values due to the short maturities of such instruments and the stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.

Accounting Policy for Ownership Interests in Investees - The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, after elimination of all material intercompany accounts, transactions, and profits.

New Accounting Pronouncements - There are no recent accounting pronouncements that are expected to have a material effect on the Company’s interim unaudited financial statements.

3.           ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at November 30, 2013 and February 28, 2013:

   
November 30,
2013
   
February 28,
2013
 
Accounts receivable
  $ 252,758     $ 153,681  
Allowance for doubtful accounts
    (70,000 )     (40,000 )
Accounts receivable, net
  $ 182,758     $ 113,681  
                 
Accounts receivable, related party
  $ 10,629     $ 8,597  

4.           INVENTORY

As of November 30, 2013 and February 28, 2013, inventory consisted of the following:

   
November 30,
2013
   
February 28,
2013
 
Food and beverages
  $ 45,461     $ 71,026  
Paper products
    29,846       27,485  
Inventory
  $ 75,307     $ 98,511  
 
 
9

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
5.           LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT

Leasehold improvements, property and equipment consisted of the following as of November 30, 2013 and February 28, 2013:

   
November 30,
2013
   
February 28,
2013
 
Café equipment
  $ 1,231,854     $ 1,176,845  
Signage
    112,395       112,395  
Furniture and fixtures
    230,026       308,698  
Computer equipment
    126,896       151,563  
Vehicles
    30,342       30,342  
Leasehold improvements
    1,559,477       1,578,757  
      3,290,990       3,358,600  
Less: accumulated depreciation
    (1,389,673 )     (1,122,884 )
Leasehold improvements, property and equipment, net
  $ 1,901,317     $ 2,235,716  
 
6.           DEFERRED REVENUE

The Company deferred franchise fee and area development agreement fee income of $316,389 and $326,500 as of November 30, 2013 and February 28, 2013, respectively.  Of the total amount deferred, and as reflected on the balance sheets, an allocation has been made to a related party classification.  See Note 13.

7.           NOTES PAYABLE, RELATED PARTY

In January 2013, in connection with the Rocky Mountain Transaction, the Company purchased leasehold improvements, property and equipment for six Aspen Leaf Yogurt cafés from RMCF in exchange for $900,000 in notes payable.  Interest accrues on the unpaid principal balances of the notes at the rate of 6% per annum, compounded annually, and the notes require monthly payments of principal and interest over a five-year period beginning January 2014 in the case of the recourse notes and January 2015 in the case of the non-recourse notes.  Payment of the notes is secured by a security interest in the six Aspen Leaf Yogurt cafés acquired.

In November 2013, the Company closed four of its under-performing company-owned Aspen Leaf Yogurt cafés and wrote off $400,000 in non-recourse notes payable together with accrued interest of $20,991.  See also Note 14.

In July 2013, the Company executed promissory notes with RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés.  Interest accrues on the notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction.  The notes require monthly payments of principal and interest over a five-year period beginning in October 2013.  Payment of the notes is secured by a security interest in all of the equipment purchased with the proceeds of the notes.
 
 
10

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
As of November 30, 2013, notes payable due to RMCF consisted of the following:

   
Principal
   
Accrued Interest
   
Total
 
                   
Full-recourse, secured, due 12/14/18
  $ 500,000     $ 26,239     $ 526,239  
Construction loans, secured, due 9/15/18
    120,927       1,745       122,672  
Balance
    620,927       27,984       648,911  
Less: current maturities
    (107,168 )     -       (107,168 )
Long-term obligations
  $ 513,759     $ 27,984     $ 541,743  
 
The following table summarizes our note payable obligations and related accrued interest as of November 30, 2013:

For the Fiscal Year Ended February 28 or 29:
 
Amount
 
       
2014
  $ 19,829  
2015
    117,315  
2016
    124,392  
2017
    131,897  
2018
    139,854  
Thereafter
    115,624  
Total minimum payments
    648,911  
Less: current maturities
    (107,168 )
         
Long-term obligations
  $ 541,743  
 
8.           FRANCHISE ROYALTIES AND FEES

During the nine months ended November 30, 2013 and 2012, the Company recognized the following franchise royalties and fees:

   
November 30,
2013
   
November 30,
2012
 
Royalty income
  $ 603,167     $ 222,297  
Franchise fee income
    53,111       95,000  
Rebate income from purveyors that
     supply products to franchisees
    317,610       102,520  
Marketing fees
    101,377       -  
Franchise royalties and fees
  $ 1,075,265     $ 419,817  

 
11

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
9.           OCCUPANCY AND RELATED EXPENSES

Occupancy and related expenses consist of the following for the nine months ended November 30, 2013 and 2012:
 
 
   
November 30, 2013
   
November 30, 2012
 
Rent
  $ 464,425     $ 240,933  
Real estate taxes, insurance and CAM fees
    108,156       39,080  
Utilities
    110,823       63,342  
Occupancy and related expenses
  $ 683,404     $ 343,355  
 
10.           STOCKHOLDERS’ EQUITY

In August 2013, the Company issued 750,000 shares of common stock previously recorded to common stock payable.

During the nine months ended November 30, 2013, the Company issued 37,500 shares of common stock pursuant to the exercise of common stock options for total gross proceeds of $12,750.
 
In November 2013, a warrant-holder exercised warrants into 105,688 shares of the Company’s common stock for total gross proceeds of $50,730.  As of November 30, 2013 those shares had not been issued and have been recorded to common stock payable.

The following is a summary of the Company’s non-vested restricted stock activity:

 
Non-vested Shares
 
Weighted
Average Grant
Date Fair Value
 
Weighted Average
Remaining Vesting
Period
             
Outstanding - December 31, 2012
-
 
$
-
 
-
Granted
759,999
   
0.1275
 
5.00 years
Vested
-
   
-
 
-
Forfeited/Cancelled
-
   
-
 
-
Outstanding - February 28, 2013
759,999
   
0.1275
 
4.88 years
Granted
-
   
-
   
Vested
-
   
-
   
Forfeited/Cancelled
-
   
-
   
Outstanding - November 30, 2013
759,999
 
$
0.1275
 
4.12 years

During the nine months ended November 30, 2013 and 2012, the Company expensed $14,535 and $0 related to restricted common stock grants, respectively.

11.
STOCK OPTIONS

On June 27, 2007, the stockholders of our Company adopted the 2007 Stock Option Plan which currently permits the granting of options to purchase up to 1,515,208 shares.  The 2007 Stock Option Plan will remain in effect until it is terminated by the board of directors except that no incentive stock option will be granted after June 26, 2017.  On April 20, 2011, the stockholders of our Company adopted the 2011 Stock Option Plan which permits the granting of options to purchase up to 750,000 shares.
 
 
12

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
The following is a summary of the Company’s stock option activity:

 
Options
 
Weighted Average Exercise Price
 
Weighted Average Remaining
Contractual Life
 
Average
Intrinsic Value
                   
Outstanding - December 31, 2012
962,000 
   
0.36
 
3.58 years
   
-
Granted
   
-
         
Exercised
   
-
         
Forfeited/Cancelled
   
-
         
Outstanding - February 28, 2013
962,000 
 
$
0.36
 
3.41 years
 
$
34,830
Granted
   
-
         
Exercised
(37,500)
   
0.34
         
Forfeited/Cancelled
(25,000)
   
0.28
         
Outstanding - November 30, 2013
899,500 
 
$
0.36
 
2.55 years
 
$
425,850
Exercisable – November 30, 2013
899,500 
 
$
0.36
 
2.55 years
 
$
418,975

During the nine months ended November 30, 2013 and 2012, the Company expensed $38,977 and $87,557 related to stock option grants, respectively.

12.           WARRANTS

The following is a summary of the Company’s warrant activity:

 
Warrants
 
Weighted
Average
Exercise Price
 
Weighted Average Remaining
Contractual Life
 
Average
Intrinsic Value
                   
Outstanding - December 31, 2012
5,111,500 
   
5.31
 
1.45 years
 
$
18,000
Granted
9,110,250 
   
4.61
         
Exercised
   
-
         
Forfeited/Cancelled
(150,000)
   
6.12
         
Outstanding - February 28, 2013
14,071,750 
 
$
4.61
 
1.32 years
 
$
52,245
Granted
   
-
         
Exercised
(105,688)
   
-
         
Forfeited/Cancelled
(7,691,250)
   
8.44
         
Outstanding - November 30, 2013
6,274,812 
 
$
0.60
 
2.11 years
 
$
1,799,775
Exercisable - November 30, 2013
2,189,782 
 
$
0.65
 
1.90 years
 
$
532,299

During the nine months ended November 30, 2013 and 2012, the Company expensed $0 and $0 related to stock warrants issued, respectively.

13.           RELATED PARTY TRANSACTIONS

The Company was owed $10,629 and $8,597 as of November 30, 2013 and February 28, 2013, respectively, from a U-Swirl franchisee that is owned and operated by the grandchildren of the Company’s Chief Marketing Officer.  The corporate secretary and treasurer of the franchisee is also the Company’s corporate secretary.
 
 
13

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2013
UNAUDITED

 
As of November 30, 2013 and February 28, 2013, the Company owed $145,325 and $11,792 to RMCF for inventories, restaurant equipment and various operating expenses, respectively.  See also Note 7, Notes Payable, Related Party.

As of November 30, 2013 and February 28, 2013, the Company had deferred revenue of $30,000 and $30,000, respectively, from an area developer in which the Company’s Chief Executive Officer and Chief Operating Officer have a minority interest.

14.           COMPANY-OWNED STORE CLOSURES

In November 2013 the Company closed four under-performing company-owned Aspen Leaf Yogurt cafés.  The operation of these locations was transferred to the Company in January 2013 in connection with the Rocky Mountain Transaction.

The Company acquired the assets associated with these locations in exchange for $400,000 in non-recourse notes payable.  Prior to the closing of these locations the Company had recorded $420,991 in notes payable and accrued interest.  See also Note 7.

Consistent with the non-recourse note agreements, the Company returned the assets underlying the notes to RMCF, the note holder.  The Company subsequently entered into an agreement to purchase certain assets salvaged from these closed locations.  The Company has agreed to pay $177,500 to RMCF for the assets salvaged from these locations and believes that this approximates the predecessor cost of these assets.

The closure of these locations resulted in the following accounting treatment:

Reduction in property and equipment
  $ 400,000  
Reduction in depreciation expense
    44,755  
Reduction in notes payable, related party
    400,000  
Reduction in interest expense
    20,991  
Increase in equipment not in service
    177,500  
Increase in accounts payable, related party
    177,500  

15.           SUBSEQUENT EVENTS

In January 2014, the Company issued 105,688 shares of common stock previously recorded to common stock payable and a warrant to purchase up to 105,688 shares of restricted common at $0.60 per share and expiring in October 2015.
 
In January 2014, the Company issued 12,500 shares of common stock pursuant to the exercise of common stock options for total gross proceeds of $3,500.
 
In January 2014, the Company acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés.  CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of the Company’s common stock.  Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of the Company’s common stock.  RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of the Company’s assets.

Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no other subsequent events have occurred that would require recognition or disclosure in the financial statements.

 
14

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the financial statements and the related notes included in this report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ significantly from those projected in the forward-looking statements as a result of many factors.

History and Overview
 
We were incorporated under the laws of the state of Nevada on November 14, 2005 to own and operate EVOS fast food franchises as “Healthy Fast Food.”  We opened two EVOS locations, using the proceeds from private placements and from our initial public offering that was completed in March 2008.
 
After experiencing continued operating losses with our EVOS restaurants, we decided to diversify into another healthy fast food concept and acquired the worldwide rights to U-Swirl Frozen Yogurt (“U-Swirl”) on September 30, 2008.  We opened our first company-owned U-Swirl café in the Las Vegas MSA in March 2009, and we have since developed five more company-owned cafés in the Las Vegas MSA.

We began marketing franchises in November 2008.  As of December 31, 2012, we had 24 franchised cafés and six company-owned cafés in operation in 10 different states.

Beginning in 2011, we recognized that (1) the frozen yogurt retail market was experiencing an influx of small chains; (2) if we could grow by acquisition, we could achieve profitability by attaining an economy of scale with respect to our operations; and (3) we could use our common stock, rather than cash, to make these acquisitions.  We entered into acquisition discussions with several frozen yogurt retail operators and our discussions culminated with the closing of the RMCF transaction in January 2013 in which we acquired six Aspen Leaf cafés and the franchise rights to Aspen Leaf Yogurt (“ALY”) and Yogurtini self-serve frozen yogurt chains from RMCF in exchange for a 60% controlling ownership interest in our company, promissory notes in the aggregate amount of $900,000, and a warrant that allows RMCF to maintain its pro rata ownership interest if any of our existing stock options and/or warrants are exercised.

In October 2013, we acquired the franchise rights to nine self-serve frozen yogurt cafés, and license agreements to two self-serve frozen yogurt cafés from Josie’s Frozen Yogurt, LLC (“Josie’s”).

As of November 30, 2013, we had 8 company-owned cafés and 77 franchised cafés in 26 different states.  Management is focusing its efforts on nurturing its relationship with the ALY, Yogurtini and Josie’s franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.

Management is also continuing its efforts to expand product offerings, including co-branding arrangements.  Some of the cafés will have co-branded RMCF products, while others may have co-branding arrangements with different entities.
 
In addition, we have recently launched the offering of U-Swirl-n-Go Store franchises, which are limited-product stores within non-traditional locations, such as convenience stores, airports, hotels and other mass gathering areas.  The initial investment for these franchises is substantially less and flat royalty fees, instead of fees based on a percentage of revenues, are charged.  We currently anticipate that the first U-Swirl-n-Go location will be opened in mid-2014.

Since we are now a subsidiary of RMCF, we changed our fiscal year-end to that of RMCF, which is the last day of February.  We filed a transition report for the two months ended February 28, 2013.

 
15

 
Results of Operations
 
Three Months Ended November 30, 2013. For the three months ended November 30, 2013, company-owned U-Swirl cafés generated $742,377 in sales, net of discounts, as compared to sales of $487,216 for the comparable period in 2012, an increase of 52%.  The increase is due primarily to an increase in the number of company-owned locations - ranging from 8 to 12 for the 2013 period, as compared to 6 for the 2012 period.
 
Our 2013 café operating costs were $735,912 or 99% of net sales revenues, resulting in café operating profit of $6,465.  For 2012, our café operating costs were $411,077, or 84% of net sales revenues, resulting in café operating profit of $76,139.  During this period, several company-owned cafés experienced lower than expected sales while still incurring indirect labor, occupancy and related expenses.  As a result, in November 2013, we closed four under-performing Aspen Leaf Yogurt cafés.
 
For 2013, we generated franchise fee income of $4,750, royalty income of $162,387, rebate income of $106,672 and marketing fees of $23,312 (a total of $297,121) as compared to franchise fee income of $20,000, royalty income of $64,221, rebate income of $34,272 and marketing fees of $0 (a total of $118,493) in 2012.  During the three months ended November 30, 2013, we had 77 franchised cafés in operation for all or part of that period, as compared to 24 during 2012.
 
Marketing and advertising expenses were $73,511 for the 2013 period as compared to $18,610 for the 2012 period.  This increase is a result of an increased volume of print ads, radio advertising and store promotions offered during 2013 as well as the hiring of a full-time Marketing Consultant and a full-time Marketing Coordinator.
 
For the three months ended November 30, 2013, general and administrative expense increased by $127,627 (52%) due to additional labor allocated to operations support and one-time expenses related to the acquisition of the Josie’s franchise system, as well as additional expenses required to close four corporate Aspen Leaf stores.  Expenses included travel, severance, loss of inventory and equipment moving costs.
 
Depreciation and amortization expense decreased by $16,256 (21%), due to the reduction in fixed assets associated with the closure of four under-performing Aspen Leaf Yogurt cafés in November 2013.
 
Despite the increased revenues, we generated an increased loss from operations of $203,983 in 2013, as compared to a loss of $146,665 in 2012 due to the increased expenses, as described above.
 
We delivered $900,000 in promissory notes to ALY in January 2013 as part of the consideration for the ALY frozen yogurt chain.  Interest accrues on these notes at the rate of 6% per annum, compounded annually.  In connection with the closure of four under-performing locations, $400,000 of these notes were written off, together with accrued interest of $20,991 in November 2013, Accordingly, for the three months ended November 30, 2013, we recorded interest expense of $14,624, offset by the removal of $20,991 in accumulated interest on the $400,000 in notes that were written off, resulting in a credit to interest expense of $6,367.  For the comparable three-month period in 2012, we incurred interest expense of $555.
 
As a result of the factors described above, we generated a net loss of $197,616 for the 2013 period, as compared to a net loss of $146,781 for the comparable 2012 period.

Nine Months Ended November 30, 2013. For the nine months ended November 30, 2013, company-owned U-Swirl cafés generated $3,374,099 in sales, net of discounts, as compared to sales of $1,877,288 for the comparable period in 2012, an increase of 80%.  The increase is due primarily to an increase in the number of company-owned locations - ranging from 8 to 14 for the 2013 period, as compared to 6 for the 2012 period.

 
16

 
Our 2013 café operating costs were $2,665,054 or 79% of net sales revenues, resulting in café operating profit of $709,045.  For 2012, our café operating costs were $1,378,552, or 73% of net sales revenues, resulting in café operating profit of $498,736.  During this period, several company-owned cafés experienced lower than expected sales while still incurring indirect labor, occupancy and related expenses.  As a result, in November 2013, we closed four under-performing Aspen Leaf Yogurt cafés.
 
For 2013, we generated franchise fee income of $53,111, royalty income of $603,167, rebate income of $317,610 and marketing fees of $101,377 (a total of $1,075,265) as compared to franchise fee income of $95,000, royalty income of $222,297, rebate income of $102,520 and marketing fees of $0 (a total of $419,817) in 2012.  During the nine months ended November 30, 2013, we had 77 franchised cafés in operation for all or part of that period, as compared to 24 during 2012.
 
Marketing and advertising expenses were $162,265 for the 2013 period as compared to $57,249 for the 2012 period.  This increase is a result of an increased volume of print ads, radio advertising and store promotions offered during 2013 as well as the hiring of a full-time Marketing Consultant and a full-time Marketing Coordinator.
 
For the nine months ended November 30, 2013, general and administrative expense increased by $341,960 (40%) due to hiring two additional full time Franchise support personnel, as well as one-time costs associated with integration of Yogurtini, Aspen Leaf, and the purchase and integration of Josie’s franchise systems.
 
Depreciation and amortization expense increased by $41,152 (18%), due to the inclusion of additional fixed assets purchased in connection with the acquisition of additional company-owned cafés in January 2013 in the transaction with RMCF, offset by the reduction in fixed assets associated with the closure of four under-performing Aspen Leaf Yogurt cafés in November 2013.
 
Primarily as a result of the increased revenues, we generated income from operations of $150,909 in 2013, as compared to a loss of $226,720 in 2012.
 
Interest expense increased by $19,928 for the 2013 period due to the $900,000 in promissory notes delivered to ALY in January 2013 as part of the consideration for the ALY frozen yogurt chain.    While $400,000 of these notes were written off, together with accrued interest of $20,991 in November 2013, interest accrued on those notes at the rate of 6% per annum, compounded annually, for most of the period.
 
As a result of the factors described above, we generated net income of $130,255 for the 2013 period, as compared to a net loss of $226,672 for the comparable 2012 period.

Liquidity and Financial Condition

At November 30, 2013, we had working capital of $99,004 and cash of $556,053.  At February 28, 2013, we had a working capital deficit of $61,045 and cash of $358,527.

For the nine months ended November 30, 2013, we had net income of $130,255.  Operating activities provided cash of $347,690, with the principal adjustment to reconcile the net income to net cash provided by operating activities being depreciation and amortization of $272,266.  During the comparable 2012 period, we had a net loss of $226,672, and operating activities used cash of $15,835.  The principal adjustment to reconcile the net loss to net cash provided by operating activities was depreciation and amortization of $231,114.

During 2013, investing activities used cash of $335,322, primarily due to purchases of equipment totaling $337,867.  This includes the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés.  These co-branded cafés opened in October 2013.  In November 2013, we also entered into an agreement with RMCF to purchase certain assets salvaged from the closed company-owned ALY cafés.  In comparison, investing activities used
 
 
17

 
 
cash of $4,141 during the 2012 period primarily due to the purchase of a company vehicle in October 2012.

Financing activities provided cash of $185,158 in 2013, with $126,170 being proceeds of a construction loan from RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés.  Interest accrues on those notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction.  We also received $63,480 from the exercise of stock options and warrants.  During the comparable 2012 period, we used $3,650 for payments on a capital lease obligation.

Accounts receivable increased from $113,681 at February 28, 2013 to $182,758 at November 30, 2013, as a direct result of the increase in rebate and royalty revenues.  We increased our allowance for doubtful accounts from $40,000 at February 28, 2013 to $70,000 at November 30, 2013 to reflect the increase in the exposure to losses based on the increase in our franchise base and related receivables.

 The increase in prepaid expenses to $131,383 at November 30, 2013 from $24,592 at February 28, 2013 reflects the timing of payment of prepaid rents, insurance premiums and professional fees.

Accounts payable, related party, increased from $11,792 at February 28, 2013 to $145,325 at November 30, 2013 due to an agreement with RMCF to purchase certain assets salvaged from the four under-performing Aspen Leaf Yogurt cafés that we closed in November 2013.

At November 30, 2013 and February 28, 2013, we recorded a total of $316,389 and $326,500 of deferred revenue, respectively, in connection with the development fees from area development agreements signed prior to those respective dates.  Of the total amount deferred, and as reflected on the balance sheets, an allocation has been made to a related party classification.  Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories and other criteria listed in Note 2 in the financial statements.

Contractual Obligations
 
In January 2013, in connection with the Rocky Mountain Transaction, the Company purchased leasehold improvements, property and equipment for six Aspen Leaf Yogurt cafés from RMCF in exchange for $900,000 in notes payable.  Interest accrues on the unpaid principal balances of the notes at the rate of 6% per annum, compounded annually, and the notes require monthly payments of principal and interest over a five-year period beginning January 2014 in the case of the recourse notes and January 2015 in the case of the non-recourse notes.  Payment of the notes is secured by a security interest in the six Aspen Leaf Yogurt cafés acquired.
 
In November 2013, we closed four of our company-owned Aspen Leaf cafés and wrote off $400,000 in non-recourse notes payable together with accrued interest of $20,991.  These four cafés were under-performing at the time of their purchase in the Rocky Mountain Transaction and thus were purchased with non-recourse notes.  We entered into an agreement to purchase certain assets salvaged from these closed locations for $177,500 from RMCF, with the goal of deploying these assets in locations which will be profitable.

In July 2013, the Company executed promissory notes with RMCF for the purchase and installation of equipment necessary to convert two Company-owned cafés into co-branded RMCF and U-Swirl cafés.  Interest accrues on the notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction.  The notes require monthly payments of principal and interest over a five-year period beginning in October 2013.  Payment of the notes is secured by a security interest in all of the equipment purchased with the proceeds of the notes.

The following table summarizes our obligations and commitments to make future payments for the periods specified as of November 30, 2013:
 
 
18

 

 
For the Fiscal Year Ended February 28 or 29:
 
Operating Leases
   
Notes Payable
   
Total
 
                   
2014
  $ 99,675     $ 19,829     $ 119,504  
2015
    205,413       117,315       322,728  
2016
    55,329       124,392       179,721  
2017
    44,961       131,897       176,858  
2018
    45,894       139,854       185,748  
Thereafter
    35,506       115,624       151,130  
Total minimum payments
    486,778       648,911       1,135,689  
Less: current maturities
    (277,300 )     (107,168 )     (384,468 )
                         
Long-term obligations
  $ 209,478     $ 541,743     $ 751,221  

Plan of Operations

The amounts set forth in the Contractual Obligations table, together with approximately $135,000 per month to cover our fixed overhead expenses, are what we require to maintain our existing operations, which now include the ALY, Yogurtini, and Josie’s Frozen Yogurt chains.  Although we have historically experienced losses from operations, including recently, based on our current projections which assume a continued increase in revenues, we believe that the operation of our eight company-owned cafés and revenues from franchise royalties and fees will provide sufficient cash to maintain our existing operations indefinitely.
 
For the current fiscal year ending February 2014, we anticipate significantly increased revenues from franchise royalties and fees with the inclusion of the ALY, Yogurtini and Josie’s chains.  We expect that our non-café operating expenses will increase over 2012 levels, as we do not anticipate achieving expected economy of scale savings until fiscal 2015 at the earliest.  RMCF has agreed to loan us up to $250,000 during each fiscal year to support our working capital needs.  Interest would accrue on this loan at the rate of 6% per annum and would be repaid no earlier than March 1, 2014 on terms to be negotiated with RMCF.
 
In January 2014, we acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés.  CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of our common stock.  Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of our common stock.  RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of our assets.

We will continue to look for expansion opportunities through acquisitions, as we believe that the self-serve frozen yogurt industry is fragmented with many small, undercapitalized chains whose owners lack the ability to expand or a viable exit strategy.  Such acquisitions may be completed using cash, shares of our stock, or a combination of both for the purchase consideration.  In those cases, it is possible that our shares may be valued at less than the then current trading price for the stock.

While we have experienced profitable quarters for the six months ended August 31, 2013, we note that we are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations.  Historically, the strongest sales of frozen yogurt have occurred in spring and summer months and our weakest sales have occurred during the winter months.  Accordingly, we incurred a net loss of $197,616 for the quarter ended November 30, 2013 and we do not anticipate profitable operations for the quarter ending February 28, 2014.  Our new co-branded locations represent our efforts to address the seasonal fluctuations in sales, as demand for gourmet chocolate products is stronger during the fall, winter and spring seasons.

 
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Summary of Significant Accounting Policies

Inventories.  Inventories consisting of food, beverages and supplies are stated at the lower of cost (FIFO) or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred.  We did not incur significant charges to cost of sales for spoilage during the periods ended November 30, 2013 and February 28, 2013.

Leasehold improvements, property and equipment.  Leasehold improvements, property and equipment are stated at cost less accumulated depreciation.  Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized.  The cost of repairs and maintenance is expensed as incurred.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 5 to 10 years.  Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets.  Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected as a gain or loss from operations.

Deposits.  Deposits consist of security deposits for multiple locations and a sales tax deposit held with the state of Nevada.

Revenue recognition policy.  We recognize revenue once pervasive evidence that an agreement exists; the product or service has been rendered; the fee is fixed and determinable; and collection of the amount due is reasonably assured.

Revenue from company-owned café sales is recognized when food and beverage products are sold.  Café sales are reported net of sales discounts.

Revenue earned as a franchisor is derived from cafés in our worldwide territory and includes initial franchise fees and royalties.  Initial franchise fee revenue from the sale of a franchise is recognized when we have substantially performed or satisfied all of our material obligations relating to the sale up through the point at which the franchisee is able to open the franchised café, and we have no intention of refunding the entire initial franchise fee or forgiving an unpaid note for the entire initial franchise fee.  Substantial performance has occurred when we have (a) performed substantially all of the initial services required by the franchise agreement, such as providing to the franchisee (1) a copy of the Operations Manual; (2) assistance in site selection and selection of suppliers of equipment, furnishings, and food; (3) lease review and comments about the lease; and (4) the initial training course to one or two franchisee representatives; and (b) completed all of our other material pre-opening obligations.  We defer revenue from the initial franchise fee until (a) commencement of operations by the franchisee; or (b) if the franchisee does not open the franchised café, (1) the date on which all pre-opening services and our obligations are substantially complete, or (2) an earlier date on which the franchisee has abandoned its efforts to proceed with the franchise operations, and in either situation, the franchisee is not entitled to, and is not given, a refund of the initial franchise fee.  Royalties ranging from three to five percent of net café sales are recognized in the period in which they are earned.

Rebates received from purveyors that supply products to our franchisees are included in franchise royalties and fees.  Rebates related to company-owned cafés are offset against café operating costs.  Product rebates are recognized in the period in which they are earned.

We also recognize a marketing and promotion fee ranging from one to three percent of net Aspen Leaf Yogurt and Yogurtini café sales which are included in franchise royalties and fees.
 
Share-based Compensation.  We recognize all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.

 
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Share-based payments are valued using a Black-Scholes option pricing model. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period.

When computing fair value, we have considered the following variables:

·    
The expected option term is computed using the “simplified” method.

·    
The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.

·    
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.

·    
We have not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the foreseeable future.

·    
The forfeiture rate is based on the historical forfeiture rate for our unvested stock options.

Recently Issued Accounting Pronouncements

There are no recent accounting pronouncements that are expected to have a material effect on our interim unaudited financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.


ITEM 4.  CONTROLS AND PROCEDURES

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the end of the period covered by this report.  This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and interim principal financial officer.  Based on this evaluation, this officer has concluded that the design and operation of our disclosure controls and procedures are effective.  There were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and interim principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 
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PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

None.

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

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.         Other Information

None.

Item 6.
Exhibits

Regulation
S-K
Number
Exhibit
2.1
Asset Purchase Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
2.2
Membership Interest Purchase Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
3.1
Amended and Restated Articles of Incorporation (2)
3.2
Amended Bylaws (2)
3.3
Certificate of Amendment to Articles of Incorporation filed April 22, 2011(3)
4.1
Form of common stock certificate (4)
4.2
Form of Class C warrant (included in Exhibit 4.3)
4.3
Form of 2010 Warrant Agreement between the Registrant and Computershare Trust Company, N.A. (5)
4.4
Form of Representative’s Purchase Warrants (6)
4.5
Warrant issued to Rocky Mountain Chocolate Factory, Inc. (1)
10.1
2007 Stock Option Plan, as amended (2)
10.2
2011 Stock Option Plan (3)
10.3
Form of Recourse Notes (1)
10.4
Form of Non-Recourse Notes (1)
10.5
Form of Security Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC (1)
10.6
Investor Rights Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
10.7
Investor Rights Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
10.8
Voting Agreement among U-Swirl, Inc., Henry Cartwright, Ulderico Conte, Terry Cartwright, Rocky Mountain Chocolate Factory, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
10.9
Form of Employment Agreement between U-Swirl, Inc. and its executive officers (1)
10.10
Form of Restricted Stock Agreement (included in Exhibit 10.9)
 
 
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Regulation
S-K
Number
Exhibit
10.11
Intercompany Advance Agreement between Rocky Mountain Chocolate Factory, Inc. and U-Swirl, Inc. dated March 27, 2013 (7)
10.12
Secured Promissory Notes dated July 16, 2013 to Rocky Mountain Chocolate Factory, Inc. (8)
31.1
Rule 13a-14(a) Certification of Chief Executive Officer and interim Chief Financial Officer
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and interim Chief Financial Officer
101*
Financial statements from the Quarterly Report on Form 10-Q of U-Swirl, Inc. for the quarterly period ended November 30, 2013, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (iv) the Notes to Financial Statements
_______________
(1)  
Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed January18, 2013.
(2)  
Incorporated by reference to the exhibits to the registrant’s registration statement on Form S-1, file number 333-145360, filed August 13, 2007.
(3)  
Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed April 26, 2011.
(4)  
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed March 11, 2008.
(5)  
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed August 18, 2010.
(6)  
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed October 20, 2010.
(7)  
Incorporated by reference to the exhibits to the registrant’s annual report on Form 10-K, file number 0-53130, for the fiscal year ended December 31, 2012, filed March 29, 2013.
(8)  
Incorporated by reference to the exhibits to the registrant’s quarter report on Form 10-Q for the quarter ended August 31, 2013, file number 0-53130, filed October 15, 2013.

*In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement of other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.



 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  U-SWIRL, INC.  
       
January 21, 2014
By:
/s/ Ulderico Conte  
    Ulderico Conte, Chief Executive Officer  
    and Interim Chief Financial Oficer  


 
 
 
 
 
 
 
 
 
 
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