Item 1.
Business
We are in the business of offering consumers frozen desserts such as yogurt and sorbet. We launched a national chain of self-serve frozen yogurt cafés called U-Swirl Frozen Yogurt and are franchising this concept. We have built and operate cafés owned and operated by the Company (“company-owned”) and franchise to others the right to own and operate U-Swirl cafés.
U-Swirl allows guests a broad choice in frozen yogurt by providing up to 20 non-fat and low-fat flavors, including tart, traditional and no sugar-added options and up to 70 toppings, including seasonal fresh fruit, sauces, candy and granola. Guests serve themselves and pay by the ounce instead of by the cup size. Similar to a coffee shop hangout, locations are furnished with couches and tables and patio seating.
We acquired the U-Swirl Frozen Yogurt concept in September 2008 from U Create Enterprises (formerly U-Swirl Yogurt, Inc.), which is owned by the grandchildren and family of Henry E. Cartwright, our former President, in consideration for 100,000 restricted shares of our common stock. U Create Enterprises continues to operate its frozen yogurt café in Henderson, Nevada, as our franchisee. No franchise fees or royalties are charged with respect to this location, as U Create Enterprises permits us to use the location as a training facility.
We issued a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in certain states which require filing. We opened our first company-owned U-Swirl location in Las Vegas, Nevada, in March 2009 and entered into our first franchise agreement in July 2009 and our first area development agreement for multiple locations in November 2009.
As of December 31, 2012, we owned and operated six U-Swirl Frozen Yogurt cafés in the Las Vegas metropolitan area, and had 24 franchised locations in operation across the country.
On January 14, 2013, we acquired the Aspen Leaf Yogurt ("ALY") and Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. (“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 existing stock options and/or warrants are exercised.
In March 2013 we opened two additional cafés in Reno, Nevada which were previously owned and operated by a U-Swirl franchisee.
The following table provides summary detail regarding our current locations, 14 of which are company-owned.
We are currently maintaining all three franchise systems and providing marketing and franchise support to all existing U-Swirl, ALY and Yogurtini franchisees. We are in the process of nurturing our relationship with the ALY and Yogurtini 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.
We have already been able to secure price reductions from various vendors as well as increase support for the franchisees that were under-performing. Going forward we see value in one cohesive brand and will work to that end. Currently we have decided to terminate the expansion with the name Aspen Leaf and will instead open all future Aspen Leaf Stores as U-Swirl. This represents four stores already under construction.
Pursuant to the terms of acquisition, the former owners of Yogurtini have the right to earn additional compensation based on a formula of total royalty income generated from Yogurtini locations open for more than a year that exceeds a specific threshold. This provides the former Yogurtini owners with a financial incentive to sell and open additional Yogurtini locations. While the number of Yogurtini branded locations may increase as result, we intend to incentivize all prospective franchisees from any brand to open as U-Swirl branded frozen yogurt café.
Our long-term strategy is to expand the U-Swirl brand. The incentives we put in place are both economic incentives for franchisees as well as offering the opportunity to co-brand with Rocky Mountain Chocolate Factory. This co-branding will be available only with U-Swirl branded cafés.
Industry Background
We believe that there is an increasing awareness among consumers of the connection between diet and good health, as evidenced by the current focus on childhood obesity by Michelle Obama and recent initiatives to improve school lunch programs. We believe that as a result, demand for high-quality healthy foods, in particular healthy fast foods, is increasing and that our U-Swirl cafés will be able to take advantage of this growing demand for healthy food by focusing on foods with lower-fat, higher nutritional content and wholesome, natural food ingredients.
According to Ice Cream and Frozen Desserts in the U.S.: Markets and Opportunities in Retail and Foodservice, 6th Edition, published in January 2010 by Packaged Facts (the “Packaged Facts Report”), the frozen dessert industry is a large and growing industry. In 2009, the U.S. market for ice cream and related frozen desserts, including frozen yogurt and frozen novelties, grew two percent to $25 billion. The Packaged Facts Report also mentioned that consumers are in search of value products and products that can benefit their health, such as those that include ingredients such as probiotics. We believe that our self-serve cafés, which offer frozen yogurt carrying the National Yogurt Association’s Live and Active Cultures seal, address this demand. The Packaged Facts Report forecasts that the inclusion of probiotics
in frozen yogurt will cause that segment’s sales growth to surpass other frozen dessert categories through 2014.
We believe that women and children/young adults comprise our targeted market based upon the observations of the staff in our U-Swirl cafés.
Competition
We believe that each of the following self-serve frozen yogurt chains provides direct competition to U-Swirl:
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TCBY - approximately 470 locations in the United States, now offering self-serve franchises
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Menchie’s - approximately 230 locations in the United States, Canada, Puerto Rico, Trinidad & Tobago, England, France, South Africa, Jordan, Kuwait, Bahrain, United Arab Emirates, Qatar, India, China, Japan and Australia
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Orange Leaf Frozen Yogurt - approximately 230 locations in the United States and Australia
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Yogurtland - over 200 locations in the United States, Guam, Mexico, Venezuela and Australia
Many of these competitors have significant competitive advantages over the Company in terms of operating histories, number of locations in operation, number of franchisees and area developers, capital and human and other resources. There are also numerous retail outlets offering self-serve frozen yogurt that are independently owned and operated. We compete not only for customers, but also for management and hourly personnel, suitable real estate sites, investment capital and qualified franchisees. We also compete against frozen yogurt retailers that are not self-serve models.
Further, the food service/restaurant industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Accordingly, there can be no assurances that the Company can successfully compete at a level to achieve our goals.
We have designed U-Swirl cafés to be distinguishable from other frozen yogurt retail outlets and attractive to customers by offering the following:
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inside café-style seating for 50 people and outside patio seating, where feasible and appropriate;
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spacious surroundings of 1,800 to 3,000 square feet;
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16 to 20 flavors of frozen yogurt;
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up to 70 toppings; and
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self-serve format allowing guests to create their own favorite snack.
Management believes that these characteristics may provide us with the ability to compete successfully in this industry. While we continue to pursue locations described above we recognize that our acquisition strategy may lead us to purchase competitors with diverse layouts.
The trade dress of the Aspen and Leaf and Yogurtini locations are similar to that of U-Swirl, although their locations use different color schemes and are typically smaller than the U-Swirl cafés.
Growth Strategy / Acquisition Strategy
Our growth strategy is to maximize our market share and market penetration through the acquisition of additional self-serve yogurt systems, as well as the acquisition of complementary businesses which may provide economies of scale and vertical integration. Although we believe there are
still many geographic opportunities for growth, we feel the self-serve frozen yogurt market has reached a saturation point. In many parts of the country the consolidation of the industry has begun. We believe this consolidation can prove beneficial to us in a number of ways, and we will concentrate a significant amount of our efforts towards the acquisition of additional franchisors of self-serve frozen yogurt. In addition to the acquisition of self-serve frozen yogurt franchisors we see benefits in complementary businesses which provide us with the opportunity for vertical integration. Those opportunities lie in owning specific products which may be sold in our cafés, as well as securing proprietary technology for use by franchisees. We see this as a possibility of adding new revenue streams while expanding into other markets in an efficient and lower risk model.
We intend to grow organically by expanding the number of locations under construction through continued development of the growing franchise base. We intend to incentivize through co-branding with proprietary concepts, and capitalize on synergistic opportunities for joint-venture cafés. We intend to leverage the RMCF relationship, utilizing its experience in logistics, franchising, and international markets to expand market share. Based on an analysis of population statistics, we believe that an estimated 3,000 U-Swirl owned cafés could be operated in the United States and abroad. These estimates are based on a variety of factors including total population, population density, drive-time and other factors related to consumer convenience, consumer demand, local market competition and other relevant factors. In addition, we believe that foreign markets represent expansion opportunities as well.
There can be no assurances that we can or will be able to successfully develop and operate the estimated 3,000 potential cafés in the United States. Similarly, other risk factors identified herein could adversely impact our ability to fully develop the forecasted market opportunity.
Franchise Marketing
Initially, our marketing strategy for establishing multi-unit franchises was to contact individuals or entities that had previously developed franchises with our management team in other concepts. We believed it was prudent to leverage established relationships and to create new relationships with management teams with the proper knowledge, experience, and access to financial resources necessary to successfully develop and operate a U-Swirl franchise in a timely fashion. Specifically, Henry Cartwright, our Chief Marketing Officer, has had significant experience in developing franchise concepts and has maintained current contact with former franchisees. We believe that these contacts were useful in identifying qualified candidates to operate multi-unit franchises.
With 14 company-owned cafés and 59 franchised cafés in operation, we now identify qualified candidates through referrals from other franchisees, inquiries on our web site and customers of U-Swirl, Aspen Leaf and Yogurtini cafés.
We are seeking individuals or groups with the skills and financial strength to operate multi-unit franchise organizations within specific geographic territories. We anticipate a franchise territory will consist of areas that are either cities or counties depending on population.
We will consider the skills and investment capital that each potential multiple franchise owner presents to determine the size and nature of the territory and the minimum number of U-Swirl locations that the franchise owner will be required to maintain in the territory in order keep the exclusive rights to that territory. We consider the appropriate number of locations in an area to be one café per 100,000 people and then set the minimum number of locations at half the amount. For example, a negotiated territory with a population of 2,000,000 should support 20 U-Swirl cafés and a franchisee of that territory would be required to open a minimum of 10 cafés over 5 years to maintain exclusivity. Franchisees will not be restricted from opening additional cafés beyond the minimum for their territory.
Yogurtini will not offer area developments after April 30th and will only offer single franchise units.
Area Development Agreements
We have elected to pursue a development strategy focused, where appropriate, on the execution of area development agreements (“ADAs”) with qualified area developers that possess, or have the ability to secure in a timely manner, the experience, knowledge and abilities, established market knowledge and relationships, capital resources, and the skills necessary to develop multiple locations in a market. Prior to the execution of an ADA, we determine the minimum number of cafés that must be developed within a territory. A territory will consist of one or more metropolitan or micropolitan1 statistical areas. A standard form ADA generally provides for the following:
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Term: Until the end of the development schedule, generally 15 years;
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Development Exclusivity: The ADA provides for limited and conditional development exclusivity for the area covered by the ADA. The exclusivity does not apply to:
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Non-traditional café types (such as shopping mall food court or airport locations), or
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Cafés acquired by the Company pursuant to a merger or acquisition;
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Minimum Development Required: A standard form ADA requires the area developer to develop a pre-determined number of locations within the territory on an annual basis for each year during the term of the ADA; and
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Rights of Renewal: The ADA may be renewed if the area developer has not committed a material breach of the ADA or an underlying franchise agreement.
Our requirements for qualified area developers will result in fewer franchisees in our system but we believe that the area developer will generally be able to create more value for the U-Swirl network by implementing more comprehensive, responsive and competitive development, operations and marketing strategy and programs.
Franchise Development and Operations
The estimated initial investment for a U-Swirl franchise is $360,000 to $465,000, exclusive of real estate costs. Franchisees pay an initial franchise fee of $25,000 for a single unit. Area developers pay a development fee of $25,000, which includes the initial franchise fee for the first café, plus $5,000 for each additional café constituting the minimum number of units for an area development agreement. The minimum number is that number of cafés we determine should be opened in the development area. The development fee of $25,000 is applied to the initial franchise fee to be developed under the agreement and for each successive café the franchise fee is $15,000. The development fee is not refundable.
Our existing franchisees pay a 3% royalty on monthly net sales and may pay an additional 2% to support national and regional advertising efforts once we determine that the system has grown to a sufficient size to warrant these efforts. Existing ALY franchisees currently pay a 1% marketing fee and Yogurtini franchisees currently pay 2% in marketing fees. We intend to maintain these terms until we have determined best course of action. We expect that determination will come once we can better gauge the integration of the existing systems as well as others that may be acquired in the future. We have increased the royalty to 5% for new franchisees to our U-Swirl system. To date we have sold one area development agreement with the royalty at 5% and intend to keep that rate for the foreseeable future. We require franchisees to dedicate at least 1% of net sales to local advertising. Yogurtini is currently charging a 5% royalty and we will honor the existing contracts. ALY is currently charging a 4% royalty and we will honor the existing contracts.
Under the U-Swirl system, each café must conform to a standard of interior design, featuring a distinctive and comfortable décor. The minimum size for a typical U-Swirl café is 1,800 square feet, but
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1 As defined by the United States Census Bureau, a micropolitan area is the area (usually a county or grouping of counties) surrounding and including a core city with population between 10,000 and 49,999 (inclusive). Suburbs of metropolitan areas are generally not considered to be micropolitan core cities, although they can be if they are in another county from the metropolitan core.
cafés in malls, kiosks or other unique locations may be smaller. Under the terms of the franchise agreement, franchisees are required to obtain our approval of the café site, build out the space in accordance with our standards, satisfactorily complete training, and purchase certain equipment and supplies from us or our approved suppliers. Franchisees are also required to purchase a point-of-sale system that meets U-Swirl system standards and to establish and maintain high-speed Internet access from a service provider meeting the minimum specifications established by us. All goods sold by our franchisees must be purchased through us or through our approved suppliers that have met our specifications and standards. Specifically, the yogurt sold in U-Swirl cafés must meet the criteria established by the National Yogurt Association for live and active culture yogurt.
Currently, all of the frozen yogurt served in our cafés is purchased from YoCream International, Inc. and all of the frozen yogurt dispensing equipment is purchased from Taylor Company and/or Stoelting Food Service Equipment Company. We source toppings and supplies from local area distributors. We believe that all of these items are readily available from other sources.
Each franchise agreement has a 15-year term and may be renewed for up to two additional 15-year terms. Transfers by the franchisees are permitted with our approval, but we have a first right of refusal to purchase the franchise business. Upon termination of the franchise agreement, we have the option to purchase the assets used in the franchise business at fair market value.
Market Development
We launched the U-Swirl concept by focusing our development efforts on company-owned cafés in the Las Vegas metropolitan statistical area. We believed that by developing our local area, we would then be able to better monitor café level operations and the effectiveness of various marketing and advertising programs, and market to persons who want to develop multi-unit areas.
We are currently engaged in developing additional market development plans. These plans will be used to develop, franchise-owned and joint-venture locations, and grow by acquisition. We are currently reviewing additional markets and will prioritize these markets based on a variety of factors including maximizing distribution channel and management efficiencies, executing area development agreements and other factors.
We launched our new market development initiatives in October 2009 with the expansion of our management team that included professionals experienced in the development of restaurant and retail concepts on a national level. While these professionals are no longer with us, we continue to utilize comprehensive data gathering and analysis, incorporating consumer demographic densities and characteristics, psychographic data, traffic counts and flow, short-term and long-term market development trends, proximity to community points-of-interest, local competitors and site availability. The recent transaction with RMCF provides us access to 30 years of experience in the retail dessert franchise business. We intend to leverage their experience in retail store marketing, franchise support, logistics, and overall knowledge of the business to expand in to new markets and specifically in identifying new locations within a particular market. Once we identify available sites that meet or exceed our criteria, we apply another round of scrutiny. These criteria include, but are not limited to, site visibility, ingress and egress, size, location within a shopping center, tenant mix and rent factors.
Personnel Development
We believe that a critical factor in the successful development and operation of each U-Swirl café is the development of café personnel. To meet this need, we have developed a comprehensive U-Swirl training program that all café personnel are required to complete. The training requirement applies to all U-Swirl cafés including company-owned, franchise-owned and licensed U-Swirl cafés. The training program addresses all key areas of café operations
In addition to its café personnel, we require that all non-café employees successfully complete the U-Swirl training program. This ensures that all non-café personnel that support our café operations
are fully aware of issues relating to successful retail operations and maximizing customer satisfaction. Yogurtini and ALY implement similar training programs for operations of their respective systems. We have begun the process of comparison for best practice implementation.
Point-of-Sale System
The Company utilizes a point-of-sale (POS) system which provides a vast array of reports that tracks key metrics and performance measures. The Company’s café managers and management team utilize the data to measure and monitor café performance and effectiveness of advertising and promotion programs. The Company continues to refine its reporting package to ensure timely and accurate reporting and trend analysis that is used to accomplish various objectives to maximize profitability, for each café and in the aggregate, including:
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Developing and implementing cost-effective new customer acquisition and customer loyalty programs;
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Achieving and maintaining target cost of sales and labor costs and gross margins;
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Incorporating café performance analytics with other relevant factors to refine criteria to provide predictive indicators for purposes of site selection for future cafés; and
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Forecasting future performance.
In addition to the U-Swirl POS system, we now have both corporate stores and franchise stores with other POS systems, namely R-Power, Lionwise, and Micros POS system. They will all continue to be part of our operations for the foreseeable future; however, our goal is to identify and create, if necessary, a cohesive, scalable system for the long-term future.
Key data tracked and analyzed includes, but is not limited to:
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Product sales and sales mix;
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Customer and transaction counts; and
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Employee labor hours.
Trademarks and Copyrights
In connection with our frozen yogurt café operations, the following marks are owned by us and have been registered with the U.S. Patent and Trademark Office:
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“u-swirl FROZEN YOGURT and Design”;
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“U-SWIRL FROZEN YOGURT”
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“U-SWIRL”;
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“U and Design”;
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“WORTH THE WEIGHT”;
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“FREQUENT SWIRLER”;
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“YOGURTINI”; and
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“SERVE YO SELF”.
The “U-SWIRL FROZEN YOGURT and Design” (a logo) is also registered in Mexico and we have a pending application for registration of “U-SWIRL” in Canada.
We are licensed to use the mark “ASPEN LEAF” and will be granted a license to use the registered marks owned by RMCF in co-branded cafés.
Government Regulation
We are subject to various federal, state and local laws affecting our business. Our cafés must comply with licensing and regulation by a number of governmental authorities, which include health, sanitation, safety and fire agencies in the state or municipality in which the café is located. Moreover, federal Food and Drug Administration regulations require yogurt to have two types of bacteria, lactobacillus bulgaricus and streptococcus thermophilus. There are no federal standards for any kind of frozen yogurt, although some have been proposed. A majority of the states have adopted standards that are either specific to frozen yogurt or cover frozen desserts generally. These standards address some or all of the following: milkfat content, milk solid content, acidity, bacteria count and content and weight.
We are also subject to federal and state laws governing employment and pay practices, overtime, tip credits and working conditions. The bulk of our employees are paid on an hourly basis at rates related to the federal and state minimum wages. Additionally, we are subject to federal and state child labor laws which, among other things, prohibit the use of certain “hazardous equipment” by employees 18 years of age or younger. Under the Americans with Disabilities Act, we could be required to expend funds to modify our cafés to better provide service to, or make reasonable accommodation for the employment of disabled persons. We continue to monitor our facilities for compliance with the Americans with Disabilities Act in order to conform to its requirements. We believe future expenditures for such compliance would not have a material adverse effect on our operations.
The franchises that we offer are subject to federal and state laws pertaining to franchising. These laws require that certain information be provided to franchise prospects at certain times and regulate what can be said and done during the offering process. Some states require the FDD to be registered and renewed on an annual basis.
Employees
Our company-owned cafés have approximately 12 full-time employees and 68 part-time employees that work various shifts. The cafés are open seven days per week generally from 11:00 a.m. to late evening. In addition to the employees at the cafés, we had 5 full-time employees as of February 28, 2013, consisting of our chief executive officer, chief operating officer, chief marketing officer and one person for each of the following functions: café operations and administration. In addition, we had 2 part-time employees and a consultant who serves as our National Operations Consultant.
Item 1A.
Item 1A.
Risk Factors
Not required for smaller reporting companies.
Item 1B.
Item 1B.
Unresolved Staff Comments
Not required for smaller reporting companies.
Item 2.
Item 2.
Properties
Facilities
Our principal offices are located at 1175 American Pacific, Suite C, Henderson, Nevada 89074, in approximately 5,200 square feet of space leased for a term of three years expiring in July 2013. We pay rent of approximately $2,800 per month.
The leases for our company-owned cafés range from approximately 400 to 3,000 square feet. The leases are generally for five-year terms with options to extend. We currently have 14 leases in place which range between $1,800 and $7,500 per month, inclusive of common area maintenance charges and taxes.
Item 3.
Item 3.
Legal Proceedings
There are no legal proceedings pending or, to the best of our knowledge, contemplated or threatened that are deemed material to our business or us.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our common stock are quoted on the OTC Markets - OTCQB under the symbol “SWRL.”
The following table sets forth the range of high and low bid quotations for our common stock for each fiscal quarter for the fiscal years ended December 31, 2011 and 2012. These quotations reflect inter-dealer prices quoted on the OTCQB without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions.
On March 26, 2013, the closing price for the common stock on the OTCQB was $0.40 per share.
Holders and Dividends
As of March 26, 2013, there were 50 record holders of our common stock. To date, we have not declared or paid any dividends on our common stock. We do not intend to declare or pay any dividends on our common stock in the foreseeable future, but rather to retain any earnings to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual and legal restrictions and other factors the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2012, we issued 33,000 shares of common stock to three officers for services valued at $7,260. We relied upon the exemption from registration contained in Section 4(2) of the Securities Act, as these persons were deemed to be sophisticated with respect to the investment in the securities due to their financial condition and involvement in our business and had access to the kind of information which registration would disclose.
Item 6.
Item 6.
Selected Financial Data
Not required for smaller reporting companies.
Item 7.
Item 7.
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 annual 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, including those discussed in “Risk Factors,” “Business” and elsewhere in this report.
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. In addition, the original U-Swirl café in Henderson, Nevada, continues to operate as a franchisee.
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 the Aspen Leaf 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.
As a result of the RMCF transaction, we now have 14 company-owned cafés and 59 franchised cafés in 23 different states. Management is focusing its efforts on nurturing its relationship with the ALY and Yogurtini 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.
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 will file a transition report on Form 10-Q for the two months ended February 28, 2013.
Results of Operations
For the year ended December 31, 2012, our U-Swirl cafés generated $2,280,323 in sales, net of discounts, as compared to sales of $2,342,027 for the prior fiscal year, a decrease of 3%. The decrease in sales was attributable to increased competition in the Las Vegas area and the continuing high rate of unemployment in the area.
Our 2012 café operating costs were $1,751,642 or 77% of net sales revenues, resulting in café operating profit of $528,681. For 2011, our café operating costs were $1,809,582, or 77% of net sales revenues, resulting in café operating profit of $532,445.
For fiscal 2012, we generated franchise fee income of $135,000, royalty income of $266,532, and rebate income of $122,366 as compared to franchise fee income of $182,500 and royalty income of $112,600 in fiscal 2011. During 2012, we opened 7 franchised cafés and had 24 franchised cafés in operation for all or part of that year. In comparison, we opened 13 franchised cafés during 2011 and had 17 franchised cafés for all or part of that year.
Marketing and advertising expenses were $75,291 for the 2012 period as compared to $95,542 for the 2011 period. This decrease is a result of the reduced volume of print ads, radio advertising and store promotions offered during 2012.
For the year ended December 31, 2012, general and administrative expense increased by $111,376 (19%) due to the recognition of a note receivable as uncollectible and also due to franchise consulting, training and development. We recorded an allowance for the full note receivable balance due to a franchisee’s default on the note in January 2013. During the fourth quarter of 2011, we engaged a national operations consultant to assist us with providing support to our franchisees, developing new product offerings, and increasing efficiencies of franchised operations through logistics, purchasing power, and operational improvements. The largest components of general and administrative expenses for the 2012 fiscal year were legal fees ($79,314), bad debt expense ($56,264), insurance ($51,876), accounting fees ($50,950), credit card fees ($47,051), repairs and maintenance ($33,379), cleaning supplies ($31,279), travel ($20,511), and office and postage expense ($19,459). In comparison, the largest components of general and administrative expenses for the 2011 fiscal year were legal fees ($110,251), accounting fees ($47,370), repairs and maintenance ($44,481), credit card fees ($43,921), insurance ($37,432), office and postage expense ($27,261), cleaning supplies ($25,319), and travel ($25,889).
Officer compensation for the 2012 fiscal year decreased by $24,822 (5%), as the value of stock issued for compensation was less in 2012 than in 2011. This expense included $88,930 and $90,440 of stock issued to our officers in 2012 and 2011, respectively.
Depreciation and amortization expense increased slightly (by $1,400), due to the inclusion of vehicles leased in 2012.
As a result of the increased revenues and decreases in operating expenses, our net loss decreased by $158,969 (24%) and our net loss for the year ended December 31, 2012 was $514,425, as compared to a loss of $673,394 for the comparable 2011 period.
Liquidity and Financial Condition
At December 31, 2012, we had working capital of $48,909 and cash of $187,298. At December 31, 2011, we had working capital of $316,215 and cash of $300,637.
During fiscal 2012, we had a net loss of $514,425, and operating activities used cash of $108,111. The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $308,361, issuance of common stock for services of $29,260 and stock-based compensation expense of $116,745. During fiscal 2011, we had a net loss of $673,394, and operating activities used cash of $165,096. The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $306,961, issuance of common stock for services of $43,890, and stock-based compensation of $53,698.
During 2012, investing activities used cash of $587, primarily due to $6,405 used to purchase fixed assets, as compared to $6,499 used in 2011, primarily due to $9,475 used to purchase fixed assets.
Accounts receivable decreased from $117,526 at December 31, 2011 to $73,205 at December 31, 2012, as a few of our franchisees owed royalties and payments for paper products at year-end. We attribute the decrease to arrangements made in 2012 to have our franchisees purchase their paper products directly from the distributor rather than have us purchase the products in bulk and to collect our royalty payments from franchisees via regularly scheduled automatic electronic transfers.
At December 31, 2011, we recorded $320,000 of deferred revenue in connection with the development fees from area development agreement signed prior to that date, as compared to $435,000 at December 31, 2011. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories.
Contractual Obligations
The following table summarizes our obligations and commitments to make future payments for the periods specified as of December 31, 2012:
The above table does not reflect $500,000 in recourse promissory notes and $400,000 in non-recourse notes that we executed and delivered to ALY in January 2013 as part of the consideration for the ALY frozen yogurt chain. 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 ALY company-owned stores.
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 and Yogurtini 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 14 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 and Yogurtini chains. We expect that our
non-café operating expenses will increase over fiscal 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.
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 December 31, 2012 and 2011.
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 U-Swirl café sales is recognized when food and beverage products are sold. Café sales are reported net of sales discounts.
Revenue earned as a U-Swirl Frozen Yogurt 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 U-Swirl 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 U-Swirl 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 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. Product rebates are recognized in the period in which they are earned. Rebates related to company-owned cafés are offset against café operating costs.
Share-based Compensation. We recognize share-based payments, including stock option grants and warrants, 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 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 period, which is generally the vesting period.
When computing fair value, we have considered the following variables:
●
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 our inception and do not anticipate paying dividends on our common stock in the foreseeable future.
●
The expected option term is computed using the “simplified” method as permitted under the provisions of Staff Accounting Bulletin (“SAB”) 107. SAB 107’s guidance was extended indefinitely by SAB 110.
●
The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.
●
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 the Company’s interim unaudited financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8.
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of U-Swirl, Inc.
We have audited the accompanying consolidated balance sheets of U-Swirl, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two year period ended December 31, 2012. U-Swirl, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U-Swirl, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ L.L. Bradford & Company, LLC
L.L. Bradford & Company, LLC
March 29, 2013
Las Vegas, Nevada
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
1.
DESCRIPTION OF BUSINESS
U-Swirl, Inc., (the “Company”) was incorporated in the state of Nevada on November 14, 2005.
U-Swirl Concept - In September 2008, the Company acquired the worldwide rights to the U-Swirl Frozen YogurtSM concept through its wholly-owned subsidiary, U-Swirl International, Inc.
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.
As of December 31, 2012, the Company owned and operated six U-Swirl Yogurt cafés. From the Company’s inception through December 31, 2012, the Company has sold the following:
(1)
Includes the first franchise agreement under the area development agreement.
(2)
Includes subsequent franchises under an area development agreement or franchises without an area development agreement.
In January 2013, the Company acquired the Aspen Leaf and Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. See Note 19, Subsequent Events.
Discontinued Operations - Fresh and Fast (formerly EVOS) Concept - The Company owned and operated two fast food restaurants located in Henderson and Las Vegas, Nevada under the “Fresh and Fast” Concept. The restaurants were formerly operated under franchise rights and “EVOS” branding purchased from EVOS USA, Inc. Effective March 1, 2009, the Company notified EVOS USA, Inc. of its intent to terminate the franchise and area development agreements. Effective July 1, 2009, the Company ceased conducting business under the EVOS USA, Inc. franchise and area development agreements and converted the restaurants to the “Fresh and Fast” Concept. Effective August 1, 2009, the Company determined to cease conducting business under the “Fresh and Fast” Concept altogether in order to focus on its U-Swirl Yogurt Concept, and has accordingly accounted for the “Fresh and Fast” Concept divestiture as discontinued operations. See Note 8, Accounts Payable and Accrued Liabilities from Discontinued Operations, for further discussion.
Accounting Policy for Ownership Interests in Investees - The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary corporation, after elimination of all material intercompany accounts, transactions, and profits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America.
Year-End - The Company had designated December 31 as its year end from November 5, 2005 (inception) through December 31, 2012. Effective January 14, 2013, the Company’s Board of Directors elected to change its year end by adopting a fiscal year ending on the last day of February. The accompanying financial statements do not reflect the change in year end.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
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 - Cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, money market accounts, and investment grade commercial paper that are readily convertible into cash and purchased with original maturities of three months or less.
The Company maintains cash balances at an institution that is insured by the Federal Deposit Insurance Corporation up to $250,000.
Accounts Receivable - 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 customers’ accounts, and the overall market and economic conditions of our customers. Past due accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due.
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. The Company did not incur significant charges to cost of sales for spoilage during the periods ended December 31, 2012 and 2011.
Prepaid Expenses - Prepaid expenses include costs incurred for prepaid rents, insurance, non-inventory items, promotions and professional fees.
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, 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.
The estimated useful lives are:
U-Swirl 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 an appropriate asset. Construction in process is valued at the lower of cost or market. As of December 31, 2012 and 2011, the Company did not have any construction-in-process.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
Deposits - Deposits consist of security deposits for multiple locations and a sales tax deposit held with the state of Nevada.
Impairment of Long-lived Assets - 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 December 31, 2012.
Revenue Recognition Policy - The Company recognizes 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 U-Swirl café sales is recognized when food and beverage products are sold. Café sales are reported net of sales discounts.
Revenue earned as a U-Swirl Frozen Yogurt 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 U-Swirl 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 U-Swirl 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 the initial franchise fee. Royalties 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. Product rebates are recognized in the period in which they are earned. Rebates related to company-owned cafés are offset against café operating costs.
Rent - Rent expense for café 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 Sheet and as both an investing activity and a component of operating activities on the Statements of Cash Flows.
Marketing and Advertising Expense - The Company recognizes marketing and advertising expense as incurred.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
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 our 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 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.
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.
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.
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.
The computation of basic and diluted loss per share for the periods presented is equivalent since the Company had continuing losses. The Company had no common stock equivalents as of December 31, 2012.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
Fair Value of Financial Instruments - The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.
·
Level 1: Observable inputs such as quoted prices in active markets;
·
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
·
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company's financial instruments consisted primarily of cash, accounts receivable, and accounts payable and accrued liabilities. The carrying amounts of the Company's financial instruments generally approximated their fair values as of December 31, 2012 and 2011, respectively due to the short-term nature of such items.
New Accounting Pronouncements - There are no recent accounting pronouncements that are expected to have a material effect on the Company’s financial statements.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following December 31, 2011 and 2011:
4. INVENTORY
As of December 31, 2012 and 2011 inventory consisted of the following:
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
5. LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT
Leasehold improvements, property and equipment consisted of the following as of December 31, 2012 and 2011:
Depreciation expense for the years ended December 31, 2012 and 2011 was $308,361 and $306,961, respectively.
6. NOTE RECEIVABLE AND BAD DEBT EXPENSE
In September 2012, the Company entered into an agreement with a franchisee converting accounts receivable of $75,945 into a note receivable. The outstanding receivable represents delinquent royalty and franchise fees due to the Company. The note bears interest at a rate of 6% per annum and requires fixed weekly payments of $135 from September 2012 to May 2013 and increases to $325 a week from June 2013 to maturity in June 2018. Interest income for the years ended December 31, 2012 and 2011 was $1,209 and $0, respectively.
On January 28, 2013 the franchisee defaulted on the note and although the Company will vigorously pursue collection of the total amount outstanding, the Company has recorded an allowance for the full note receivable balance as of December 31, 2012.
As of December 31, 2012 and 2011, the note receivable balance consisted of the following:
Bad debt expense for the years ended December 31, 2012 and 2011 totaled $56,264 and $0, respectively.
7.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES FROM DISCONTINUED OPERATIONS
During August 2009, the Company closed its two Fresh and Fast (formerly EVOS) restaurants. As a result of the closures, activities of the Fresh and Fast concept have been accounted for as discontinued operations. These results are presented as net amounts in the Consolidated Statements of Operations, with prior periods restated to conform to the current presentation.
Net assets and liabilities of the Fresh and Fast concept operations, which are presented as separately stated amounts in the Consolidated Balance Sheets at December 31, 2012 and 2011, were as follows:
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
As of December 31, 2012, the Company was under continued negotiations to sever its franchisee relationship with EVOS USA, Inc. A formal severance agreement has yet to be accepted by both parties. The Company continues to record royalty fee payable as of December 31, 2012, until such time as both parties have accepted a formal agreement which officially terminates the franchise and area development agreements.
8. CAPITAL LEASE
The Company leased its vehicle under an agreement that is classified as a capital lease. The term of the lease agreement expired in October 2012. The cost of equipment under capital lease is included on the Balance Sheet as leasehold improvements, property, and equipment as follows:
Amortization of the asset under the capital lease is included in depreciation expense.
9. DEFERRED REVENUE
The Company deferred franchise fee and area development agreement fee income of $320,000 and $435,000 as of December 31, 2012 and 2011, respectively. Of the total amount deferred, and as reflected on the balance sheet, an allocation has been made to a related party classification. See Note 16, Related Party Transactions, for additional information.
An area developer has encountered delays in meeting the requirements of the area development agreement and the Company is currently in negotiations to resolve the delinquency. The area developer has outstanding receivables of approximately $40,000 and deferred revenue of $75,000 as of December 31, 2012.
10. FRANCHISE ROYALTIES AND FEES
During the year ended December 31, 2012 and 2011, the Company recognized the following franchise royalties and fees:
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
11. OCCUPANCY AND RELATED EXPENSES
Occupancy and related expenses consists of the following for years ended December 31, 2012 and 2011:
12. INCOME TAXES
The Company accounts for its income taxes in accordance with FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2012 and 2011 are as follows:
At December 31, 2012 and 2011, a valuation allowance has been recorded to offset the deferred tax assets, including those related to the net operating losses. During the years ended December 31, 2012 and 2011, the Company determined that it was more likely than not that it would not realize its deferred tax assets and a valuation allowance was recorded. At December 31, 2012 and 2011, the Company had approximately $5,995,138 and $5,597,458 of federal and state net operating losses, respectively. The net operating loss carry forwards, if not utilized will begin to expire in 2024.
Reconciliations of the U.S. federal statutory rate to the actual tax rate follows for the years ended December 31, 2012 and 2011 are as follows:
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
13. STOCKHOLDERS’ EQUITY
During the year ended December 31, 2011, the Company granted 132,000 shares of its $0.001 par value common stock to officers as share-based compensation. The fair market value of the shares on the dates of grant totaled $43,890.
During the year ended December 31, 2012, the Company granted 132,000 shares of its $0.001 par value common stock to officers for services. The fair market value of the shares on the dates of grant totaled $29,260.
14.
STOCK OPTIONS
As of December 31, 2012 and 2011, the Company had the following stock option grants:
The Black-Scholes assumptions used are as follows:
The following is a summary of the Company’s stock option activity:
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
During the year ended December 31, 2012 and 2011, the Company expensed $116,745 and $53,698 related to stock option grants, respectively.
15.
WARRANTS
The following is a summary of the Company’s warrant activity:
During the year ended December 31, 2012 and 2011, the Company expensed $0 and $0 related to stock warrants issued, respectively.
16. RELATED PARTY TRANSACTIONS
The Company was owed $7,048 and $6,765 as of December 31, 2012 and 2011, 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.
As of December 31, 2012 and 2011, 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.
17. LEGAL PROCEDINGS
On June 21, 2010, Katherine Hemingway, our former Vice President of Marketing and Communications, filed a Notice of Charge of Discrimination against us with the United States Equal Employment Opportunity Commission (“EEOC”), asserting that she was denied equal terms and conditions of employment and compensation. She sought monetary damages and an unspecified amount of stock.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
We entered into a settlement agreement with Ms. Hemingway in February 2012 for $22,500. This amount was paid in full as of May 2012. Ms. Hemingway is married to Gregory Janson, a former director.
There are no other legal proceedings pending or, to the best of our knowledge, contemplated or threatened that are deemed material to our business or us.
18. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. Such matters can be subject to many uncertainties, and outcomes are not predictable with assurance. The Company is not aware of the existence of any such matters at December 31, 2012, and has not provided for any such contingencies, accordingly.
19. SUBSEQUENT EVENTS
On January 14, 2013, the Company acquired the Aspen Leaf and Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. (“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 existing stock options and/or warrants are exercised.
In March 2013 we opened two additional cafés in Reno, Nevada which were previously owned and operated by a U-Swirl franchisee.
As of March 25, 2013, the Company has 14 company-owned cafés and 59 franchised cafés in 23 different states.
On March 27, 2013, the Company entered into an intercompany advance agreement, pursuant to which RMCF has agreed to loan the Company up to $250,000 during each fiscal year to support its working capital needs. Interest is to accrue on this loan at the rate of 6% per annum and is to repaid no earlier than March 1, 2014 on terms to be negotiated with RMCF. As of the date of this report, no advances have been to the Company by RMCF.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), 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 rules and forms of the Securities and Exchange Commission (“SEC”). 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 or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Rule 13a-15 under the Exchange Act, requires us to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012, being the date of our most recently completed fiscal year end. This evaluation was implemented under the supervision and with the participation of our Chief Executive Officer and interim Chief Financial Officer, Ulderico Conte. Based on this evaluation, this officer has concluded that the design and operation of our disclosure controls and procedures are not effective since the following material weaknesses exist:
·
Since the resignation of our chief financial officer in October 2009, our chief executive officer also functions as our interim chief financial officer. As a result, our officers may not be able to identify errors and irregularities in the financial statements and reports.
·
We were unable to maintain full segregation of duties within our financial operations due to our reliance on limited personnel in the finance function. While this control deficiency did not result in any audit adjustments to our financial statements, it could have resulted in a material misstatement that might have been prevented or detected by a segregation of duties.
·
Documentation of all proper accounting procedures is not yet complete.
To the extent reasonably possible given our limited resources, we intend to take measures to cure the aforementioned weaknesses, including, but not limited to, the following:
·
Increasing the capacity of our qualified financial personnel to ensure that accounting policies and procedures are consistent across the organization and that we have adequate control over financial statement disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13-a-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our officer has assessed the effectiveness of our internal controls over financial reporting as of December 31, 2012. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In conducting his evaluation, our officer noted the following material weaknesses in our internal controls over financial reporting:
·
While certain accounting procedures have been adopted, compliance with such procedures has been inconsistent.
·
While the Board of Directors has established an Audit Committee, it has not functioned as a separate committee. Accordingly, the entire Board, rather than an independent body, has reviewed our financial statements.
·
Segregation procedures could be improved by strengthening cross approval of various functions, including cash disbursements and internal audit procedures where appropriate.
As a result of these deficiencies in our internal controls, our officer concluded further that the design and operation of our disclosure controls and procedures may not be effective and that our internal control over financial reporting was not effective.
In January 2013, our Board of Directors increased the number of directors to eight and elected five independent directors. In February 2013, the Board of Directors appointed three independent directors, each of whom meets the audit committee financial expert standards, to serve on the Audit Committee. During fiscal 2013, we may implement additional appropriate changes as they are identified, including changes to remediate material weaknesses in our internal controls.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
During the period covered by this annual report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Our directors, executive officers and key employees, and their ages as of the date of this report, are as follows:
Name
Age
Position
Franklin E. Crail
Chairman of the Board
Ulderico Conte
Chief Executive Officer, Interim Chief Financial Officer and Director
Terry A. Cartwright
Chief Operating Officer
Henry E. Cartwright
Chief Marketing Officer
Scott G. Capdevielle
Director
Clyde W. Engle
Director
Bryan J. Merryman
Director
Lee N. Mortenson
Director
The term of office of each director ends at the next annual meeting of our stockholders or when such director’s successor is elected and qualifies. The term of office of each officer ends at the next annual meeting of our Board of Directors, expected to take place immediately after the next annual meeting of stockholders, or when such officer’s successor is elected and qualifies.
Franklin E. Crail has been the Chairman of the Board since February 2013 and a director since January 2013. Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. Since RMCF’s incorporation in November 1982, he has served as its Chief Executive Officer, President and as a director, and, from September 1981 to January 2000, he served as its Treasurer. He was elected Chairman of the Board in March 1986. Prior to founding RMCF, Mr. Crail was co-founder and President of CNI Data Processing, Inc., a software firm which developed automated billing systems for the cable television industry. As RMCF’s Chief Executive Officer, President and director since 1982, Mr. Crail brings his leadership, extensive experience and knowledge of the industry and the investment community to the Board of Directors.
Ulderico Conte has been our Chief Executive Officer and Interim Chief Financial Officer since April 2011 and a director since November 2010. He served as our Vice President of Franchise Development from April 2007 to April 2011 and was one of our founders. From June 2005 to November 2005, he researched various restaurant concepts before deciding on the EVOS concept and forming the Company. He served as our Vice President, Secretary and a Director from inception to April 2007. Mr. Conte was the President and Principal of PIN Financial LLC, a FINRA member investment banking firm from May 2005 to February 2009. From October 2004 to May 2005, he worked as an institutional trader with Garden State Securities. He served in a similar role with Tradition Aisle Securities from February 2003 to October 2004. Until 2003, Mr. Conte owned and operated Stone Harbor Financial Services, LLC, a securities broker-dealer firm. Following the events of September 11, 2001, he made substantial personal loans to support Stone Harbor and pay its employees. Stone Harbor ceased doing business in 2003 and Mr. Conte filed for personal bankruptcy in October 2003. He received a Bachelor’s degree in Business from Rider University and a Master’s degree in Business Administration from the University of Phoenix. We have concluded that Mr. Conte should serve as a director because of his familiarity with the Company and business development experience.
Terry A. Cartwright has been our Chief Operating Officer since April 2011 and a director since January 2013. He served as our Vice President of Café Development since April 2007 and was one of
our founders. Since May 2002, he has served as President of Gold Key, Inc., d/b/a Monster Framing, a wholesale custom picture and art manufacturing company specializing in hotels, timeshares, condos and retail shops. Since 1989, he has served as Vice President and Director of Operations for MV Entertainment, a franchisee of Blockbuster Entertainment Corp., with stores in Southern California. From 1985 until 1989, he served as the Director of New Store Development for Major Video Corp. Mr. Cartwright attended the University of Nevada at Las Vegas. He is the son of Henry E. Cartwright. We have concluded that Mr. Cartwright should serve as a director because of his previous experience with franchised concepts.
Henry E. Cartwright has been our Chief Marketing Officer since January 2013. He previously served as our Chairman of the Board and President from April 2007 to January 2013, and as our Chief Executive Officer from April 2007 to April 2011. From October 2002 to April 2007, Mr. Cartwright was semi-retired and a private investor in numerous real estate and lending transactions and other ventures. Mr. Cartwright served as Chairman of the board of directors of Major Video Corp. from December 1982 until its merger with Blockbuster Entertainment Corporation in January 1989. During his tenure, Major Video had over 20 multiple unit franchisees in 28 states and Canada. In September 1993, Mr. Cartwright founded Back to the 50’s, Inc., a company that sold 50’s and 60’s memorabilia through a mail order catalog and showroom. Back to the 50’s, Inc., was acquired by Crowne Ventures, Inc. in November 1995. Mr. Cartwright served as a Director of Crowne Ventures, Inc., from 1995 until he resigned in April 1998. He served as Chairman of the board of directors of Americabilia.com, Inc. (now known as Seaena, Inc.), from September 1999 to October 2002. Americabilia was engaged in direct Internet merchandising of American-themed collectibles, gifts and memorabilia. Mr. Cartwright also had similar management responsibilities with franchised concepts such as Taco Boy, a Mexican fast food company; Olde English Fish and Chips; Mom’s Ice Cream; and Pizza Hut. He is the father of Terry A. Cartwright. We have concluded that Mr. Cartwright should serve as a director because of his previous management experience with franchised concepts.
Scott G. Capdevielle has been a director since January 2013. He has served on the RMCF Board of Directors since June 2009. Mr. Capdevielle founded and has served as President, Chief Executive Officer and a member of the Board of Directors of Syndicom, Inc., a software and consulting company, since 2000. Prior to founding Syndicom, Inc., from 1999 to 2000, Mr. Capdevielle was Chief Executive Officer and founder of Untv, Inc., a company pioneering user-generated web video and distribution on the Internet. From 1995 to 1999, Mr. Capdevielle founded and held the position of Chief Technical Officer and a member of the Board of Directors of Andromedia Corporation, a developer of web analytics software to Fortune 1000 companies prior to its sale to Macromedia, Inc. Mr. Capdevielle has been engaged in the software industry since 1993 and has served on several advisory boards and Board of Directors of technology companies from 1994 to present. He is currently a partner in Incas, LLC, a seed stage investment company focused in the medical device industry. Mr. Capdevielle’s extensive executive and board experience brings operational, investment, strategic, technology and industry expertise to the Board of Directors.
Clyde W. Engle has been a director since January 2013. He has served on the RMCF Board of Directors since January 2000, and previously from December 1987 to August 1995. Mr. Engle is currently the Chairman of the Board of Directors, President and Chief Executive Officer of Lincolnwood Bancorp, Inc. (formerly known as GSC Enterprises, Inc.). Lincolnwood Bancorp, Inc. owned the Bank of Lincolnwood until June 2009 when the Bank of Lincolnwood came under control of the Federal Deposit Insurance Corporation (“FDIC”). Mr. Engle’s extensive executive and board experience brings governance, investment and strategic expertise to the Board of Directors.
Bryan J. Merryman has been a director since January 2013. He joined RMCF in December 1997 as its Chief Financial Officer and Vice President - Finance. Since April 1999, Mr. Merryman has also served as its Chief Operating Officer and as a director, and since January 2000, as its Treasurer. From January 1997 to December 1997, Mr. Merryman was a principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm). Mr. Merryman also served as Chief Financial Officer of Super Shops, Inc., a retailer and manufacturer of after-market auto parts, from July 1996 to November 1997, and prior to July 1996, was employed for
more than eleven years by Deloitte and Touche LLP, most recently as a Senior Manager. Mr. Merryman’s extensive operational, accounting and financial expertise, along with his extensive knowledge of our business and broad industry expertise, provides significant value and insights to the Board of Directors.
Lee N. Mortenson has been a director since January 2013, and has served on the RMCF Board of Directors since 1987. He has been engaged in consulting and investment activities since July 2000 and was a Managing Director of Kensington Partners, LLC (a private investment firm) from June 2001 to April 2006. Mr. Mortenson has been President and Chief Executive Officer of Newell Resources LLC since 2002 providing management consulting and investment services. Mr. Mortenson served as President, Chief Operating Officer and a director of Telco Capital Corporation, a manufacturing and real estate company, from January 1984 to February 2000. He was President, Chief Operating Officer and a director of Sunstates Corporation, a manufacturing and real estate company, from December 1990 to February 2000. Mr. Mortenson was a director of Alba-Waldensian, Inc., an apparel and medical device manufacturing company, from 1984 to July 1999, and also served as its President and Chief Executive Officer from February 1997 to July 1999. Mr. Mortenson’s general business experience and investment expertise provides valuable insight to the Board of Directors with respect to our operations and financial success.
All of our officers work full-time for the company.
Nominees to the Board of Directors
Since our last proxy statement, we have not made any material changes to the procedures by which stockholders may recommend nominees to our Board of Directors.
Committees
The following directors serve on committees of our Board of Directors:
·
Audit Committee - Bryan J. Merryman (Chair), Franklin E. Crail and Lee N. Mortenson
·
Compensation Committee - Bryan J. Merryman (Chair), Scott G. Capdevielle and Lee N. Mortenson
·
Nominating and Corporate Governance Committee - Bryan J. Merryman (Chair), Scott G. Capdevielle and Lee N. Mortenson
The Board of Directors has determined that each of Bryan J. Merryman, Franklin E. Crail and Lee N. Mortenson meets the audit committee financial expert standards as established by the SEC and the financial sophistication standards as established by the Nasdaq Stock Market.
Conflicts of Interest
Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to us. Accordingly, direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all
directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.
Code of Ethics
We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, principal accounting officer or controller, or persons performing similar functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors, and persons who beneficially own more than 10% of our common stock to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us, or written representations that no Form 5 filings were required, we believe that during the fiscal year ended December 31, 2012, there was compliance with all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners.
Item 11.
Item 11.
Executive Compensation
The following table sets forth information about the remuneration of our principal executive officer for services rendered during our last two completed fiscal years, and our other executive officers that had total compensation of $100,000 or more for our last completed fiscal year (the “Named Officers”). Certain tables and columns have been omitted as no information was required to be disclosed under those tables or columns.
Summary Compensation Table
_________________
(1)
The option awards were valued using a Black-Scholes option pricing model using the following assumptions: volatility rate of 123.53% - 125.65%; risk-free interest rate of 0.40% - 1.09% based on a U.S. Treasury rate of 3 years; and a 3-year expected option life (simplified method).
(2)
The amounts shown below consist of health insurance and dental insurance premiums paid for these officers and their dependents.
(3)
Mr. Cartwright served as our President during our last two completed fiscal years
Employment Arrangements
From September 1, 2009 through December 31, 2012, we paid the following monthly compensation to officers of the Company:
·
Henry E. Cartwright - $7,000 and 3,000 shares of common stock;
·
Ulderico Conte - $7,000 and 3,000 shares of common stock; and
·
Terry A. Cartwright - $5,000 and 5,000 shares of common stock.
On January 14, 2013, we entered into employment agreements with each of the above named officers. Each agreement has an initial term of two years and will renew automatically for additional one-year terms unless we or the employee notifies the other that it will not renew at least 30 days prior to the end of the current term. For the first year of employment, each officer will receive a monthly base salary of $8,400 and an annual bonus of $30,000 if our earnings for the year ended February 28, 2014, prior to interest, taxes, depreciation and amortization, are at least $712,900. For the second year of employment, each will receive a monthly base salary of $9,240 and an annual bonus of $33,000 if our earnings for the year ended February 28, 2015, prior to interest, taxes, depreciation and amortization, are at least $1,120,400. In addition, each individual was granted 253,333 restricted shares of common stock, which vest at the rate of 20% per year on each anniversary date of the Closing (January 14, 2013). If the bonus goals are achieved during the second year of employment, each will also receive restricted shares of common stock equal to his base salary divided by the fair market value of our common stock on the date of grant, which will vest at the rate of 20% per year on each anniversary of the date the shares are granted. The shares that were issued, as well as those that may be issued under the bonus arrangement, are subject to the terms of a restricted stock agreement.
The following table set forth information regarding the outstanding equity awards as of December 31, 2012 for our Named Officers.
Outstanding Equity Awards At Fiscal Year-End
_________________
(1)
These options were granted on May 16, 2011. Half of the options granted vested May 16, 2012 and the remaining half vest May 16, 2013.
(2)
These options were granted on November 17, 2011. Half of the options granted vested November 17, 2012 and the remaining half vest November 17, 2013
During the fiscal year ended December 31, 2012, there were no exercises of stock options by the Named Officers.
Compensation of Directors
Each of our non-employee directors receives reimbursement for expenses incurred as a result of attendance at any meetings of the Board or the committees of the Board. Prior to February 12, 2013, we did not pay any cash compensation to any of our non-employee directors for their service on the board. We did not pay compensation of any kind to our non-employee directors for services rendered during the year ended December 31, 2012.
On February 12, 2013, we adopted a Non-Employee Director Compensation Program which sets forth the following compensation:
·
Annual cash compensation of $6,000 to each of the Audit Committee Chair, Compensation Committee Chair and Nominating and Corporate Governance Committee Chair
·
Annual cash compensation of $2,000 to each member of the Audit Committee and Nominating and Corporate Governance Committee
·
Annual cash compensation of $3,000 to each member of the Compensation Committee
·
Per meeting cash compensation to each member of the Audit Committee of $250 for each meeting attended by phone and $500 for each meeting attended in person
·
Stock grant of 150,000 shares of common stock upon first being appointed or elected to the Board, which shares vest on the grant date
·
Stock grant of 50,000 shares of common stock immediately after each annual meeting of stockholders beginning with the 2013 annual meeting, which shares vest on the grant date
Stock Option Plans
2007 Stock Option Plan. Our stockholders adopted the 2007 Stock Option Plan (the “2007 Plan”) on June 27, 2007, which currently permits the granting of options to purchase up to 486,683 shares. This amount adjusts at the beginning of each of our fiscal quarters to a number equal to 10% of the number of shares of common stock outstanding at the end of our last completed fiscal quarter, or 470,000 shares, whichever is greater, and provided further that such number will be increased by the number of shares of option stock that we subsequently may reacquire through repurchase or otherwise. Options may be granted to officers, directors, employees, and consultants on a case-by-case basis. The 2007 Plan will remain in effect until it is terminated by the board of directors or, if so appointed by the board, a committee of two or more disinterested directors administering the 2007 Plan, except that no incentive stock option will be granted after June 26, 2017.
The 2007 Plan is intended to (i) encourage ownership of shares by our employees and directors and certain consultants to the company; (ii) induce them to work for the benefit of the company; and (iii) provide additional incentive for such persons to promote the success of the company.
The board of directors or committee may amend, suspend or discontinue the 2007 Plan at any time or from time to time; provided that no action of the board will cause incentive stock options granted under the 2007 Plan not to comply with Section 422 of the Internal Revenue Code unless the board specifically declares such action to be made for that purpose and provided further that without the approval of our stockholders, no such action may: (i) materially increase the maximum aggregate number of shares that may be issued under options granted pursuant to the 2007 Plan, (ii) materially increase the benefits accruing to 2007 Plan participants, or (iii) materially modify eligibility requirements for the participants. Moreover, no such action may alter or impair any option previously granted under the 2007 Plan without the consent of the holder of such option.
The 2007 Plan contains provisions for proportionate adjustment of the number of shares for outstanding options and the option price per share in the event of stock dividends, recapitalizations, stock splits or combinations.
Each option granted under the 2007 Plan will be evidenced by a written option agreement between us and the optionee. The option price of any incentive stock option or non-qualified option may be not less than 100% of the fair market value per share on the date of grant of the option; provided, however, that any incentive stock option granted to a person owning more than 10% of the total combined voting power of the common stock will have an option price of not less than 110% of the fair market value per share on the date of grant. “Fair Market Value” per share as of a particular date is defined in the 2007 Plan as the closing price of our common stock as reported on a national securities exchange or the last transaction price on the reporting system or, if none, the average of the closing bid and asked prices of our common stock in the over-the-counter market or, if such quotations are unavailable, the value determined by the board in its discretion in good faith.
The exercise period of incentive stock options or non-qualified options granted under the 2007 Plan may not exceed ten years from the date of grant thereof. Incentive stock options granted to a
person owning more than ten percent of the total combined voting power of our common stock will be for no more than five years.
The right to exercise an option granted under the 2007 Plan will be subject to the following vesting periods, subject to the optionee continuing to be an eligible participant and the occurrence of any other event (including the passage of time) that would result in the cancellation or termination of the option:
(i)
no portion of the option will be exercisable prior to four (4) months from the grant date;
(ii)
upon and after the expiration of one year from the grant date, the optionee may exercise up to one-half of the option granted; and
(iii)
the option will become exercisable on a cumulative basis as to the remaining half of the total option granted, two years from the grant date, so that the option will have become fully exercisable, subject to the optionee’s remaining an eligible participant, on the second anniversary of such grant date; and
(iv)
such additional vesting periods as may be determined by the board or committee in its sole discretion.
To exercise an option, the optionee must pay the full exercise price in cash, by check or such other legal consideration as may be approved by the committee. Such other consideration may consist of shares of common stock having a fair market value equal to the option price, cashless exercise, a personal recourse note, or in a combination of cash, shares, cashless exercise and a note, subject to approval of the committee.
An option may not be exercised unless the optionee then is an employee, consultant, officer, or director of our company or its subsidiaries, and unless the optionee has remained continuously as an employee, consultant, officer, or director of our company since the date of grant of the option. If the optionee ceases to be an employee, consultant, officer, or director of our company or its subsidiaries other than by reason of death, disability, or for cause, all options granted to such optionee, fully vested to such optionee but not yet exercised, will terminate three months after the date the optionee ceases to be an employee, consultant, officer or director of our company.
If the employee is terminated “for cause” (as that term is defined in the 2007 Plan), such employee’s options will terminate immediately on the date the optionee ceases employment or association.
If an optionee dies while an employee, consultant, officer or director of our company, or if the optionee’s employment, consultant, officer, or director status terminates by reason of disability, all options theretofore granted to such optionee, whether or not otherwise exercisable, unless earlier terminated in accordance with their terms, may be exercised at any time within one year after the date of death or disability of said optionee, by the optionee or by the optionee’s estate or by a person who acquired the right to exercise such options by bequest or inheritance or otherwise by reason of the death or disability of the optionee.
As of December 31, 2012, 212,000 options were outstanding under the 2007 Plan.
2011 Stock Option Plan. Our stockholders adopted the 2011 Stock Option Plan (the “2011 Plan”) on April 20, 2011, which permits the granting of options to purchase up to 750,000 shares. The terms and provisions of the 2011 Plan are identical to the 2007 Plan, except that the 2011 Plan provides for the granting of “formula options” to purchase 25,000
shares of common stock to our non-employee directors on the date on which such directors are first appointed by the board or elected by the stockholders. Immediately after the completion of each annual meeting of the stockholders of the Company, each non-employee member of the board will be awarded a formula option to purchase 25,000 shares of common stock. Formula options will have an option price equal to the fair market value of the common stock as of the date of such grant. The terms of the 2011 Plan, including the vesting provisions described above, will apply to all formula options granted. Formula options to purchase a total of 50,000 shares of common stock were granted on April 26, 2011, of which half vested April 20, 2012 and the remaining half vests April 20, 2013.
In addition, options to purchase a total of 700,000 shares of common stock were granted on May 16, 2011 and on November 17, 2011, of which one-half vested on the one-year anniversary of the grant date and the remaining half will vest on the two-year anniversary of the grant date.
As of December 31, 2012, 750,000 options were outstanding under the 2011 Plan.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Set forth below is information regarding the beneficial ownership of our common stock, as of March 26, 2013 by (i) each person whom we know owned, beneficially, more than 5% of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of our named executive officers, and (iv) all of the current directors and executive officers as a group.
We believe that, except as otherwise noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed. Unless otherwise indicated herein, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares beneficially owned.
A person is also deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of that security within 60 days of March 26, 2013 through the exercise of options or warrants, vesting of restricted stock, or through the conversion of another security. For purposes of calculating each person’s or group’s percentage ownership, shares of our common stock issuable upon the exercise of options or warrants, vesting of restricted stock or through conversion of another security within 60 days of March 26, 2013 are included as outstanding and beneficially owned for that person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
__________________
(1)
Based on 15,152,088 shares outstanding.
(2)
The address for this stockholder is 265 Turner Drive, Durango, Colorado 81303.
(3)
Includes 1,382,600 shares held of record by its wholly-owned subsidiary, Aspen Leaf Yogurt, LLC.
(4)
This stockholder entered into a Voting Agreement dated January 14, 2013 with , pursuant to which it agreed to vote its/his shares in order to ensure that, among other things, (i) the size of the U-Swirl board shall be eight directors; (ii) Henry Cartwright, Terry Cartwright and Ulderico Conte remain on the U-Swirl board for at least the first full year after the date of the Voting Agreement, and (iii) for so long as RMCF continues to beneficially own at least 10% of our outstanding common stock, at least a majority of the board shall consist of directors designated by RMCF. Neither the number of shares shown to be owned beneficially by this stockholder nor the percent of class gives effect to the Voting Agreement, which give the parties to that agreement the shared power to direct the voting of the shares owned by the parties.
(5)
The address for this stockholder is 1175 American Pacific #C, Henderson, Nevada 89074.
(6)
Includes 253,333 shares which are subject to forfeiture and vest at the rate of 20% per year beginning January 14, 2014. The shares may be voted while subject to the vesting requirements.
(7)
Includes 200,000 shares held of record by Gold Key Management Corp., 204,500 shares issuable upon the exercise of options that have vested or will vest within 60 days, and 14,000 shares issuable upon the exercise of warrants.
(8)
Includes 25,000 shares held by Mr. Conte’s wife, 204,500 shares issuable upon the exercise of options that have vested or will vest within 60 days, and 5,000 shares issuable upon the exercise of warrants.
(9)
Includes 204,500 shares issuable upon the exercise of options that have vested or will vest within 60 days.
(10)
Includes 613,500 shares issuable upon the exercise of options that have vested or will vest within 60 days and 19,000 shares issuable upon the exercise of warrants.
Changes in Control
There are no agreements known to management that may result in a change of control of our company.
Equity Compensation Plan Information
The following table sets forth information as of the end of the most recently completed fiscal year, December 31, 2012:
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Purchase of U-Swirl Frozen Yogurt Concept
On September 30, 2008, we acquired the worldwide rights to the U-Swirl Frozen Yogurt concept in exchange for 100,000 restricted shares of our common stock from a company then known as U-Swirl Yogurt, Inc. (now known as U Create Enterprises), which is owned by the grandchildren and family of Henry E. Cartwright. The shares were valued at $180,000, based on the fair market value of the stock on the date of acquisition. U Create Enterprises operates a frozen yogurt café in Henderson, Nevada, as our franchisee. As part of the terms of the acquisition, we agreed that no franchise fees or royalties would be charged with respect to this location, as it will permit us to use the location as a training facility. We did not obtain a formal valuation on the use of the Henderson location for training purposes, but we believed that being able to have our initial U-Swirl employees trained there and utilize the past experience of that location with respect to restaurant operation procedures and staffing, inventory and advertising was
critical to us at the time. In addition, we granted U Create Enterprises the right to open additional locations in Henderson, Boulder City and Pahrump, Nevada. U Create Enterprises will pay an initial franchise fee of $5,000 for each location and a 3% royalty on net sales. We were owed $7,048 and $6,765 as of December 31, 2012 and 2011, respectively, by u-Create Enterprises.
Area Development Agreement with RMR Group, LLC
On February 15, 2010, we entered into an area development agreement with RMR Group, LLC for the Monmouth County, New Jersey, development area. American Pacific Investments, Limited, which owns one-third of RMR Group, is a Nevada limited liability company whose members are Ulderico Conte, Terry A. Cartwright, Paul Heroy and Stan Cartwright. Ulderico Conte and Terry Cartwright are directors and officers of the Company, and Terry Cartwright and Stan Cartwright are the adult children of Henry E. Cartwright. RMR Group paid a $30,000 development fee, which was derived in accordance with our then existing policy of $15,000 plus $5,000 times the minimum number of units for an area development agreement. The minimum number of units for the Monmouth County area was determined to be three. We have entered into an amendment to the area development agreement to delay the development schedule by one year. RMR Group has identified a location for its initial café that has been involved in various construction delays which have further stalled the development of the area.
Area Development Agreement with Trust Owned by Director
On May 20, 2011, we entered into an area development agreement with Jimmy D. Sims and Nancy M. Sims 2001 Revocable Trust for the Colorado Springs, Colorado metropolitan statistical area (“Colorado Springs MSA”). Mr. Sims was a director when we entered into that agreement. The Trust paid a development fee of $30,000, which was derived in accordance with our then existing policy of $15,000 plus $5,000 times the minimum number of units for an area development agreement. The minimum number of units for the Colorado Springs MSA was determined to be three. The Trust has not committed to any café locations and may be open to transferring the area to a new area developer.
Future Transactions
All future affiliated transactions will be made or entered into on terms that are no less favorable to us than those that can be obtained from any unaffiliated third party. A majority of the independent, disinterested members of our board of directors will approve future affiliated transactions, and we will maintain at least two independent directors on our board of directors to review all material transactions with affiliates.
Director Independence
As of the date of this annual report, our common stock is not listed on any exchange. As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of the board of directors be independent. Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accordance with the Nasdaq Capital Market’s requirements for independent directors (Nasdaq Marketplace Rule 5605(a)(2)). The Nasdaq independence definition includes a series of objective tests, such as that the director is not an employee of the company and has not engaged in various types of business dealings with the company.
Scott G. Capdevielle, Franklin E. Crail, Clyde W. Engle, Bryan J. Merryman and Lee N. Mortenson are considered independent directors under the above definition. As they are considered our only independent directors at this time, the entire board of directors, rather than committees, acts on various items.
Item 14.
Item 14.
Principal Accounting Fees and Services
The fees billed for professional services rendered by our principal accountant are as follows:
FISCAL
AUDIT-RELATED
YEAR
AUDIT FEES
FEES
TAX FEES
ALL OTHER FEES
$51,000
$-0-
$-0-
$-0-
$51,000
$-0-
$-0-
$-0-
Pre-Approval Policies and Procedures
The board of directors must pre-approve any use of our independent accountants for any non-audit services. All services of our auditors are approved by our whole board and are subject to review by our whole board.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
Regulation
S-K Number
Exhibit
__________________
(1)
Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed January 18, 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 333-145360, filed March 25, 2008.
(6)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed February 8, 2008.
(7)
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.
(8)
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.
(9)
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, 2008, filed March 27, 2009.
(10)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed December 31, 2009.
*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 or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 29, 2013
/s/ Ulderico Conte
Ulderico Conte, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.