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

Form 10-Q
(Mark One)
[x]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012

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

Commission file number 0-53130


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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [x]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,978,836 shares of Common Stock, $0.001 par value, as of November 8, 2012


 
 

 
U-SWIRL, INC.
CONSOLIDATED BALANCE SHEETS

 
   
Unaudited
       
   
September 30, 2012
   
December 31, 2011
 
 ASSETS
           
             
Current assets
           
Cash
  $ 300,977     $ 300,637  
Accounts receivable, net
    78,307       117,526  
Due from related party
    4,245       6,765  
Current portion of note receivable
    6,061       -  
Inventory
    47,598       85,666  
Prepaid expenses
    44,027       28,061  
Total current assets
    481,215       538,655  
                 
Leasehold improvements, property and equipment, net
    1,475,270       1,705,631  
                 
Other assets
               
Deposits
    47,872       47,872  
Note receivable
    69,884       -  
Other assets
    41,695       46,271  
Total other assets
    159,451       94,143  
                 
Total assets
  $ 2,115,936     $ 2,338,429  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 251,441     $ 205,727  
Accounts payable and accrued liabilities from
               
discontinued operations
    12,072       12,072  
Current portion of long-term debt
    -       4,641  
Total current liabilities
    263,513       222,440  
                 
Deferred rent
    174,028       238,906  
Deferred revenue
    260,000       405,000  
Deferred revenue - related party
    30,000       30,000  
                 
Total liabilities
    727,541       896,346  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Preferred stock; $0.001 par value; 25,000,000 shares
         
authorized, no shares issued and outstanding
    -       -  
Common stock; $0.001 par value; 100,000,000 shares
         
authorized, 4,956,836 and 4,868,836 shares issued
         
and outstanding, respectively
    4,957       4,869  
Common stock payable
    11       -  
Additional paid-in capital
    7,924,488       7,815,030  
Accumulated deficit
    (6,541,061 )     (6,377,816 )
Total stockholders' equity
    1,388,395       1,442,083  
                 
Total liabilities and stockholders' equity
  $ 2,115,936     $ 2,338,429  
 
The accompanying notes are an integral part of these financial statements.
 
2

 
 
U-SWIRL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
   
Unaudited
   
Unaudited
 
   
For the three months ended
   
For the nine months ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
Revenues
                       
  Cafe sales, net of discounts
  $ 663,345     $ 693,701     $ 1,896,132     $ 1,973,059  
  Franchise royalties and fees
    169,872       109,102       445,143       239,595  
Total revenues
    833,217       802,803       2,341,275       2,212,654  
                                 
Cafe operating costs
                               
  Food, beverage and packaging costs
    210,138       222,561       612,573       617,105  
  Labor and related expenses
    158,350       162,263       439,929       464,039  
  Occupancy and related expenses
    116,319       118,986       329,560       349,595  
Marketing and advertising
    15,575       12,535       54,961       76,615  
General and administrative
    134,286       151,514       483,209       431,092  
Officer compensation
    118,515       129,482       353,646       357,827  
Depreciation and amortization
    76,719       76,748       230,361       230,160  
Total costs and expenses
    829,902       874,089       2,504,239       2,526,433  
Income (loss) from operations
    3,315       (71,286 )     (162,964 )     (313,779 )
                                 
Interest expense
    (41 )     (313 )     (281 )     (1,061 )
                                 
Income (loss) from continuing operations before income taxes
    3,274       (71,599 )     (163,245 )     (314,840 )
Provision for income taxes
    -       -       -       -  
Net income (loss)
  $ 3,274     $ (71,599 )   $ (163,245 )   $ (314,840 )
                                 
Net income (loss) per common share - basic and diluted
  $ 0.00     $ (0.01 )   $ (0.03 )   $ (0.07 )
                                 
Weighted average common shares outstanding -
                         
 basic and diluted
    4,944,879       4,811,781       4,911,591       4,778,288  
 
The accompanying notes are an integral part of these financial statements.

 
 
3

 
U-SWIRL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   
Unaudited
 
   
For the nine months ended
 
   
September 30, 2012
   
September 30, 2011
 
             
Cash flows from operating activities:
           
Net loss
  $ (163,245 )   $ (314,840 )
Adjustments to reconcile net loss to net cash used
               
by operating activities:
               
Depreciation and amortization
    230,361       230,160  
Issuance of common stock for services
    22,000       34,320  
Stock-based compensation expense
    87,557       29,474  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    39,219       (57,845 )
Inventory
    38,068       (46,227 )
Prepaid expenses
    (15,966 )     35,368  
Note receivable
    (75,945 )     -  
Accounts payable and accrued liabilities
    45,714       (11,970 )
Deferred rent
    (64,878 )     (55,234 )
Deferred revenue
    (145,000 )     67,583  
Net cash used by operating activities
    (2,115 )     (89,211 )
                 
Cash flows from investing activities:
               
Due from related party
    2,520       1,790  
Deposits
    -       19,771  
Purchases of property and equipment
    -       (7,375 )
Other assets
    4,576       4,576  
Net cash provided by investing activities
    7,096       18,762  
                 
Cash flows from financing activities:
               
Payments on capital lease obligation
    (4,641 )     (4,056 )
Net cash used by financing activities
    (4,641 )     (4,056 )
                 
Net change in cash
    340       (74,505 )
                 
Cash, beginning of period
    300,637       477,734  
                 
Cash, end of period
  $ 300,977     $ 403,229  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 281     $ 1,061  
Taxes paid
  $ -     $ -  
 
The accompanying notes are an integral part of these financial statements.
 
4

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED

1.
DESCRIPTION OF BUSINESS

U-Swirl, Inc., formerly Healthy Fast Food, Inc., (the “Company”) was incorporated in the state of Nevada on November 14, 2005.

U-Swirl Concept - In September 30, 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 September 30, 2012, the Company owned and operated six U-Swirl Yogurt cafés.  From the Company’s inception through September 30, 2012, the Company has sold the following:

   
 
Agreements
Franchise area development agreements (1)
13
Single-unit franchise agreements (2)
15
License agreement converted to a franchise agreement
1

(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.

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

The financial information as of December 31, 2011 is derived from the audited financial statements presented in the Company’s Annual Report on Form 10-K for the years ended December 31, 2011 and 2010.  The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the results of operations for the nine months ended September 30, 2012.
 
 
 
5

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
 
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting.  Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows.  It is management's opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation.  The interim results for the nine months ended September 30, 2012 are not necessarily indicative of results for the full fiscal year.

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 minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institutions. The Company believes it is not exposed to any significant credit risk on cash and short-term investments due to the temporary unlimited deposit insurance coverage at all FDIC-insured depository institutions through December 31, 2012.

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 September 30, 2012 and December 31, 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.  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:
Café equipment
7 years
Signage
7 years
Furniture and fixtures
7 years
Computer equipment
5 years
Vehicles
5 years
Leasehold improvements
10 years
 
 
 
6

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
 
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 September 30, 2012 and December 31, 2011, the Company did not have any construction-in-process.

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. 

Revenue Recognition Policy - 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 franchise sale 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.  
 
 
 
7

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
 
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.  Common stock equivalent shares are excluded from the computation if their effect is antidilutive. 
 
 
8

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
Fair Value of Financial Instruments - The Company discloses, when reasonably attainable, the fair market values of its assets and liabilities which are deemed to be financial instruments.  As of September 30, 2012 the carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature of such financial instruments.

Risks and Uncertainties - The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks and the potential risk of business failure.

Concentration of Risk - The Company’s operations and future business model are dependent in a large part on U-Swirl International, Inc.’s ability to execute its company-owned store and franchising business model.  U-Swirl International, Inc.’s inability to meet its obligations as company-owned store operator and franchisor may have a material adverse effect on the Company’s financial condition.

Geographic Concentration - As of September 30, 2012, all of the Company’s cafe sales are derived from its restaurants located in Southern Nevada, which may be impacted in the event of a decline in the local economy.

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

3.           GOING CONCERN

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.  The Company incurred a net loss of $163,245 for the nine months ended September 30, 2012, and has accumulated net losses totaling $6,541,061 since inception.

The Company has been developing company-owned stores, as well as a franchise network through the sale of franchises and establishment of area development agreements.  It has relied on fund raising and the sales of new franchises to augment the cash flow it receives from operating its company-owned stores.  The current economic conditions have resulted in lower-than-expected sales of new franchises, which have resulted in a significant decrease in its cash position.  
 
The Company’s ability to fund its operations will depend on the length of time of the current economic downturn, its future performance, and its ability to successfully implement its business and growth strategies.  In the event that it needs additional capital and is unable to obtain it, the Company could be left without sufficient liquidity.  The Company will continually monitor its operating and overhead expenses and reduce those expenses to match the revenue flow.  However, realization of a return on investment on company-owned stores, a significant portion of the assets in the accompanying balance sheet, is dependent on Company management’s ability to reach consistent and sustainable profitability.  The Company is also dependent on management’s ability to increase sales of new franchises and/or their ability to raise additional capital through a placement of its securities.

4.           ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at September 30, 2012 and December 31, 2011:

   
September 30,
2012
   
December 31,
2011
 
Accounts receivable
  $ 88,307     $ 146,526  
Allowance for doubtful accounts
    (10,000 )     (29,000 )
Accounts receivable, net
  $ 78,307     $ 117,526  
 
 
9

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
5.           INVENTORY

As of September 30, 2012 and December 31, 2011 inventory consisted of the following:

   
September 30,
2012
   
December 31,
2011
 
Food and beverages
  $ 21,972     $ 31,441  
Paper products
    25,626       54,225  
Inventory
  $ 47,598     $ 85,666  

6.           LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT

Leasehold improvements, property and equipment consisted of the following as of September 30, 2012 and December 31, 2011:

   
September 30,
2012
   
December 31,
2011
 
Café equipment
  $ 907,392     $ 907,392  
Signage
    112,395       112,395  
Furniture and fixtures
    130,244       130,244  
Computer equipment
    107,367       107,367  
Vehicles
    23,937       23,937  
Leasehold improvements
    1,168,673       1,168,673  
      2,450,008       2,450,008  
Less: accumulated depreciation
    (974,738 )     (744,377 )
Leasehold improvements, property and equipment, net
  $ 1,475,270     $ 1,705,631  

7.           DEPOSITS

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

8.           NOTE RECEIVABLE

In September 2012, the Company entered into an agreement with an area developer 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.

As of September 30, 2012 and December 31, 2011, the note receivable balance consisted of the following:
 
   
September 30,
2012
   
December 31,
2011
 
             
Total note receivable
  $ 75,945     $ -  
Less current maturities
    (6,061 )     -  
Net long-term note receivable
  $ 69,884     $ -  
 
 
10

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
9.
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 September 30, 2012 and December 31, 2011, were as follows:

   
September 30,
2012
   
December 31,
2011
 
Assets
  $ -     $ -  
Liabilities
    (12,072 )     (12,072 )
Net liabilities
  $ (12,072 )   $ (12,072 )

As of September 30, 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 September 30, 2012, until such time as both parties have accepted a formal agreement which officially terminates the franchise and area development agreements.

10.           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:

   
September 30,
2012
   
December 31,
2011
 
Leased equipment
  $ 23,937     $ 23,937  
Accumulated amortization
    (23,937 )     (19,296 )
Net capital lease
  $ -     $ 4,641  

Amortization of the asset under the capital lease is included in depreciation expense.

11.           DEFERRED REVENUE

The Company deferred franchise fee and area development agreement fee income of $290,000 and $435,000 as of September 30, 2012 and December 31, 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 17, 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 September 30, 2012.
 
 
11

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
12.           FRANCHISE ROYALTIES AND FEES

During the nine months ended September 30, 2012 and 2011, the Company recognized the following franchise royalties and fees:

   
September 30,
2012
   
September 30,
2011
 
Royalty income
  $ 217,779     $ 82,178  
Franchise fee income
    135,000       157,417  
Rebate income from purveyors
   that supply products to our franchisees
    92,364       -  
Franchise royalties and fees
  $ 445,143     $ 239,595  

13.           OCCUPANCY AND RELATED EXPENSES

Occupancy and related expenses consists of the following for nine months ended September 30, 2012 and 2011:
 
   
September 30,
2012
   
September 30,
2011
 
Rent
  $ 236,383     $ 242,757  
Real estate taxes, insurance and CAM fees
    41,262       49,855  
Utilities
    51,915       56,983  
Occupancy and related expenses
  $ 329,560     $ 349,595  

14.           STOCKHOLDERS’ EQUITY

During the nine months ended September 30, 2012, the Company granted 99,000 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 $22,000.  As of September 30, 2012, 11,000 of those shares had not been issued and are recorded as common stock payable.

15.
STOCK OPTIONS

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

 
Options
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Life
Average
Intrinsic Value
                   
Balance - December 31, 2011
1,230,750
   
$
1.24
   
$
-
Granted
-
   
$
-
       
Exercised
-
   
$
-
       
Forfeited/Cancelled
(268,750
)  
$
4.40
       
Outstanding - September 30, 2012
962,000
   
$
0.36
 
3.83 years
$
-

During the nine months ended September 30, 2012 and 2011, the Company expensed $87,557 and $29,474 related to stock option grants, respectively.
 
 
12

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED
16.
WARRANTS

The following is a summary of the Company’s warrant activity:
 
 
 
 
Warrants
   
Weighted
Average
Exercise Price
 
Weighted Average Remaining
Contractual Life
Average
Intrinsic Value
                   
Outstanding - December 31, 2011
5,161,500
   
$
     
$
-
Granted
-
   
$
-
       
Exercised
-
   
$
-
       
Forfeited/Cancelled
(50,000)
   
$
7.50
       
Outstanding - September 30, 2012
5,111,500
   
$
5.31
 
1.45 years
$
-

During the nine months ended September 30, 2012 and 2011, the Company expensed $0 and $0 related to stock warrants issued, respectively.

17.           RELATED PARTY TRANSACTIONS

The Company was owed $4,245 and $6,765 as of September 30, 2012 and December 31, 2011, respectively, from a U-Swirl franchisee that is owned and operated by the grandchildren of the Company’s Chief Executive Officer.  The corporate secretary and treasurer of the franchisee is also the Company’s corporate secretary.

As of September 30, 2012 and December 31, 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.
 
18.           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.  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.

19.           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 September 30, 2012, and has not provided for any such contingencies, accordingly.

 
 
13

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
UNAUDITED

20.           SUBSEQUENT EVENTS

On October 1, 2012, the Company issued 11,000 shares of common stock which was recorded to common stock payable as of September 30, 2012.

On October 31, 2012, the Company granted 11,000 shares of its $0.001 par value common stock to officers for services rendered.  The fair market value of the shares on the date of grant totaled $3,080.

 
14

 


ITEM 2.               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and the related notes included in this report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ significantly from those projected in the forward-looking statements as a result of many factors.

History and Overview

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.”

Shortly after signing a franchise agreement in December 2005 to operate an EVOS restaurant in Henderson, Nevada, we engaged in a private placement to raise the capital necessary to open the restaurant.  We sold 300,000 shares of common stock in the private placement, resulting in net proceeds of $544,878.  These proceeds, together with loans from related parties, were used to build out, open and operate the restaurant, which opened in October 2006.

In December 2006, we entered into an area representative agreement that gave us the exclusive right to develop EVOS restaurants in a 12-state territory.  To maintain our exclusivity in the territory, we were required to open a minimum number of restaurants within certain timeframes through 2016.  These restaurants could be opened by us or by franchise owners that we identified and solicited.  From December 2006 to June 2007, we engaged in a second private placement of 389,450 shares of common stock, resulting in net proceeds of $1,552,127.  These proceeds were used to repay related party loans, pay some of the expenses of our initial public offering, fund our efforts to solicit franchise owners for our territory, and open another restaurant.

In March 2008, we completed an initial public offering of 1,000,000 units, each unit consisting of one share of common stock, one Class A warrant and two Class B warrants, resulting in gross proceeds of $5,100,000 and net proceeds of $4,002,840.  The net proceeds of the offering were intended to be used to open company-owned EVOS restaurants in the Las Vegas metropolitan statistical area (the “Las Vegas MSA”) during the following 12 to 18 months, as well as for marketing expenses, franchise development and working capital.  We opened our second restaurant in the Las Vegas MSA in December 2008, and our EVOS sub-franchisee in California opened its first restaurant in November 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 issued a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in certain states which require filing.  In July 2009, we entered into a franchise agreement for a café in Reno, Nevada, which opened in October 2009.  Our franchisee in Reno opened a second location in October 2010, and a third café in June 2011.  We also entered into franchise agreements for locations in Marietta, Georgia; Waco, Texas; and Philadelphia, Pennsylvania.  The Waco, Texas café opened in September 2011, the Jenkintown, Pennsylvania café opened in June 2012, and the Marietta, Georgia café opened in July 2012.  In addition, we have signed area development agreements as follows:

·     
Phoenix, Arizona for the development of a minimum of seven cafés by November 2011 (of which three have been opened in 2011), three more cafés by November 2012 and a total of 23 cafés by November 2019;
 
 
15

 
 
·     
Monmouth County, New Jersey for the development of a minimum of one café by February 2012, one more café by February 2013 and a total of three cafés by February 2014 (pursuant to an amended development schedule);
 
·     
Las Vegas, Nevada for the development of a minimum of one café by April 2011, one more café by April 2012 and a total of four cafés by April 2013;
 
·     
Boise, Idaho for the development of a minimum of one café by June 2011 (which opened in November 2010) and a total of two cafés by June 2012 (the second café having opened in June 2011 and the third café having opened in July 2011);
 
·     
Tucson, Arizona for the development of a minimum of one café by October 2011 (which opened in July 2011), one more café by October 2012 and a total of five cafés by October 2015;
 
·     
Orlando, Florida for the development of a minimum of one café by December 2011 (which opened in July 2011), one café by December 2012 and a total of four cafés by December 2014;
 
·     
Northern California for the development of a minimum of one café by January 2012 (which opened in June 2011) and a total of five cafés by January 2014;
 
·    
New Mexico for the development of a minimum of one café by May 2012 (which opened in February 2012) and a total of ten cafés by May 2015 (the second café having opened in March 2012 and the third café having opened in June 2012);
 
·     
Colorado Springs, Colorado for the development of a minimum of one café by May 2012 and a total of three cafés by May 2014;
 
·     
Montana for the development of a minimum of one café by June 2012 (which opened in January 2012) and a total of four cafés by June 2014 (the second café having opened in May 2012);
 
·     
Salt Lake City, Provo and Ogden, Utah for the development of a minimum of one café by September 2012 and a total of two cafés by September 2013 (with a total of three cafés being opened in 2011) ; and
 
·     
Houston, Texas for the development of a minimum of two cafés by December 2012 and a total of ten cafés by December 2015.
 
In some cases, our area developers have encountered delays with lease negotiations, licensing and permitting issues, and construction schedules.  We have chosen to continue to work with the developers, rather than enforce the development schedules contained in their respective agreements, in an effort to promote and support our franchising efforts.

We were not successful with the EVOS concept and ceased operating those restaurants under the EVOS concept in July 2009.  After briefly operating under a concept known as “Fresh and Fast,” we closed the two restaurants in August 2009, and have reflected activities related to this concept as discontinued operations in our financial statements.  Prior periods have been restated to conform to the current presentation.  We changed our name to “U-Swirl, Inc.” effective May 16, 2011.

Results of Operations
 
Three Months Ended September 30, 2012.  For the three months ended September 30, 2012, our U-Swirl cafés generated $663,345 in sales, net of discounts, as compared to $693,701 for the three months ended September 30, 2011.  The decrease in sales revenue is attributed to the continued high unemployment rate in the Las Vegas area where all of our cafés are located and increased competition from other frozen yogurt retailers.

 
16

 
Our 2012 café operating costs were $484,807, or 73% of net cafe sales revenues, resulting in café operating profit of $178,538, as compared to $503,810, or 73% of net cafe sales revenues in 2011, resulting in café operating profit of $189,891.

We also generated $35,000 in franchise fee income, $88,354 in royalty income, and $46,518 in rebate income for a total of $169,872 in franchise royalties and fees during the three months ended September 30, 2012.  During the three months ended September 30, 2011, we recognized $68,917 in franchise fee income and $40,185 in royalty income, for a total of $109,102.  Prior to 2012, we did not receive any payment discounts, rebates, and/or other types of remuneration from any suppliers based on purchases by our franchisees.  Beginning in January 2012, a supplier started paying rebate income based on purchases by our franchisees.  During the three months ended September 30, 2012, we had 23 franchised cafés in operation for the entire period and one franchised café in operation for a portion of the period.  During the comparable 2011 period, we had twelve franchised cafés in operation for the entire period and two franchised cafés in operation for a portion of the period.

Marketing and advertising expenses were $15,575 for the 2012 period as compared to $12,535 for the 2011 period.  This increase is a result of the larger volume of print ads and the creation of new social media applications for mobile phone users during the third quarter of 2012.

For the three months ended September 30, 2012, general and administrative expense decreased by $17,228 (11%) to $134,286 in part due to a $20,500 decrease in bad debt expense and a $43,360   decrease in legal fees.  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 expense for the 2012 period were credit card fees $14,336, repairs and maintenance $14,799, consulting fees $20,135, legal fees $13,620, and training and development $19,083.

Officer compensation for the 2012 period decreased by $10,967 (8%) to $118,515, in part due to the reclassification of our corporate trainers’ salary from officer salaries to training and development expense and also decrease in the valuation of the shares of common stock issued for services from $10,780 in 2011 to $8,140 in 2012.

Depreciation and amortization expense decreased slightly from $76,748 to $76,719.

We realized income of $3,315 from operations for the three months ended September 30, 2012, as compared to a loss of $71,286 for the comparable period in 2011, primarily as a result of the increase in franchise royalties and fees and the decrease in operating expenses.

As a result of the above, our net income for the three months ended September 30, 2012 was $3,274, as compared to a loss of $71,599 for the comparable 2011 period.

Nine Months Ended September 30, 2012.  For the nine months ended September 30, 2012, our U-Swirl cafés generated $1,896,132 in sales, net of discounts, as compared to $1,973,059 for the nine months ended September 30, 2011.  The decrease in sales revenue is attributed to the continued high unemployment rate in the Las Vegas area where all of our cafés are located and increased competition from other frozen yogurt retailers.

Our 2012 café operating costs were $1,382,062, or 73% of net cafe sales revenues, resulting in café operating profit of $514,070, as compared to $1,430,739, or 73% of net cafe sales revenues in 2011, resulting in café operating profit of $542,320.

We also generated $135,000 in franchise fee income, $217,779 in royalty income, and $92,364 in rebate income for a total of $445,143 in franchise royalties and fees during the nine months ended September 30, 2012.  During the nine months ended September 30, 2011, we recognized $157,417 in franchise fee income and $82,178 in royalty income, for a total of $239,595.  Prior to 2012, we did not
 
 
 
17

 
 
receive any payment discounts, rebates, and/or other types of remuneration from any suppliers based on purchases by our franchisees.  Beginning in January 2012, a supplier started paying rebate income based on purchases by our franchisees.  During the nine months ended September 30, 2012, we had 17 franchised cafés in operation for the entire period and seven franchised cafés in operation for a portion of the period.  During the comparable 2011 period, we had three franchised cafés in operation for the entire period and eleven franchised cafés in operation for a portion of the period.

Marketing and advertising expenses were $54,961 for the 2012 period as compared to $76,615 for the 2011 period.  This decrease is a result of the reduced volume of print ads, radio advertising and store promotions offered during the nine month period in 2012.

For the nine months ended September 30, 2012, general and administrative expense increased by $52,117 (12%) to $483,209 in part due to franchise consulting, training and development  (reflecting the inclusion of our corporate trainers salary as described above) and increased travel to franchised cafe locations, as described above.  The largest components of general and administrative expense for the 2012 period were credit card fees $36,019, repairs and maintenance $28,804, accounting fees $43,950, consulting fees $60,405, legal fees $58,569, and training and development $51,526.

Officer compensation for the 2012 period decreased slightly by $4,181 (1%) to $353,646, primarily due to the decrease in the valuation of the shares of common stock issued for services from $34,320 in 2011 to $22,000 in 2012 reflecting lower stock prices.

Depreciation and amortization expense increased slightly from $230,160 to $230,361.

Our loss from operations decreased by $150,815 for the nine months ended September 30, 2012, primarily as a result of the increase in franchise royalties and fees.

As a result of the above, our net loss for the nine months ended September 30, 2012 was $163,245, as compared to a loss of $314,840 for the comparable 2011 period.

Liquidity and Financial Condition

As of September 30, 2012.  At September 30, 2012, we had working capital of $217,702 and cash of $300,977, as compared to working capital of $316,215 and cash of $300,637 at December 31, 2011.

We had a net loss of $163,245 during the first nine months of 2012, and operating activities used cash of $2,115.  The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $230,361 and stock-based compensation of $87,557.  In comparison, operating activities used cash of $89,211 for the nine months ended September 30, 2011, and the principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $230,160 and stock-based compensation of $29,474.

Investing activities provided cash of $7,096 in 2012 as compared to $18,762 in 2011.  Pre-payments for inventory items are recorded as deposits.  When the items are received, they are then recorded as inventory and the amounts of prepayment are credited against deposits.  For 2011, we had deposit credits of $19,771, offset by $7,375 used to purchase signage and equipment for our new corporate headquarters located in Henderson, Nevada.  Other assets of $4,576 reflected for both the 2012 and 2011 periods is the amortization of an expense incurred to secure our Green Valley Ranch location.

Cash used by financing activities was $4,641 in 2012, as compared to cash used of $4,056 in 2011, resulting from payments on capital lease obligations.

The Company had deferred franchise fee and area representative agreement fee revenues of $290,000 as of September 30, 2012.  Per the terms of the agreements, the Company will recognize
 
 
18

 
 
franchise fee revenue upon the opening of each restaurant within the respective territories.

Accounts receivable decreased from $117,526 at December 31, 2011 to $78,307 at September 30, 2012, as a few of our franchisees owed royalties and payments for paper products at the end of the year.  During the current fiscal year, we arranged to have our franchisees purchase their paper products directly from the distributor rather than have us purchase the products in bulk, and have started to implement a system to collect our royalty payments from franchisees via regularly scheduled automatic electronic transfers.  In addition to these measures, we arranged to have one of our franchisees reduce amounts owed to us to a promissory note in the principal amount of $75,945, on which interest is charged at 6% per annum.  The note requires fixed weekly payments of $135 from September 2012 to May 2013 and increases to $325 per week from June 2013 to maturity in June 2018.  The decrease in inventory of $38,068 to $47,598 at September 30, 2012 is due to the implementation of the direct purchase arrangement.

The increase in prepaid expenses of almost $16,000 at September 30, 2012 reflects the timing of payment of prepaid rent and insurance premiums.
 
Going Concern

In its report prepared in connection with our 2011 financial statements, our independent registered public accounting firm included an explanatory paragraph stating that, because of our net loss of $673,394 for the year ended December 31, 2011, and accumulated net losses totaling $6,377,816 from inception to December 31, 2011, there is substantial doubt about our ability to continue as a going concern.  For the nine months ended September 30, 2012, our net loss was $163,245 and we had accumulated net losses of $6,541,061 from inception to September 30, 2012.  Our continued existence will depend on the duration of the current economic downturn, our future performance, and our ability to successfully implement our business and growth strategies and manage our franchise system.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Contractual Obligations

The following table summarizes our obligations and commitments to make future payments for the periods specified as of September 30, 2012:

 
 
Payments Due by Period
 
 
Contractual Obligations
 
Total
   
Less Than
1 Year
   
1-3 Years
   
3-5 Years
   
More Than
5 Years
 
Capital lease obligations
  $ -     $ -     $ -     $ -     $ -  
Operating lease obligations
    803,991       99,821       652,040       41,704       10,426  
Total
  $ 803,991     $ 98,821     $ 652,040     $ 41,704     $ 10,426  

Capital lease obligations are amounts owed under a lease agreement for our vehicle, which expired in October 2012.  Operating lease obligations are amounts owed under leases for our existing six company-owned U-Swirl cafés and our corporate headquarters in Henderson, Nevada.

Plan of Operations

The amounts set forth in the Contractual Obligations table, together with approximately $95,000 per month to cover our fixed overhead expenses, are what we require to maintain our existing operations.  We have historically experienced losses from operations, including recently, despite a continued increase in revenues. The operation of our six company-owned cafés and revenues from franchise royalties and fees do not yet provide sufficient cash to maintain our existing operations.  We have been forced to use our cash reserves to cover our operating expenses.

 
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For the current fiscal year, we have generated increased revenues from franchise royalties and fees but experienced decreased sales in our company-owned cafés.  In addition, we have not been able to hold our non-café operating expenses to fiscal 2011 levels.  We do not anticipate that we will be able to significantly reduce our fixed overhead expenses. For 2012, we added a national operations consultant which increased our general and administrative expenses.  We believe that with the assistance of this consultant, we can improve the performance of both company-owned cafés and those owned by franchisees.  Specifically, we are looking at ways to increase our revenue base and achieve improved operating efficiencies, including expansion through the continued sale of franchises, expansion through acquisition using our stock as consideration, possible joint venture arrangements, and additional product offerings.

The net proceeds from our secondary public offering were $410,704.  We had planned to use these proceeds to open one company-owned U-Swirl café in the southeastern area of the United States, thereby providing greater exposure for our U-Swirl brand.  However, since the completion of that offering, we have entered into a franchise agreement for a U-Swirl café in Marietta, Georgia, and an area development agreement for Orlando, Florida.  In addition, a significant portion of the proceeds have been used for working capital as we do not yet have profitable operations.  As described above, rather than focus our efforts on opening another company-owned U-Swirl café, we are concentrating on improving our operations.

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 September 30, 2012 and December 31, 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.  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.

Impairment of long-lived assts.  We periodically evaluate 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. 

Deposits.  At September 30, 2012 and December 31, 2011, deposits consisted of security deposits for multiple locations and a sales tax deposit held with the State of Nevada.  All deposits are carried at the lower of fair value or cost.

Revenue recognition policy.  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 a franchise sale 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
 
 
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initial franchise fee or forgiving an unpaid note for the entire initial franchise fee.  Substantial performance has occurred when hawse have (a) performed substantially all of our 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 of our pre-opening services and 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.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.


ITEM 4.  CONTROLS AND PROCEDURES

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

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


 
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PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

None.

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

During the quarter ended September 30, 2012, we issued 33,000 shares of common stock to three officers valued at $8,140.  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 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.          Other Information

None.

Item 6.
Exhibits

Regulation
S-K
Number
Exhibit
3.1
Amended and Restated Articles of Incorporation (1)
3.2
Amended Bylaws (1)
3.3
Certificate of Amendment to Articles of Incorporation filed April 22, 2011(2)
4.1
Form of common stock certificate (3)
4.2
Form of Class A warrant (included in Exhibit 4.5)
4.3
Form of Class B warrant (included in Exhibit 4.5)
4.4
Form of unit certificate (4)
4.5
Form of 2008 Warrant Agreement between the Registrant and Computershare Trust Company, N.A. (5)
4.6
Form of Class C warrant (included in Exhibit 4.7)
4.7
Form of 2010 Warrant Agreement between the Registrant and Computershare Trust Company, N.A. (6)
4.8
Form of Representative’s Purchase Warrants (7)
10.1
2007 Stock Option Plan, as amended (1)
10.2
Asset Purchase Agreement with U-Swirl Yogurt, Inc. Dated September 19, 2008 (8)
10.3
Area Development Agreement for Phoenix Arizona Metropolitan Statistical Area (9)
10.4
Area Development Agreement for Monmouth County, New Jersey (10)
10.5
Area Development Agreement for Tucson, Arizona (11)
10.6
Form of Franchise Agreement (11)
10.7
Area Development Agreement for Boise, Idaho (10)
10.8
2011 Stock Option Plan (2)
31.1
Rule 13a-14(a) Certification of Chief Executive Officer and interim Chief Financial Officer
 
 
 
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Regulation
S-K
Number
Exhibit
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and interim Chief Financial Officer
101*
Financial statement from the Quarterly Report on Form 10-Q of U-Swirl, Inc. for the quarterly period ended September 30, 2012, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (iv) the Notes to Financial Statements

(1)     
Incorporated by reference to the exhibits to the registrant’s registration statement on Form S-1, file number 333-145360, filed August 13, 2007.
(2)     
Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed April 26, 2011.
(3)     
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.
(4)     
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.
(5)     
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.
(6)     
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.
(7)     
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.
(8)     
Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K, file number 0-53130, filed September 22, 2008.
(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, 2009, filed March 31, 2010.
(10)  
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed June 25, 2010.
(11)  
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed May 26, 2010.

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



 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  U-SWIRL, INC.  
       
November 9, 2012
By:
/s/ Ulderico Conte  
    Ulderico Conte, Chief Executive Officer  
    and Interim Chief Financial Officer  


 
 
 
 
 
 
 
 
 
 
 
 
 
 
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