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EX-32.1 - EXHIBIT 32.1 - U-SWIRL, INC.ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - U-SWIRL, INC.ex31_1.htm
EX-21 - EXHIBIT 21 - U-SWIRL, INC.ex21.htm


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

FORM 10-K

þ  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 2014

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ___________

Commission File No. 000-53130

U-Swirl, Inc.
(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.¨ Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  ¨ Yes þ No

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. þ 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).  þ Yes  ¨No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 
 

 
 
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 þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨Yes   þNo

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $10,659,138 as of August 31, 2013

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:  17,815,484 shares of common stock as of May 31, 2014


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this annual report that are subject to risks and uncertainties.  These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives.  In some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” the negative of these words or other comparable words.  These statements are only predictions.  You should not place undue reliance on these forward-looking statements.  The forward-looking statements are qualified by their terms and/or important factors, many of which are outside our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made.  The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.  Neither we nor any other person assumes responsibility for the accuracy or completeness of these statements.  We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.  If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.
 


 
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U-SWIRL, INC.

FORM 10-K
FOR THE FISCAL YEAR
ENDED FEBRUARY 28, 2014

INDEX


   
Page
PART I
Item 1.
Business
4
Item 1A.
Risk Factors
13
Item 1B.
Unresolved Staff Comments
13
Item 2.
Properties
13
Item 3.
Legal Proceedings
13
Item 4.
Mine Safety Disclosures
13
     
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
Item 6.
Selected Financial Data
14
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
23
Item 8.
Financial Statements and Supplementary Data
23
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
50
Item 9A.
Controls and Procedures
50
Item 9B.
Other Information
52
     
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
52
Item 11.
Executive Compensation
55
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
60
Item 13.
Certain Relationships and Related Transactions, and Director Independence
61
Item 14.
Principal Accounting Fees and Services
63
     
 
PART IV
 
Item 15
Exhibits, Financial Statement Schedules
64
     
 
SIGNATURES
 
 
 
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PART I

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 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.

In January 2013, we entered into agreements to acquire Aspen Leaf Yogurt (“ALY”) café assets, consisting of leasehold improvements, property and equipment, for six Aspen Leaf Yogurt cafés and the franchise rights to 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, a warrant that allows RMCF to maintain its pro rata ownership interest if existing stock options and/or warrants are exercised, and promissory notes in the aggregate amount of $900,000 (the “RMCF Transaction”).

In March 2013, we opened two additional cafés in Reno, Nevada which were previously owned and operated by a U-Swirl franchisee.  In July 2013, we transferred the two company-owned Reno cafés to an existing franchisee from New Mexico and executed a new area development agreement covering all three cafés operated by this franchisee.

In October 2013, we acquired the assets of the Josie’s Self-Serve Frozen Yogurt system (“Josie’s”) from OnLincoln, LLC and Josie’s of Nevada, LLC.  There are currently eleven Josie’s cafés in operation.

In January 2014, we acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés.  CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of our common stock.  Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of our common stock.  We also acquired the business assets of another operator and franchisor of self-serve frozen yogurt cafés, Fuzzy Peach Franchising, LLC, in February 2014, thereby adding 17 cafés.  We paid $481,000 at closing, plus an earnout, based upon royalty income generated by Fuzzy Peach cafés over the next twelve months, that could increase the purchase price by up to another $349,000.  RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of our assets.
 
 
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The following table provides summary detail regarding our locations as of February 28, 2014, 13 of which were company-owned:
 
State/Province/
Foreign Country
Number of locations
 
U-Swirl
Aspen
Leaf
Yogurtini
Josie’s
CherryBerry
Yogli
Mogli
Fuzzy
Peach
Total
Arizona
5
 
5
2
     
12
Arkansas
       
3
   
3
California
1
           
1
Colorado
 
4
3
 
1
   
8
Connecticut
       
5
   
5
Florida
   
2
 
2
   
4
Georgia
   
1
 
2
21
 
24
Idaho
3
2
         
5
Illinois
 
1
   
7
2
 
10
Indiana
     
1
2
   
3
Iowa
 
1
   
11
   
12
Kansas
   
2
 
4
   
6
Kentucky
       
1
1
 
2
Michigan
       
1
   
1
Minnesota
       
33
   
33
Mississippi
2
           
2
Missouri
 
1
8
 
3
   
12
Montana
2
     
2
   
4
Nebraska
   
1
 
4
   
5
Nevada
9
   
2
     
11
New Jersey
   
1
       
1
New Mexico
2
1
   
1
   
4
New York
   
1
       
1
North Carolina
       
4
 
14
18
North Dakota
       
9
   
9
Ohio
1
   
1
1
   
3
Oklahoma
       
17
   
17
Pennsylvania
1
       
1
 
2
South Carolina
   
1
1
   
2
4
South Dakota
       
9
   
9
Tennessee
2
       
1
 
3
Texas
5
1
 
2
6
 
1
15
Utah
2
     
5
   
7
Virginia
   
2
1
     
3
Washington
1
 
1
       
2
Wisconsin
       
19
   
19
Wyoming
       
1
   
1
Canada
       
2
   
2
Pakistan
       
1
   
1
Turkey
       
1
   
1
Total
36
11
28
10
157
26
17
285

We are currently maintaining all seven franchise systems and providing marketing and franchise support to all existing U-Swirl, ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach franchisees.  We are in the process of nurturing our relationship with each of our 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.
 
 
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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 renew franchise disclosure documents of U-Swirl, Yogurtini, and CherryBerry for expansion of new locations.  We do, however, expect to open cafés of acquired brands already under franchise agreement, but not yet opened under those acquired brands.

Pursuant to the terms of acquisition, the former owners of Yogurtini and Fuzzy Peach have the right to earn additional compensation based on a formula of total royalty income generated from their respective locations open for more than a year that exceeds a specific threshold.  This provides the former owners with a financial incentive to sell and open additional locations.  While the number of Yogurtini and Fuzzy Peach branded locations may increase as a result, we intend to incentivize all prospective franchisees from any brand to open as U-Swirl branded frozen yogurt café. The former owners of Yogurtini were paid $472,398 as additional compensation under this arrangement for the fiscal year ended February 28, 2014.
 
Our long-term strategy is to expand the operation to critical mass and then operate as one 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 brands in the U-Swirl franchise system.
 
In March 2014, our wholly-owned subsidiary, Moxie Consumer Products, LLC, a Nevada limited liability company (“Moxie”), acquired the business assets of Moxie USA, LLC, which distributed beverage and gummies products, for an earnout of up to a total of 250,000 shares of our common stock (the “Moxie Acquisition”).  Moxie currently distributes beverage and gummies products in 15 states.  Our goal is to utilize Moxie Consumer Products as a more efficient way to provide complementary products such as beverages and gummies, which are sold as toppings, to franchisees as well as other retail clients.
 
Industry Background

We believe that U-Swirl offers two distinct market opportunities.  The first opportunity lies with the 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.  The second opportunity lies with the demographic more interested in an indulgent experience, which may be provided by U-Swirl and/or all its brands through co-branding with RMCF.

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:
 
·
TCBY – approximately 470 locations in the United States, now offering self-serve franchises
 
 
·
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
 
 
·
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
 
 
·
Sweet Frog – over 300 locations in the United States and abroad.
 
Several 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:
 
 
·
inside café-style seating for 50 people and outside patio seating, where feasible and appropriate;
 
 
·
spacious surroundings of 1,800 to 3,000 square feet;
 
 
·
16 to 20 flavors of frozen yogurt;
 
 
·
up to 70 toppings;
 
 
·
self-serve format allowing guests to create their own favorite snack; and
 
 
·
co-branding opportunities with RMCF.

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 Leaf, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach 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, such as the Moxie Acquisition.  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.
 
 
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We also 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.   We intend to pursue relationships for non-traditional locations through the development of U-Swirl-n-Go.  We also intend to differentiate ourselves by launching our e-commerce gift card site, ecarddeal.com, for the purpose of reaching loyal customers on their mobile devices and before they make a decision on where to purchase frozen yogurt.  Based on an analysis of population statistics, we believe that an estimated 3,000 U-Swirl franchised 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 13 company-owned cafés and 272 franchised cafés in operation, we now identify qualified candidates through referrals from other franchisees, inquiries on our web site, as well as through two web portals for franchise leads, and customers of U-Swirl, Aspen Leaf, Yogurtini, Josie’s, CherryBerry and Yogli Mogli 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.

After April 30, 2013, Yogurtini discontinued offering area developments and only offers 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;
 
 
·
Development Exclusivity:  The ADA provides for limited and conditional development exclusivity for the area covered by the ADA.  The exclusivity does not apply to:
 
·
Non-traditional café types (such as shopping mall food court or airport locations), or
 
·
Cafés acquired by the Company pursuant to a merger or acquisition;
 
 
·
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
 
 
·
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 U-Swirl franchisees pay a royalty ranging from 2% to 5% based on net sales.  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.  The acquired brands are charging the following royalties in their existing franchise and/or license agreements, which we will honor: Yogurtini – 5%, ALY – 4%, Josie’s – 3% to 6%, CherryBerry – 2.5% to 6%, Yogli Mogli - 6%, and Fuzzy Peach - 6%.  We intend to raise the franchise royalty rate to 6% for all brands upon renewal of the franchise disclosure document, which should be June 30, 2014.

The CherryBerry frozen yogurt franchise system offers the opportunity for franchisees to become development agents whereby they can sell franchises and service franchisees within their designated territory for a percentage of the initial fee, usually 50% of the total franchise fee, and a percentage of the monthly royalty fee, usually 33% of the total royalty fee charged.  We intend to honor the development agent contracts and offer the ability to continue to expand under the development agent model.

U-Swirl franchisees pay a 1% marketing fee based on net sales to support national and regional advertising efforts.  We also require franchisees to dedicate at least 1% of net sales to local advertising.  We intend to maintain these terms until we have determined the 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.
 
                                                                           

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.
 
 
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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 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. (also known as Dannon YoCream) and/or Honey Hill Farms, Inc.  U-Swirl will use its commercial best efforts to switch all franchisees to the YoCream International, Inc. product.  Currently, 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 U-Swirl franchise agreement has a 15-year term and may be renewed for up to two additional 15-year terms.  There may be circumstances in other brands when terms may differ from a 15-year term.  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.

U-Swirl-n-Go

We also intend to offer franchises for a limited-product store (a “U-Swirl-n-Go Store”) within a non-traditional location, such as a convenience store, airport, or hotel.  U-Swirl-n-Go Stores will typically offer two to six flavors of self-service yogurt, with customers filing containers with as much of one or more flavors as desired, selecting from over 40 toppings, and then paying by the ounce for the yogurt and toppings or a flat fee, as determined by the franchisee.  U-Swirl-n-Go Stores will typically occupy 50 square feet or less within the non-traditional location, and with no dedicated seating.

The total investment necessary to begin operation of a U-Swirl-n-Go Store franchise without an area development agreement is from $71,000 to $115,000.  This amount includes $20,000 that must be paid as the initial franchise fee.  Instead of a royalty based on a percentage of net sales, the royalty for a U-Swirl-n-Go Store will be $10,000 per year if paid in a lump sum in advance or $1,000 per month.  Instead of paying 1% of net sales to support national and regional advertising efforts, franchisees of U-Swirl-n-Go Stores will pay up to $150 per month. The first U-Swirl-n-Go location in the University of Nevada – Reno Student Union should open in the summer of 2014.  Due to the lack of experience and history in this segment of the industry, all terms of agreement are subject to change based on market conditions.

Ecarddeal.com

Ecarddeal.com will be used to sell gift cards for all the brands.   We intend to offer discounted gift card deals from time to time to existing customers.

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.
 
 
10

 
 
We are currently engaged in developing additional market development plans.  These plans will be used to develop franchise-owned 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.  ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach implement similar training programs for operations of their respective systems.  We have begun the process of comparison for best practice implementation.

Franchise support development will be the key personnel development strategy as the company intends to elevate the level of support for franchisees in the areas of store operations, store marketing initiatives, field support and visitation, development and understanding of profit and loss statements at the store level.

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:
 
 
·
Developing and implementing cost-effective new customer acquisition and customer loyalty programs;
 
 
·
Achieving and maintaining target cost of sales and labor costs and gross margins;
 
 
·
Incorporating café performance analytics with other relevant factors to refine criteria to provide predictive indicators for purposes of site selection for future cafés; and
 
 
·
Forecasting future performance.
 
 
11

 

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.  We have engaged RMCF for support services related to information technology and financial reporting services.  RMCF will provide integration of POS data to legible sales reports for management use.  RMCF will utilize reports to execute daily financial reporting services for U-Swirl, including accounts receivable and accounts payable.  Beginning April 1, 2014, RMCF began charging us $2,000 for the first month, $3,000 for the second month, $4,000 for the third month, and $5,500 for each month thereafter for as long as the services are provided.

Key data tracked and analyzed includes, but is not limited to:
 
 
·
Product sales and sales mix;
 
 
·
Customer and transaction counts; and
 
 
·
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:

 
·
“u-swirl FROZEN YOGURT and Design”;
 
·
“U-SWIRL FROZEN YOGURT”
 
·
“U-SWIRL”;
 
·
“U and Design”;
 
·
“WORTH THE WEIGHT”;
 
·
“FREQUENT SWIRLER”;
 
·
“YOGURTINI”;
 
·
“SERVE YO SELF”;
 
·
“BEST ON THE PLANET”;
 
·
“CHERRYBERRY self-serve yogurt bar”;
 
·
“YOGLI MOGLI”; and
 
·
“FUZZY PEACH”

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.

We have a pending application for registration of “U-SWIRL-N-GO” with the U.S. Patent and Trademark Office.

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.
 
 
12

 
 
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 40 full-time employees and 60 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 16 full-time employees as of May 8, 2014, consisting of our Chief Executive Officer, Chief Operating Officer, Chief Marketing Officer and personnel for each of the following functions: national operations, café operations, franchise development, finance, marketing and administration.  In addition, we had one part-time employee.

Item 1A.
Risk Factors

Not required for smaller reporting companies.

Item 1B.
Unresolved Staff Comments

Not required for smaller reporting companies.

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 five years expiring in July 2018.  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.
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.
Mine Safety Disclosures

Not applicable.

 
13

 

PART II

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 year ended December 31, 2012, the two-month period ended February 28, 2013, and the fiscal year ended February 28, 2014.  These quotations reflect inter-dealer prices quoted on the OTCQB without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions.

 
Bid Prices ($)
 
High
Low
2012 Fiscal Year:
   
March 31, 2012
$0.30
$0.10
June 30, 2012
$0.35
$0.15
September 30, 2012
$0.37
$0.17
December 31, 2012
$0.28
$0.18
     
2013 Transition Period:
   
February 28, 2013
$0.42
$0.20
     
2014 Fiscal Year:
   
May 31, 2013
$0.42
$0.30
August 31, 2013
$0.93
$0.33
November 30, 2013
$1.38
$0.60
February 28, 2014
$1.10
$0.62

On June 6, 2014, the closing price for the common stock on the OTCQB was $0.77 per share.

Holders and Dividends

As of May 31, 2014, there were 69 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 February 28, 2014, we issued 12,500 shares of our common stock to a former director pursuant to the exercise of a stock option granted under our 2007 Stock Option Plan.  We relied upon the exemption from registration contained in Section 4(2) of the Securities Act, as this person was deemed to be sophisticated with respect to the investment in the securities due to his financial condition and involvement in our business and had access to the kind of information which registration would disclose.

Item 6.
Selected Financial Data

Not required for smaller reporting companies.

 
14

 

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 six Aspen Leaf cafés and the franchise rights to Aspen Leaf Yogurt (“ALY”) and Yogurtini self-serve frozen yogurt chains from RMCF in exchange for a 60% controlling ownership interest in our company, promissory notes in the aggregate amount of $900,000, and a warrant that allows RMCF to maintain its pro rata ownership interest if any of our existing stock options and/or warrants are exercised (the “Rocky Mountain Transaction”).

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

In January 2014, we acquired the assets of the CherryBerry and Yogli Mogli frozen yogurt systems, thereby tripling the size of our self-serve frozen yogurt café network.  We also acquired the business assets of Fuzzy Peach frozen yogurt system in February 2014.
 
As of February 28, 2014, we had 13 company-owned cafés and 272 franchised cafés in 37 different states and three foreign countries.  Management is focusing its efforts on nurturing its relationship with the ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.

Management is also continuing its efforts to expand product offerings, including co-branding arrangements.  Some of the cafés will have co-branded RMCF products, while others may have co-branding arrangements with different entities.

In addition, we have recently launched the offering of U-Swirl-n-Go Store franchises, which are limited-product stores within non-traditional locations, such as convenience stores, airports, hotels and other mass gathering areas.  The initial investment for these franchises is substantially less and more flexible royalty fees, instead of fees based on a percentage of revenues, are offered.  We currently anticipate that the first U-Swirl-n-Go location will be opened in the summer of 2014.
 
 
15

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

Results of Operations
 
We have presented audited Consolidated Statements of Operations for the year ended February 28, 2014, the two months ended February 28, 2013 (the “2013 Transition Period”) and the year ended December 31, 2012 (the “2012 Fiscal Year”).  So that the readers of this report will have a better understanding of the changes in our results of operations for the 2014 fiscal year, we have included an unaudited consolidated statement of operations for the twelve months ended February 28, 2013 (the “2013 Fiscal Year”).  See Note 19 of our Notes to the Consolidated Financial Statements.

For the year ended February 28, 2014, our cafés generated $4,051,789 in sales, net of discounts, as compared to $433,084, $2,405,839 and $2,280,323 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.  The increase for the 2014 period was due primarily to an increase in the average number of company-owned cafés, which averaged twelve for 2014, versus seven for the 2013 Fiscal Year.

Our 2014 café operating costs were $3,186,089 or 79% of net sales revenues, resulting in café operating profit of $865,700.  For the 2013 Transition Period, café operating costs were $414,587 or 96% of net sales revenues, resulting in café operating profit of $18,497.  As discussed below, the spring and summer quarters are our busiest times of the year, and the two-month 2013 Transition Period represents our slowest months of the year.  As a result, our café operating costs as a percentage of revenues for that period were significantly higher than what we normally experience for an entire year of operations.  For the 2013 Fiscal Year, café operating costs were $1,902,184 or 79% of net sales revenues, resulting in café operating profit of $503,655, and for the 2012 Fiscal Year, café operating costs were $1,751,642 or 77% of net sales revenues, resulting in café operating profit of $528,681.  Management believes that the higher operating costs in 2014 and 2013 were due to the acquisition of six company-owned cafés in January 2013.  Management is working towards better operating efficiencies to achieve a 77% level.

For 2014, we generated franchise fee income of $68,111, royalty income of $879,312, rebate income of $387,507 and marketing fees of $141,930.  For the 2013 Transition Period, we generated franchise fee income of $0, royalty income of $69,636, rebate income of $45,485 and marketing fees of $15,175.  During the fiscal year ended February 28, 2014, we had 272 franchised cafés for all or part of that period, as compared to 58 franchised cafés in operation for all or part of the two months ended February 28, 2013 and 24 franchised cafés in operation for all or part of the year ended December 31, 2012.
 
We incurred $60,493 for franchise development expense in the 2014 period, which represents salaries and travel expenses for five individuals that we retained following the acquisition of CherryBerry and Yogli Mogli to support our growing franchise base.
 
Marketing and advertising expenses were $254,947 for the 2014 period, as compared to $9,399, $72,912, and $75,291 for the 2013 Transition Period, 2013 Fiscal Year, and 2012 Fiscal Year, respectively.  Marketing fees paid by our franchisees increase in accordance with system-wide sales.  Therefore, we spent more on store marketing expenses for the 2014 fiscal year as we had an average of 90 stores versus 30 stores most of the prior fiscal year.

For the year ended February 28, 2014, general and administrative expense was $1,693,597, as compared to $440,513, $1,463,577, and $1,183,733 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.  The increase in 2014 was due primarily to the increase in the growth of our Company.
 
 
16

 
 
Depreciation and amortization expense for the 2014 period was $520,979, as compared to $70,146, $327,259, and $308,361 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.  The increase in 2014 reflects the ownership of an average of twelve company-owned locations for the year, as compared to an average of seven company-owned locations for the prior year.

We incurred asset acquisition expenses of $619,435 for the year ended February 28, 2014, which represented legal fees associated with the acquisitions, due diligence fees for accountants and auditors, the expense of auditing the acquired companies, and the legal fees associated with updating our Franchise Disclosure Document to reflect the acquisitions.  In addition, we recorded a fair value adjustment of $1,290,790 in connection with the Note Payable to RMCF that funded the acquisition of the CherryBerry, Yogli Mogli and Fuzzy Peach assets.

As a result of the above, our loss from operations was $2,097,681 in 2014, as compared to $371,265, $787,679, and $514,806 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.

We borrowed from RMCF to fund the acquisition of the CherryBerry, Yogli Mogli and Fuzzy Peach assets.  Accordingly, interest expense for 2014 was $28,803, as compared to $6,579, $7,304, and $828 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.  This resulted in a net loss for 2014 of $2,126,484, as compared to $377,584, $793,669, and $514,425 for the 2013 Transition Period, 2013 Fiscal Year and 2012 Fiscal Year, respectively.

Liquidity and Capital Resources

At February 28, 2014, we had a working capital deficit of $391,289 and cash of $701,748.  At February 28, 2013, we had a working capital deficit of $61,045 and cash of $358,527.

In January 2013, in connection with the Rocky Mountain Transaction, we purchased leasehold improvements, property and equipment for six Aspen Leaf Yogurt cafés from RMCF in exchange for $900,000 in notes payable.  Interest accrues on the unpaid principal balances of the notes at the rate of 6% per annum, compounded annually, and the notes require monthly payments of principal and interest over a five-year period beginning January 2014 in the case of the recourse notes and January 2015 in the case of the non-recourse notes.  Payment of the notes is secured by a security interest in the six Aspen Leaf Yogurt cafés acquired.  In November 2013, the Company closed four of its under-performing company-owned Aspen Leaf Yogurt cafés and wrote off $400,000 in non-recourse notes payable together with accrued interest of $20,991.  Consistent with the non-recourse note agreements, we returned the assets underlying the notes to RMCF, the note holder.  We subsequently entered into an agreement to purchase certain assets salvaged from these closed locations.  We agreed to pay $177,500 to RMCF for the assets salvaged from these locations, which was approximately the predecessor cost of these assets.  In February 2014, we paid off the recourse notes.
 
In July 2013, we executed promissory notes with RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés.  Interest accrues on the notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction.  The notes require monthly payments of principal and interest over a five-year period beginning in October 2013.  Payment of the notes is secured by a security interest in all of the equipment purchased with the proceeds of the notes.  At February 28, 2014, the unpaid balance of these notes was $116,867.

In January 2014, we acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés.  CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of our common stock.  Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of our common stock.  RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of our assets.
 
 
17

 
 
Under the loan and security agreement with RMCF, RMCF agreed to loan us up to $7,750,000.  Interest accrues at the rate of 9% per annum, with the principal and unpaid accrued interest due January 16, 2016.  Payment of the loan is secured by a security interest in all of our assets.  RMCF charged an origination fee of $542,500, which accrued to the loan and is amortized over the life of the loan.  All payments of principal, interest and fees are payable in cash, shares of Series A Convertible Preferred Stock (the “Preferred Stock”), or a combination thereof, at the option of RMCF.  The rights and preferences of the Preferred Stock include cumulative dividends equal to 9% of the stated value of $0.90 per share, a liquidation preference, the right to vote with our common stock on all matters submitted for a vote to holders of the common stock, and the right to convert into shares of our common stock.  We may prepay up to $2,100,000 of the outstanding amounts due at our option and without penalty in cash from the proceeds raised from (i) advances on rebates from our yogurt suppliers and (ii) the exercise of outstanding stock options and warrants.  We also have the option to redeem all amounts owed under the loan agreement at any time after January 16, 2015 at the rate of 108% of the total amounts owed, by making payment in cash, shares of Preferred Stock, or a combination thereof, at the option of RMCF.  At February 28, 2014, we owed $8,513,166 to RMCF under the convertible note.

Subsequent to February 28, 2014, we redeemed our outstanding Class C Warrants, and 1,515,882 Class C Warrants were exercised for gross proceeds of $909,529.  We plan to use the proceeds to prepay amounts owed under the RMCF convertible note.

For the year ended February 28, 2014, we had a net loss of $2,126,484.  Operating activities provided cash of $1,733,751, with the principal adjustments to reconcile the net loss to net cash provided by operating activities being the fair value adjustment on the note payable to RMCF of $1,290,790  and depreciation and amortization of $520,979.  For the two months ended February 28, 2013, we had a net loss of $377,584.  Operating activities provided cash of $94,164, with the principal adjustments to reconcile the net loss to net cash provided by operating activities being issuance of common stock for non-employee services of $95,625 and depreciation and amortization of $70,146.  We used cash of $108,111 for operating activities for the year ended December 31, 2012, with the principal adjustments to reconcile the net loss of $514,425 being depreciation and amortization of $308,361 and amortization of stock-based compensation of $116,745.
 
During 2014, investing activities used cash of $7,758,620, primarily due to $6,267,035 for the purchase of franchise rights and intangible assets associated with the CherryBerry, Yogli Mogli and Fuzzy Peach acquisitions and $1,494,295 for property and equipment associated with those acquisitions and with the conversion of two company-owned stores into co-branded stores. During the two months ended February 28, 2013 and year ended December 31, 2012, investing activities used cash of $2,719 and $587, respectively.

Financing activities provided cash of $6,368,090 for the year ended February 28, 2014, with $8,335,795 being proceeds from the RMCF loan offset by $542,500 of capitalized loan origination fees and $1,532,803 in loan repayments.  Financing activities provided cash of $79,784 for the two months ended February 28, 2013, which consisted of working capital received in the RMCF Transaction.  For the year ended December 31, 2012, financing activities used cash of $4,641, consisting of payment on our capital lease obligation.
 
As a result of the acquisitions of CherryBerry, Yogli Mogli and Fuzzy Peach, our accounts receivable and accounts payable balances were significantly higher at February 28, 2014 than at February 28, 2013.  We picked up certain amounts as receivables, but also picked up the corresponding amounts as payables.  In addition, the overall growth of the Company, from 56 franchisees at February 28, 2013 to 272 at February 28, 2014, has increased our balances.  Accounts receivable increased from $113,681 at February 28, 2013 to $1,418,960 at February 28, 2014, due to $1,253,612 in gift card liability receivables and marketing funds owed to us by CherryBerry and Yogli Mogli.  Accounts payable increased from $653,161 at February 28, 2013 to $2,346,572 at February 28, 2014.  Included in the payables were most of the asset acquisition expenses.
 
 
18

 
 
At February 28, 2014, we recorded $1,688,647 of deferred revenue in connection with the development fees from area development agreements signed prior to that date, as compared to $326,500 at February 28, 2013.  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 February 28, 2014:

   
Operating
Leases
   
Notes
Payable
   
Total
 
                   
2015
  $ 590,310     $ 22,837     $ 613,147  
2016
    405,901       8,537,412       8,943,313  
2017
    217,876       25,741       243,617  
2018
    163,752       27,329       191,081  
2019
    146,833       16,714       163,547  
Thereafter
    17,623       -       17,623  
Total minimum payments
    1,542,295       8,630,033       10,172,328  
Less: current maturities
    (590,310 )     (22,837 )     (613,147 )
                         
Long-term obligations
  $ 951,985     $ 8,607,196     $ 9,559,181  

Plan of Operations

The amounts set forth in the Contractual Obligations table, together with approximately $175,000 per month to cover our fixed overhead expenses, are what we require to maintain our existing operations, which now include the ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach Frozen Yogurt chains.  Although we have historically experienced losses from operations, including recently, based on our current projections which assume a continued increase in revenues, we believe that the operation of our 13 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 2015, we anticipate significantly increased revenues from franchise royalties and fees with the inclusion of the ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach chains.  We expect that our non-café operating expenses will increase over 2014 levels, however we anticipate achieving some levels of economy of scale savings in fiscal 2015.  
 
We will continue to look for expansion opportunities through acquisitions, as we believe that the self-serve frozen yogurt industry is fragmented with many small, undercapitalized chains whose owners lack the ability to expand or a viable exit strategy.  Such acquisitions may be completed using cash, shares of our stock, or a combination of both for the purchase consideration.  In those cases, it is possible that our shares may be valued at less than the then current trading price for the stock.

While we have experienced profitable operations for the six months ended August 31, 2013, we note that we are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations.  Historically, the strongest sales of frozen yogurt have occurred in spring and summer months and our weakest sales have occurred during the winter months.  Accordingly, we incurred a net loss of $197,616 for the quarter ended November 30, 2013 and incurred an operating loss for the quarter ending February 28, 2014.  Our new co-branded locations with RMCF represent our efforts to address the seasonal fluctuations in sales, as demand for gourmet chocolate products is stronger during the fall, winter and spring seasons.
 
 
19

 
 
Critical Accounting Policies and Estimates

Accounts Receivable. During the normal course of business, we extend credit to our franchisees for inventory, supplies and fees.  An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which we perform our analysis is conducted on a franchisee by franchisee basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. We monitor the collectability of our accounts receivable on an ongoing basis by assessing the credit worthiness of our customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.

Inventory.  Inventories consisting of food, beverages, and supplies are stated at the lower of cost or market.  An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or market based on actual differences.  This inventory reserve is determined through analysis of items held in inventory, and, if the value of those items at cost is higher than their market value, we record an expense to reduce inventory to our actual market value.  The process by which we perform our analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential.  Cost is determined using the first-in, first-out method.

Leasehold Improvements, Property and Equipment.  Leasehold improvements, property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to ten years.  Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

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

Goodwill and Other Intangible Assets.  We record intangible assets acquired in a business combination under the acquisition method of accounting at their estimated fair values at the date of acquisition.  Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.  Other intangible assets are amortized over their estimated useful lives.

Goodwill is not amortized.  Instead goodwill is reviewed for impairment at least annually or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.  In assessing goodwill for impairment, we assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that fair value of a reporting unit is less than its carry amount.  Goodwill impairment exists when the carrying value of goodwill exceeds its implied fair value.

Other intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and reported separately from goodwill.  Intangible assets with definite lives are amortized over the estimated useful lives and tested for impairment when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred.  Intangible assets with definite lives are tested for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value.
 
 
20

 
 
Intangible assets are generally valued as the present value of estimated future cash flows expected to be generated from the asset using a risk-adjusted discount rate. Estimates and assumptions about future expected revenue and remaining useful lives of the assets are used when determining the fair value of our intangible assets.

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

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

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

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

Franchise and Royalty Fees.  Revenue earned as a franchisor is derived from cafés in our worldwide territory and includes initial franchise fees and royalties.  Initial franchise fee revenue from a the sale of a franchise is recognized when we have substantially performed or satisfied all of our material obligations relating to the sale up through the point at which the franchisee is able to open the franchised café, and we have no intention of refunding the entire initial franchise fee or forgiving an unpaid note for the entire initial franchise fee.  Substantial performance has occurred when we have (a) performed substantially all of 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 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 ranging from three to five percent of net café sales are recognized in the period in which they are earned.

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

Marketing Fees.  We also recognize a marketing and promotion fee ranging from one to three percent of net café sales which are included in franchise royalties and fees.

Marketing and Advertising Expense.  We engage in local and regional marketing efforts by distributing advertisements, coupons and marketing materials as well as sponsoring local and regional events.   We recognize marketing and advertising expense as incurred.  

Share-Based Compensation Expense.  We recognize all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.

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.
 
 
21

 
 
When computing fair value of share-based compensation, we consider 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.
 
 
·
We have not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the foreseeable future.
 
 
·
The forfeiture rate is based on the historical forfeiture rate for its unvested stock options.

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The ASU is effective for annual and interim periods beginning after January 1, 2013.  We adopted this guidance in 2013 without material impact on our financial position, results of operations or cash flows.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”  ASU 2013-11 amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed.  ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and early adoption is permitted.  We adopted this guidance without a material impact on our financial position, results of operations or cash flows.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. We are currently evaluating the new standard.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.
 
 
22

 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

Item 8.
Financial Statements and Supplementary Data



 
 
 
 
23

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of Directors and Stockholders of
U-Swirl, Inc. and Subsidiaries
Henderson, Nevada


We have audited the accompanying consolidated balance sheet of U-Swirl, Inc. and Subsidiaries (the “Company”) as of February 28, 2014, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.  The financial statements of U-Swirl, Inc. and Subsidiaries as of February 28, 2013, for the two months then ended, and for the year ended December 31, 2012, were audited by other auditors and whose report, dated May 24, 2013, expressed an unqualified opinion on those statements.

We conducted our audit 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 (“Internal Control”).  Our audit included consideration of Internal Control 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.  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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U-Swirl, Inc. and Subsidiaries as of February 28, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

EKS&H LLLP

June 13, 2014
Denver, Colorado

 
24

 
 
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 February 28, 2013 and December 31, 2012, and the consolidated statements of operations, stockholders’ equity, and cash flows for the two months ended February 28, 2013 and the year 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 February 28, 2013 and December 31, 2012, and the results of its operations and its cash flows for the two months ended February 28, 2013 and the year 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
May 24, 2013
Las Vegas, Nevada

 
25

 
 
U-SWIRL, INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
             
   
February 28, 2014
   
February 28, 2013
 
 ASSETS
           
             
Current assets
           
Cash
  $ 701,748     $ 358,527  
Accounts receivable, net
    1,418,960       113,681  
Accounts receivable, related party
    11,989       8,597  
Inventory
    118,219       98,511  
Prepaid expenses
    18,182       24,592  
Total current assets
    2,269,098       603,908  
                 
Leasehold improvements, property and equipment, net
    2,939,820       2,235,716  
                 
Other assets
               
Deposits
    72,185       39,086  
Goodwill and other intangible assets, net
    10,243,522       800,000  
Other assets
    541,645       39,153  
Total other assets
    10,857,352       878,239  
                 
Total assets
  $ 16,066,270     $ 3,717,863  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 2,346,572     $ 653,161  
Accounts payable, related party
    290,978       11,792  
Current portion of long-term debt, related party
    22,837       -  
Total current liabilities
    2,660,387       664,953  
                 
Deferred rent
    105,031       126,792  
Deferred revenue
    1,658,647       296,500  
Deferred revenue, related party
    30,000       30,000  
Notes payable, related party
    8,607,196       906,579  
Total liabilities
    13,061,261       2,024,824  
                 
Stockholders' equity
               
Preferred stock; $0.001 par value; 25,000,000 shares
               
authorized, no shares issued and outstanding
    -       -  
Common stock; $0.001 par value; 100,000,000 shares
               
authorized, 15,440,029 and 14,402,088 shares issued
               
and outstanding, respectively
    15,440       14,402  
Common stock payable
    4,278       750  
Prepaid equity-based compensation
    (75,019 )     (94,399 )
Additional paid-in capital
    12,456,619       9,042,111  
Accumulated deficit
    (9,396,309 )     (7,269,825 )
Total stockholders' equity
    3,005,009       1,693,039  
                 
Total liabilities and stockholders' equity
  $ 16,066,270     $ 3,717,863  

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

 
26

 

U-SWIRL, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                   
                   
   
For the Year Ended
   
For the Two Months Ended
   
For the Year Ended
 
   
February 28, 2014
   
February 28, 2013
   
December 31, 2012
 
                   
Revenues
                 
Café sales, net of discounts
  $ 4,051,789     $ 433,084     $ 2,280,323  
Franchise royalties and fees
    1,476,860       130,296       523,898  
Total revenues
    5,528,649       563,380       2,804,221  
                         
Café operating costs
                       
Food, beverage and packaging costs
    1,307,238       156,634       745,380  
Labor and related expenses
    1,109,734       146,840       571,954  
Occupancy and related expenses
    769,117       111,113       434,308  
Franchise development
    60,493       -       -  
Marketing and advertising
    254,947       9,399       75,291  
General and administrative
    1,693,597       440,513       1,183,733  
Depreciation and amortization
    520,979       70,146       308,361  
Asset acquisition expenses
    619,435       -       -  
Fair value adjustment
    1,290,790       -       -  
Total costs and expenses
    7,626,330       934,645       3,319,027  
Loss from operations
    (2,097,681 )     (371,265 )     (514,806 )
                         
Interest income
    -       260       1,209  
Interest expense
    (28,803 )     (6,579 )     (828 )
                         
Loss from continuing operations before income taxes
    (2,126,484 )     (377,584 )     (514,425 )
Provision for income taxes
    -       -       -  
Net loss
  $ (2,126,484 )   $ (377,584 )   $ (514,425 )
                         
Net loss per common share, basic and diluted
  $ (0.14 )   $ (0.03 )   $ (0.10 )
                         
Weighted average common shares outstanding,
                       
basic and diluted
    15,332,233       12,171,282       4,938,753  

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

 
27

 

U-SWIRL, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                                                 
                                                 
         
 
               
Prepaid
               
Total
 
   
Common Stock
   
Common Stock Payable
   
Stock-Based
   
Additional
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Compensation
   
Paid-in Capital
   
Deficit
   
Equity
 
Balance, December 31, 2011
    4,868,836     $ 4,869       -     $ -     $ -     $ 7,815,030     $ (6,377,816 )   $ 1,442,083  
                                                                 
Issuance of common stock as compensation
    132,000       132       -       -       -       29,128       -       29,260  
                                                                 
Amortization of stock-based compensation
    -       -       -       -       -       116,745       -       116,745  
                                                                 
Net loss
    -       -       -       -       -       -       (514,425 )     (514,425 )
                                                                 
Balance, December 31, 2012
    5,000,836       5,001       -       -       -       7,960,903       (6,892,241 )     1,073,663  
                                                                 
Issuance of common stock pursuant to Rocky Mountain Transaction
    8,641,253       8,641       -       -       -       871,143       -       879,784  
                                                                 
Issuance of common stock as compensation
    759,999       760       -       -       (96,900 )     96,140       -       -  
                                                                 
Issuance of common stock for non-employee services
    -       -       750,000       750       -       94,875       -       95,625  
                                                                 
Amortization of prepaid stock-based compensation
    -       -       -       -       2,501       -       -       2,501  
                                                                 
Amortization of stock-based compensation
    -       -       -       -       -       19,050       -       19,050  
                                                                 
Net loss
    -       -       -       -       -       -       (377,584 )     (377,584 )
                                                                 
Balance, February 28, 2013
    14,402,088       14,402       750,000       750       (94,399 )     9,042,111       (7,269,825 )     1,693,039  
                                                                 
Issuance of common stock payable
    750,000       750       (750,000 )     (750 )     -       -       -       -  
                                                                 
Issuance of common stock pursuant to option exercise
    50,000       50       -       -       -       16,200       -       16,250  
                                                                 
Issuance of common stock pursuant to warrant exercise, net of offering costs
    237,941       238       -       -       -       91,110       -       91,348  
                                                                 
Issuance of common stock pursuant to CherryBerry Acquisition
    -       -       4,000,000       4,000       -       3,056,000       -       3,060,000  
                                                                 
Issuance of common stock pursuant to Yogli Mogli Acquisition
    -       -       277,778       278       -       212,222       -       212,500  
                                                                 
Amortization of prepaid stock-based compensation
    -       -       -       -       19,380       -       -       19,380  
                                                                 
Amortization of stock-based compensation
    -       -       -       -       -       38,976       -       38,976  
                                                                 
Net loss
    -       -       -       -       -       -       (2,126,484 )     (2,126,484 )
                                                                 
Balance, February 28, 2014
    15,440,029     $ 15,440       4,277,778     $ 4,278     $ (75,019 )   $ 12,456,619     $ (9,396,309 )   $ 3,005,009  

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

 
28

 

U-SWIRL, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                   
                   
   
For the Year Ended
   
For the Two Months Ended
   
For the Year Ended
 
   
February 28, 2014
   
February 28, 2013
   
December 31, 2012
 
                   
Cash flows from operating activities:
                 
Net loss
  $ (2,126,484 )   $ (377,584 )   $ (514,425 )
Adjustments to reconcile net loss to net cash provided
                       
by operating activities:
                       
Depreciation and amortization
    520,979       70,146       308,361  
Fair value adjustment on notes payable, related party
    1,290,790       -       -  
Accrued interest on notes payable, related party
    28,803       6,579       -  
Amortization of prepaid stock-based compensation
    19,380       2,501       -  
Issuance of common stock as compensation
    -       -       29,260  
Issuance of common stock for non-employee services
    -       95,625       -  
Amortization of stock-based compensation
    38,976       19,050       116,745  
Changes in operating assets and liabilities:
                       
Accounts receivable, net
    (1,305,279 )     (40,476 )     44,321  
Inventory
    (19,708 )     (55,400 )     42,555  
Prepaid expenses
    6,410       2,009       1,460  
Deposits
    (33,099 )     54       8,732  
Accounts payable and accrued liabilities
    1,693,411       364,807       70,555  
Accounts payable, related party
    279,186       11,792       -  
Deferred rent
    (21,761 )     (11,439 )     (100,675 )
Deferred revenue
    1,362,147       6,500       (115,000 )
Net cash provided by (used in) operating activities
    1,733,751       94,164       (108,111 )
                         
Cash flows from investing activities:
                       
Accounts receivable, related party
    (3,392 )     (1,549 )     (283 )
Purchases of property and equipment
    (1,494,295 )     (2,187 )     (6,405 )
Purchases of goodwill and other intangible assets
    (6,267,035 )     -       -  
Decrease in other assets
    6,102       1,017       6,101  
Net cash used in investing activities
    (7,758,620 )     (2,719 )     (587 )
                         
Cash flows from financing activities:
                       
Payments on capital lease obligation
    -       -       (4,641 )
Working capital received from Rocky Mountain Transaction
    -       79,784       -  
Capitalized loan origination fees
    (542,500 )             -  
Proceeds from notes payable, related party
    8,335,795       -       -  
Repayments on notes payable, related party
    (1,532,803 )     -       -  
Proceeds from issuance of common stock
    107,598       -       -  
Net cash provided by (used in) financing activities
    6,368,090       79,784       (4,641 )
                         
Net change in cash
    343,221       171,229       (113,339 )
                         
Cash, beginning of period
    358,527       187,298       300,637  
                         
Cash, end of period
  $ 701,748     $ 358,527     $ 187,298  
                         
Supplemental disclosure of cash flow information:
                       
Interest paid
  $ 8,267     $ -     $ 828  
Income tax paid
  $ -     $ -     $ -  
Disposition of café assets in connection with café closings
  $ 400,000     $ -     $ -  
Forgiveness of non-recourse debt in connection with café closings
  $ (400,000 )   $ -     $ -  
                         
Supplemental disclosure of noncash investing and financing activities:
                       
Rocky Mountain Transaction:
                       
Acquisition of property and equipment through issuance
                       
of notes payable
  $ -     $ 900,000     $ -  
Acquisition of franchise rights through issuance of common stock
  $ -     $ 800,000     $ -  
                         
CherryBerry Acquisition:
                       
Acquisition of franchise rights and intangible assets
                       
through issuance of common stock
  $ 3,060,000     $ -     $ -  
                         
Yogli Mogli Acquisition:
                       
Acquisition of franchise rights and intangible assets
                       
through issuance of common stock
  $ 212,500     $ -     $ -  

The accompanying notes are an integral part of these financial statements.
 
 
29

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
NOTE 1 - DESCRIPTION OF BUSINESS

U-Swirl, Inc. was incorporated in the state of Nevada on November 14, 2005.  Its wholly-owned subsidiaries are U-Swirl International, Inc. (“U-Swirl”), which was incorporated in the state of Nevada on September 4, 2008, and Moxie Consumer Products, LLC (“Moxie”), a Nevada limited liability company which was organized in the state of Nevada on February 11, 2014 (collectively referred to as the “Company”).

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

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

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

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

In January 2014, the Company entered into business acquisitions with two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés.  CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of the Company’s common stock (the “CherryBerry Acquisition”).  Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of the Company’s common stock (the “Yogli Mogli Acquisition”).

The Company also entered into an asset acquisition with another operator and franchisor of self-serve frozen yogurt cafés, Fuzzy Peach Franchising, LLC (“Fuzzy Peach”), in February 2014, thereby adding 17 cafés.  The Company paid $481,000 at closing, plus an earn out, based upon royalty income generated by Fuzzy Peach cafés over the next twelve months, that could increase the purchase price by up to another $349,000.  RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of the Company’s assets.
 
 
30

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014

As of February 28, 2014 the Company had the following locations:

  Number of locations
 
U-Swirl
Aspen
Leaf
 
Yogurtini
 
Josie’s
Cherry-
Berry
Yogli
Mogli
Fuzzy
Peach
 
Total
Company-owned
    Cafés
6
2
-
-
1
4
-
13
Franchised cafés
30
9
28
10
156
22
17
272
Total
36
11
28
10
157
26
17
285

NOTE 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

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

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of acquisition to be cash equivalents.  There were no cash equivalents at February 28, 2014 or 2013.

Accounts Receivable

During the normal course of business, the Company extends credit to its franchisees for inventory, supplies and fees.  An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable, assessments of collectability based on historical trends, and an evaluation of the impact of current and projected economic conditions. The process by which the Company performs its analysis is conducted on a franchisee by franchisee basis and takes into account, among other relevant factors, sales history, outstanding receivables, customer financial strength, as well as customer specific and geographic market factors relevant to projected performance. The Company monitors the collectability of its accounts receivable on an ongoing basis by assessing the credit worthiness of its customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Estimates with regard to the collectability of accounts receivable are reasonably likely to change in the future.

 
31

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
Inventory

Inventories consisting of food, beverages, and supplies are stated at the lower of cost or market.  An inventory reserve is established to reduce the cost of obsolete, damaged and excess inventories to the lower of cost or market based on actual differences.  This inventory reserve is determined through analysis of items held in inventory, and, if the value of those items at cost is higher than their market value, the Company records an expense to reduce inventory to its actual market value.  The process by which the Company performs its analysis is conducted on an item by item basis and takes into account, among other relevant factors, market value, sales history and future sales potential.  Cost is determined using the first-in, first-out method.

Prepaid Expenses

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

Leasehold Improvements, Property and Equipment

Leasehold improvements, property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the estimated useful life of the asset, which range from five to ten years.  Leasehold improvements are amortized on the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

Company-owned cafés 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 expense capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-process is transferred to the appropriate asset group. As of February 28, 2014 and 2013, the Company did not have any construction-in-process.

The Company reviews its long-lived assets through analysis of estimated fair value whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’s policy is to review the recoverability of all assets, at a minimum, on an annual basis.  Based on its evaluation, the Company has determined that no impairment exists as of February 28, 2014 or 2013.

Deposits

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

Goodwill and Other Intangible Assets

The Company records intangible assets acquired in a business combination under the acquisition method of accounting at their estimated fair values at the date of acquisition.  Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.  Other intangible assets are amortized over their estimated useful lives.

Goodwill is not amortized.  Instead, goodwill is reviewed for impairment at least annually or on an interim basis between annual tests when events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.  In assessing goodwill for impairment, the Company assesses qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that fair value of a reporting unit is less than its carry amount.  Goodwill impairment exists when the carrying value of goodwill exceeds its implied fair value.
 
 
32

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
Other intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and reported separately from goodwill.  Intangible assets with definite lives are amortized over the estimated useful lives and tested for impairment when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred.  Intangible assets with definite lives are tested for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value.

Intangible assets are generally valued as the present value of estimated future cash flows expected to be generated from the asset using a risk-adjusted discount rate. Estimates and assumptions about future expected revenue and remaining useful lives of the assets are used when determining the fair value of the Company’s intangible assets.

Deferred Rent

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

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

Revenue Recognition Policy

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

Café Sales

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

Franchise Royalties and Fees

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

 
33

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
Rebates

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

Marketing Fees

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

Marketing and Advertising Expense

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

Share-Based Compensation Expense

The Company recognizes all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.

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

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

 
·
The expected option term is computed using the “simplified” method.
 
 
·
The expected volatility is based on the historical volatility of its common stock using the daily quoted closing trading prices.
 
 
·
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
 
 
·
The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.
 
 
·
The forfeiture rate is based on the historical forfeiture rate for its unvested stock options.
 
Income Taxes

The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years.  Based on its evaluation, the Company does not believe it will not have an income tax liability as of the end of its current fiscal year.

 
34

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
Earnings (Loss) per Share

Basic earnings (loss) per share is computed as net earnings (losses) divided by the weighted average number of common shares outstanding during each year. Diluted earnings (loss) per share reflects the potential dilution that could occur from common shares issuable through stock options and restricted stock units.
 
FAIR VALUE MEASUREMENTS
 
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
 
Level 1: Quoted prices are available in active markets for identical assets or liabilities;
 
Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or
 
Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.
 
The valuation policies are determined by the Controller and are approved by the Chief Executive Officer (the “CEO”).  Each quarter, the Controller and the CEO will update the inputs used in the fair value calculations and internally review the changes from period to period for reasonableness.
 
The Company has consistently applied the valuation techniques discussed below in all periods presented. The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of February 28, 2014 and 2013 by level within the fair value hierarchy:
 
February 28, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities
                       
  Convertible Note
  $ -     $ -     $ 7,969,399     $ 7,969,399  

February 28, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities
                       
  Convertible Note
  $ -     $ -     $ -     $ -  

 
35

 
 
The Company determined the fair value of the Convertible Note using the income valuation technique.  Because of the hybrid nature of the Convertible Note, the Company first valued the debt host contract, or straight “bond”, component using a discounted cash flow analysis, and then valued the compound embedded derivative features using a Flexible Monte Carlo simulation.  See Note 8 for discussion of the embedded features.  Significant inputs to the valuation model include the coupon rate, effective yield, volatility, expected return and implied equity value. The Company’s Convertible Note is included in the Level 3 fair value hierarchy because not all the significant inputs are directly or indirectly observable.
 
The following table summarizes the valuation techniques, models and significant unobservable inputs used for the Company’s Convertible Note (broken into its components), categorized within Level 3 of the fair value hierarchy:
 
Liabilities (at Fair Value)
 
Fair Value at February 28, 2014
Valuation techniques / Model
 
Unobservable inputs
         
 Bond component
 
$6,177,626
Income approach using discounted cash flow model
Effective yield ranging from 13.75% – 20%
         
Embedded conversion
features
 
$1,791,733
Income approach using flexible Monte Carlo simulation
Expected return ranging from 5% - 10%
Implied Equity Value ranging from 5% - 10%

 
Significant increases (decreases) in the unobservable inputs used in the fair value measurements would result in a significantly lower (higher) fair value measurement.
 
The following table sets forth a reconciliation of changes in the fair value of the Convertible Note classified as Level 3 in the fair value hierarchy:
 
 
Convertible Note
Balance as of February 28, 2013
$          -       .
   Purchases
$ 8,020,998
   Payments
($    988,000)
   Unrealized loss
$     936,401
Balance as of February 28, 2014
$ 7,969,399
 
Accounting Policy for Ownership Interests in Investees

The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, after elimination of all material intercompany accounts, transactions, and profits.

New Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350):Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that indefinite-lived intangible assets are impaired before calculating the fair value of the assets.  After assessment of certain qualitative factors, if it is determined to be more likely than not that an indefinite-lived asset is impaired, entities must perform the quantitative impairment test.  Otherwise, the quantitative test becomes optional.  The amended guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.  The Company adopted this guidance without a material impact on its financial position, results of operations or cash flows.
 
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income”. The ASU requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted this guidance without a material impact on its financial position, results of operations or cash flows.
                 
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 amends the guidance related to the presentation of unrecognized tax benefits and allows for the reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December 15, 2013, and early adoption is permitted. The Company adopted this guidance without a material impact on its financial position, results of operations or cash flows.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is currently evaluating the new standard.

 
36

 
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED FEBRUARY 28, 2014
 
NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at February 28, 2014 and 2013:

   
February 28,
2014
   
February 28,
2013
 
Accounts receivable, trade
  $ 175,348     $ 153,681  
Allowance for doubtful accounts, trade
    (10,000 )     (40,000 )
Accounts receivable, other
    1,253,612       -  
Accounts receivable, net
  $ 1,418,960     $ 113,681  
                 
Accounts receivable, related party
  $ 11,989     $ 8,597  

Accounts receivable, other consists of gift card liability receivables and marketing funds owed to us by CherryBerry and Yogli Mogli as a result of the respective business acquisitions.

NOTE 4 - INVENTORY

As of February 28, 2014 and 2013, inventory consisted of the following:

   
February 28,
2014
   
February 28,
2013
 
Food and beverages
  $ 61,108     $ 71,026  
Paper products
    28,054       27,485  
Supplies
    29,057       -  
Inventory
  $ 118,219     $ 98,511  

NOTE 5 - LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT

Leasehold improvements, property and equipment consisted of the following as of February 28, 2014 and 2013:

   
February 28,
2014
   
February 28, 2013
 
 
Café equipment
  $ 1,580,650     $ 1,176,845  
Signage
    112,395       112,395  
Furniture and fixtures
    461,026       308,698  
Computer equipment
    184,646       151,563  
Vehicles
    30,342       30,342  
Leasehold improvements
    2,079,227       1,578,757