U-SWIRL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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Prepaid
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Total
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Common Stock
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Stock Payable
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Equity-Based
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Additional
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Accumulated
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Stockholders'
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Shares
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Amount
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Shares
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Amount
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Compensation
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Paid-in Capital
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Deficit
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Equity
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Balance, December 31, 2011
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4,868,836
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$
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4,869
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-
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$
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-
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$
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-
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$
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7,815,030
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$
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(6,377,816
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)
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$
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1,442,083
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Issuance of common stock as compensation
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132,000
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132
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-
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-
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-
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29,128
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|
-
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29,128
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Amortization of equity-based compensation
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-
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-
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-
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-
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-
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116,745
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-
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116,745
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Net loss
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-
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-
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-
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-
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-
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-
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(514,425
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)
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(514,425
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)
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Balance, December 31, 2012
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5,000,836
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5,001
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-
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-
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-
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7,960,903
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(6,892,241
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)
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1,073,663
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Issuance of common stock related to Rocky Mountain Transaction
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8,641,253
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8,641
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-
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-
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-
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871,143
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-
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879,784
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Issuance of common stock as compensation
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759,999
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|
760
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-
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-
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(96,900
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)
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96,140
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-
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-
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Issuance of common stock for non-employee services
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-
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-
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750,000
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750
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|
-
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94,875
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|
-
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95,625
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|
|
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Amortization of prepaid equity-based compensation
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|
-
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|
|
|
-
|
|
|
|
-
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|
|
|
-
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|
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2,501
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-
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-
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2,501
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Amortization of equity-based compensation
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-
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-
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-
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-
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-
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19,050
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-
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19,050
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Net loss
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-
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-
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-
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-
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-
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-
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(377,584
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)
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(377,584
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)
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Balance, February 28, 2013
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14,402,088
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$
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14,402
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750,000
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$
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750
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$
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(94,399
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)
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$
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9,042,111
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$
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(7,269,825
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)
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$
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1,693,039
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The accompanying notes are an integral part of these financial statements.
U-SWIRL, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Two Months Ended
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For the Year Ended
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February 28, 2013
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February 29, 2012
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December 31, 2012
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Cash flows from operating activities:
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|
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Net loss
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$
|
(377,584
|
)
|
|
$
|
(98,340
|
)
|
|
$
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(514,425
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)
|
Adjustments to reconcile net loss to net cash used
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by operating activities:
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Depreciation and amortization
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70,146
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51,248
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308,361
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Accrued interest on notes payable, related party
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6,579
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-
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-
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Amortization of prepaid equity-based compensation
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2,501
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-
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-
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Issuance of common stock as compensation
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-
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3,960
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29,260
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Issuance of common stock for non-employee services
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95,625
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-
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-
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Amortization of equity-based compensation
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19,050
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19,457
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|
116,745
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Changes in operating assets and liabilities:
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Accounts receivable, net
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(40,476
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)
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(30,516
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)
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44,321
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Inventory
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(55,400
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)
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29,044
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|
|
42,555
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Prepaid expenses
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2,009
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|
|
2,408
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|
|
|
1,460
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Deposits
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|
54
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|
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|
3,671
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8,732
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Accounts payable and accrued liabilities
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364,807
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(13,527
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)
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|
70,555
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Accounts payable, related party
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11,792
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|
-
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-
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Deferred rent
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(11,439
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)
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(16,017
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)
|
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(100,675
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)
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Deferred revenue
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|
6,500
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|
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|
(40,000
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)
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|
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(115,000
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)
|
Net cash provided (used) by operating activities
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|
94,164
|
|
|
|
(88,612
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)
|
|
|
(108,111
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities:
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|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, related party
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|
|
(1,549
|
)
|
|
|
3,085
|
|
|
|
(283
|
)
|
Purchases of property and equipment
|
|
|
(2,187
|
)
|
|
|
-
|
|
|
|
(6,405
|
)
|
Other assets
|
|
|
1,017
|
|
|
|
1,017
|
|
|
|
6,101
|
|
Net cash provided (used) by investing activities
|
|
|
(2,719
|
)
|
|
|
4,102
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on capital lease obligation
|
|
|
-
|
|
|
|
(991
|
)
|
|
|
(4,641
|
)
|
Working capital received from Rocky Mountain Transaction
|
|
|
79,784
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided (used) by financing activities
|
|
|
79,784
|
|
|
|
(991
|
)
|
|
|
(4,641
|
)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Net change in cash
|
|
|
171,229
|
|
|
|
(85,501
|
)
|
|
|
(113,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
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|
|
187,298
|
|
|
|
300,637
|
|
|
|
300,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
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|
$
|
358,527
|
|
|
$
|
215,136
|
|
|
$
|
187,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
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|
|
|
|
|
|
|
|
Interest paid
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|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
828
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
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|
|
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activities related to Rocky Mountain Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment through issuance of notes payable
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|
$
|
900,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquisition of franchise rights through issuance of common stock
|
|
$
|
800,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these financial statements.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
1.
|
DESCRIPTION OF BUSINESS
|
U-Swirl, Inc., (the “Company”) was incorporated in the state of Nevada on November 14, 2005.
In September 2008, the Company acquired the worldwide rights to the U-Swirl Frozen Yogurt
SM
concept through its wholly-owned subsidiary, U-Swirl International, Inc. (“USI”).
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 (“ALY’’) 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 approximately 40% of the issued and outstanding common stock. Due to the significant minority interest, the fair value increments and decrements have not been included in the accompanying financial statements. As the accounting acquirer, RMCF will consolidate the Company’s results of operations in its financial statements.
In March 2013 USI opened two additional cafés in Reno, Nevada which were previously owned and operated by a U-Swirl franchisee. As of February 28, 2013 USI had the following locations:
|
Number of locations
|
U-Swirl
|
Aspen Leaf
|
Yogurtini
|
Total
|
Company-owned cafés
|
6
|
6
|
-
|
12
|
Franchised cafés
|
24
|
10
|
24
|
58
|
Total
|
30
|
16
|
24
|
70
|
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.
The accompanying financial statements include the two month transition period ended February 28, 2013.
Use of Estimates
- The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash
- The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of acquisition to be cash equivalents. There were no cash equivalents at February 28, 2013 and December 31, 2012, respectively.
The Company maintains cash balances at an institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. As of February 28, 2013 and December 31, 2012, no amounts were in excess of the federally insured limits, respectively.
Accounts Receivable
-
During the normal course of business, the Company extends credit to its franchisees for inventory, supplies and fees. The Company monitors its exposure to losses on accounts receivable and maintains an allowance for potential losses or adjustments. The Company reserves an amount based on
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
the evaluation of the aging of accounts receivable, detailed analysis of high-risk customer accounts, and the overall market and economic conditions of its customers. Past due accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due.
Inventory
- Inventories consisting of food, beverages, and supplies are stated at the lower of cost or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred. The Company did not incur significant charges to cost of sales for spoilage during the periods ended February 28, 2013 and December 31, 2012.
Prepaid Expenses
- Prepaid expenses include costs incurred for prepaid rents, insurance and professional fees.
Leasehold Improvements, Property and Equipment
- Leasehold improvements, property and equipment are stated at cost less accumulated depreciation. Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected as a gain or loss from operations.
The estimated useful lives are:
|
|
Café equipment
|
7 years
|
Signage
|
7 years
|
Furniture and fixtures
|
7 years
|
Computer equipment
|
5 years
|
Vehicles
|
5 years
|
Leasehold improvements
|
10 years
|
Company-owned cafés currently under development are accounted for as construction-in-process. Construction-in-process is recorded at acquisition cost, including leasehold improvements, equipment expenditures, professional fees and interest expenses capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-process is transferred to an appropriate asset. As of February 28, 2013 and December 31, 2012, the Company did not have any construction-in-process.
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of leasehold improvements, property and equipment or whether the remaining balance of property and equipment should be evaluated for possible impairment. Based on its evaluation, the Company has determined that no impairment exists as of February 28, 2013.
Deposits
- Deposits consist of security deposits for multiple locations and a sales tax deposit held with the state of Nevada.
Franchise Rights
-
The Company tests franchise rights for impairment annually, and more frequently if impairment indicators are present. Recoverability of the franchise rights is evaluated through comparison of the fair value of each of its reporting units with its carrying value. To the extent that a reporting unit’s carrying value
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
exceeds the implied fair value of its franchise rights, an impairment loss is recognized. Based on its evaluation, the Company has determined that no impairment exists as of February 28, 2013.
Deferred Rent
- Rent expense for company-owned café leases, which provide for escalating rents over the terms of the leases, is recorded on a straight-line basis over the lease terms. The lease terms began when the Company had the right to control the use of the property, which was before rent payments were actually due under the leases.
The difference between the rent expense and the actual amount payable under the terms of the leases is recorded as a leasehold improvement asset and deferred rent liability on the Balance Sheet and as both an investing activity and a component of operating activities on the Statements of Cash Flows.
Revenue Recognition Policy
- The Company recognizes revenue once pervasive evidence that an agreement exists; the product has been rendered; the fee is fixed and determinable; and collection of the amount due is reasonably assured.
Revenue from company-owned café sales is recognized when food and beverage products are sold. Café sales are reported net of sales discounts.
Revenue earned as a franchisor is derived from cafés in the Company’s worldwide territory and includes initial franchise fees and royalties. Initial franchise fee revenue from a the sale of a franchise is recognized when the Company has substantially performed or satisfied all of its material obligations relating to the sale up through the point at which the franchisee is able to open the franchised café, and the Company has no intention of refunding the entire initial franchise fee or forgiving an unpaid note for the entire initial franchise fee. Substantial performance has occurred when the Company has (a) performed substantially all of its initial services required by the franchise agreement, such as providing to the franchisee (1) a copy of the Operations Manual; (2) assistance in site selection and selection of suppliers of equipment, furnishings, and food; (3) lease review and comments about the lease; and (4) the initial training course to one or two franchisee representatives; and (b) completed all of its other material pre-opening obligations. The Company defers revenue from the initial franchise fee until (a) commencement of operations by the franchisee; or (b) if the franchisee does not open the franchised café, (1) the date on which all pre-opening services and obligations of the Company are substantially complete, or (2) an earlier date on which the franchisee has abandoned its efforts to proceed with the franchise operations, and in either situation, the franchisee is not entitled to, and is not given, a refund of the initial franchise fee. Royalties ranging from three to five percent of net café sales are recognized in the period in which they are earned.
Rebates received from purveyors that supply products to the Company's franchisees are included in franchise royalties and fees. Rebates related to company-owned cafés are offset against café operating costs. Product rebates are recognized in the period in which they are earned.
The Company also recognizes a marketing and promotion fee ranging from one to three percent of net Aspen Leaf Yogurt and Yogurtini 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.
Equity-based Compensation Expense
- The Company recognizes all forms of equity-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.
Equity-based payments, excluding restricted stock, are valued using a Black-Scholes option pricing model.
Equity-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 equity-based payment, whichever is
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
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 equity-based compensation, the Company considers the following variables:
·
|
The expected option term is computed using the “simplified” method.
|
·
|
The expected volatility is based on the historical volatility of its common stock using the daily quoted closing trading prices.
|
·
|
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
|
·
|
The Company has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in the foreseeable future.
|
·
|
The forfeiture rate is based on the historical forfeiture rate for its unvested stock options.
|
Income Taxes
- Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the statements of operations.
Earnings (Loss) per Share
- Basic earnings (loss) per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed using the weighted-average number of outstanding common stock during the applicable period. Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period.
The computation of basic and diluted loss per share for the periods presented is equivalent since the Company had continuing losses.
Fair Value of Financial Instruments
- The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows.
·
|
Level 1: Observable inputs such as quoted prices in active markets;
|
·
|
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
·
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company’s financial instruments consist of cash, accounts receivable, inventory, prepaid expenses, leasehold improvements, property and equipment, deposits, franchise rights, other assets, accounts payable, deferred rent, deferred revenue, and notes payable. The recorded values of cash, accounts receivable, inventory, prepaid expenses, and accounts payable approximate fair values due to the short maturities of such instruments. Recorded values for notes payable and related liabilities approximate fair values, since their stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.
The following table presents assets that were measured and recognized at fair value as of February 28, 2013:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements, property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
2,235,716
|
|
|
|
2,235,716
|
|
Franchise rights
|
|
|
-
|
|
|
|
-
|
|
|
|
1,021,711
|
|
|
|
1,021,711
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
39,153
|
|
|
|
39,153
|
|
Deferred rent
|
|
|
-
|
|
|
|
(126,792
|
)
|
|
|
-
|
|
|
|
(126,792
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
(326,500
|
)
|
|
|
-
|
|
|
|
(326,500
|
)
|
Notes payable
|
|
|
-
|
|
|
|
(906,579
|
)
|
|
|
-
|
|
|
|
(906,579
|
)
|
Totals
|
|
|
-
|
|
|
|
(1,359,871
|
)
|
|
|
3,296,580
|
|
|
|
1,936,709
|
|
Accounting Policy for Ownership Interests in Investees
- The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary corporation, after elimination of all material intercompany accounts, transactions, and profits.
New Accounting Pronouncements
- In January 2013, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosure about Offsetting Assets and Liabilities. The ASU clarifies disclosures required for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 310-20-45 or Section 815-10-46 or subject to an enforceable master netting arrangement or similar agreement. The ASU is effective for annual and interim periods beginning after January 1, 2013. The Company adopted this guidance in 2013 without 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 in 2013 without material impact on its financial position, results of operations or cash flows.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
Accounts receivable consisted of the following at February 28, 2013 and December 31, 2012:
|
|
February 28,
2013
|
|
|
December 31,
2012
|
|
Accounts receivable
|
|
$
|
153,681
|
|
|
$
|
83,205
|
|
Allowance for doubtful accounts
|
|
|
(40,000
|
)
|
|
|
(10,000
|
)
|
Accounts receivable, net
|
|
$
|
113,681
|
|
|
$
|
73,205
|
|
Bad debt expense for the two months ended February 28, 2013 and February 29, 2012 was $30,000 and $0, respectively.
4. INVENTORY
As of February 28, 2013 and December 31, 2012, inventory consisted of the following:
|
|
February 28,
2013
|
|
|
December 31,
2012
|
|
Food and beverages
|
|
$
|
71,026
|
|
|
$
|
28,321
|
|
Paper products
|
|
|
27,485
|
|
|
|
14,790
|
|
Inventory
|
|
$
|
98,511
|
|
|
$
|
43,111
|
|
5. LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT
Leasehold improvements, property and equipment consisted of the following as of February 28, 2013 and December 31, 2012:
|
|
February 28,
2013
|
|
|
December 31,
2012
|
|
Café equipment
|
|
$
|
1,176,845
|
|
|
$
|
907,392
|
|
Signage
|
|
|
112,395
|
|
|
|
112,395
|
|
Furniture and fixtures
|
|
|
308,698
|
|
|
|
130,244
|
|
Computer equipment
|
|
|
151,563
|
|
|
|
107,367
|
|
Vehicles
|
|
|
30,342
|
|
|
|
30,342
|
|
Leasehold improvements
|
|
|
1,578,757
|
|
|
|
1,168,673
|
|
|
|
|
3,358,600
|
|
|
|
2,456,413
|
|
Less: accumulated depreciation
|
|
|
(1,122,884
|
)
|
|
|
(1,052,738
|
)
|
Leasehold improvements, property and equipment, net
|
|
$
|
2,235,716
|
|
|
$
|
1,403,675
|
|
Depreciation expense for the two months ended February 28, 2013 and February 29, 2012 was $70,146 and $51,248, respectively
and $308,361 for the year ended December 31, 2012.
6. BUSINESS ACQUISITION AND FRANCHISE RIGHTS
On January 14, 2013, the Company entered into agreements to acquire the franchise rights to the Aspen Leaf Yogurt and Yogurtini self-serve frozen yogurt chains from RMCF in exchange for 8,641,253 shares of common stock representing an approximate 60% controlling interest in the Company. Additionally, the Company issued a warrant to purchase up to 9,110,250 shares of common stock that allow RMCF to maintain its pro rata ownership interest if existing stock options and/or warrants are exercised. In connection with the aforementioned agreement, the Company also received cash from RMCF totaling $79,784 for working capital purposes.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
On that same date, the Company acquired the café assets, consisting of leasehold improvements, property and equipment, for six Aspen Leaf Yogurt cafés from RMCF in exchange for $900,000 in notes payable. The Company is currently operating each of the six Aspen Leaf Yogurt cafés and believes that collectively the stores have the potential to contribute to future operating results. Pursuant to the acquisition agreement, RMCF has agreed to reimburse the Company on a monthly basis, for a period of twelve months following the closing date, all operating losses, if any attributable to four of the six acquired cafes.
RMCF has been identified as the accounting acquirer and will consolidate the Company’s results of operations in its’ financial statements. As the Company has been identified as the acquired company and has a significant minority interest, the push-down accountings of the fair value increments and decrements have not been included in the accompanying financial statements.
The corresponding assets and liabilities were recorded using RMCF’s historical cost as of the date of transfer and consisted of the following:
Assets acquired:
|
|
Historic
Cost
|
|
Working capital
|
|
$
|
79,784
|
|
Leasehold improvements, property and equipment
|
|
|
900,000
|
|
Franchise rights – Yogurtini
|
|
|
800,000
|
|
Total assets acquired
|
|
|
1,779,784
|
|
Liabilities assumed:
|
|
|
|
|
Non-recourse notes payable
|
|
|
(400,000
|
)
|
Recourse notes payable
|
|
|
(500,000
|
)
|
Total liabilities assumed
|
|
|
(900,000
|
)
|
Total net assets acquired
|
|
$
|
879,784
|
|
Consideration paid:
|
|
|
|
|
8,641,253 shares of common stock and 9,110,250 warrants
|
|
|
879,784
|
|
Total consideration paid
|
|
$
|
879,784
|
|
7. NOTE RECEIVABLE
In September 2012, the Company entered into an agreement with a franchisee converting accounts receivable of $75,945 into a note receivable. The outstanding receivable represents delinquent royalty and franchise fees due to the Company. The note bears interest at a rate of 6% per annum and requires fixed weekly payments of $135 from September 2012 to May 2013 and increases to $325 a week from June 2013 to maturity in June 2018. Interest income for the two months ended February 28, 2013 and February 29, 2012 was $260 and $0, respectively.
On January 28, 2013 the franchisee defaulted on the note and although the Company will vigorously pursue collection of the total amount outstanding, the Company has recorded an allowance for the full note receivable balance.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
As of February 28, 2013 and December 31, 2012, the note receivable balance consisted of the following:
|
|
February 28,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Note receivable
|
|
$
|
75,264
|
|
|
$
|
75,264
|
|
Allowance for doubtful accounts
|
|
|
(75,264
|
)
|
|
|
(75,264
|
)
|
Note receivable, net
|
|
$
|
-
|
|
|
$
|
-
|
|
8. DEFERRED REVENUE
The Company deferred franchise fee and area development agreement fee income of $326,500 and $320,000 as of February 28, 2013 and December 31, 2012, respectively. Of the total amount deferred, and as reflected on the balance sheet, an allocation has been made to a related party classification. See Note 16.
An area developer has encountered delays in meeting the requirements of the area development agreement and the Company is currently in negotiations to resolve the delinquency. The area developer has outstanding receivables of approximately $40,000 and deferred revenue of $75,000 as of February 28, 2013.
9. NOTES PAYABLE, RELATED PARTY
On January 14, 2013,
in connection with the Rocky Mountain Transaction,
the Company purchased leasehold improvements, property and equipment for six Aspen Leaf Yogurt cafés from RMCF in exchange for $900,000 in notes payable. As of February 28, 2013, notes payable due to RMCF consisted of the following:
|
|
Principal
|
|
|
Accrued Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse, secured, due 12/14/19
|
|
$
|
400,000
|
|
|
$
|
2,924
|
|
|
$
|
402,924
|
|
Full recourse, secured, due 12/14/18
|
|
|
500,000
|
|
|
|
3,655
|
|
|
|
503,655
|
|
Balance, February 28, 2013
|
|
$
|
900,000
|
|
|
$
|
6,579
|
|
|
$
|
906,579
|
|
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.
The following table summarizes our note payable obligations as of February 28, 2013:
|
|
Amount
|
|
|
|
|
|
2015
|
|
$
|
85,918
|
|
2016
|
|
|
148,830
|
|
2017
|
|
|
191,080
|
|
Thereafter
|
|
|
480,751
|
|
Total minimum payments
|
|
|
906,579
|
|
Less: current maturities
|
|
|
-
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
906,579
|
|
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
10. FRANCHISE ROYALTIES AND FEES
During the two months ended February 28, 2013 and February 29, 2012, the Company recognized the following franchise royalties and fees:
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
Royalty income
|
|
$
|
69,636
|
|
|
$
|
29,626
|
|
Franchise fee income
|
|
|
-
|
|
|
|
40,000
|
|
Rebate income from purveyors
that supply products to franchisees
|
|
|
45,485
|
|
|
|
12,154
|
|
Marketing fees
|
|
|
15,175
|
|
|
|
-
|
|
Franchise royalties and fees
|
|
$
|
130,296
|
|
|
$
|
81,780
|
|
11. OCCUPANCY AND RELATED EXPENSES
Occupancy and related expenses consist of the following for the two months ended February 28, 2013 and February 29, 2012:
|
|
February 28,
2013
|
|
|
February 29,
2012
|
|
Rent
|
|
$
|
74,695
|
|
|
$
|
50,084
|
|
Real estate taxes, insurance and CAM fees
|
|
|
21,713
|
|
|
|
11,602
|
|
Utilities
|
|
|
14,705
|
|
|
|
11,792
|
|
Occupancy and related expenses
|
|
$
|
111,113
|
|
|
$
|
73,478
|
|
12. INCOME TAXES
Significant components of the Company’s deferred tax liabilities and assets as of February 28, 2013 and December 31, 2012 are as follows:
|
|
February 28,
2013
|
|
|
December 31,
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
377,584
|
|
|
$
|
514,425
|
|
Stock options and warrants issued for services
|
|
|
(19,050
|
)
|
|
|
(116,745
|
)
|
|
|
|
358,534
|
|
|
|
397,680
|
|
Income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
121,902
|
|
|
|
135,211
|
|
Less valuation allowance
|
|
|
(121,902
|
)
|
|
|
(135,211
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognizes deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. The Company has established a valuation allowance to reflect the likelihood of realization of deferred tax assets.
In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be utilized before their expiration. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
Company considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based on consideration of these items, the Company has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of February 28, 2013 and December 31, 2012. Accordingly, valuation allowances of $121,902 and $135,211 have been recorded, and the ending deferred tax asset was $0 and $0 at February 28, 2013 and December 31, 2012, respectively.
The Company files income tax returns in United States federal jurisdiction, the states of Arizona, Colorado, Illinois, Iowa, Tennessee, Texas and certain local jurisdictions.
13. STOCKHOLDERS’ EQUITY
During the year ended December 31, 2012, the Company granted 132,000 shares of restricted common stock to officers for services. The fair market value of the shares on the dates of grant totaled $29,260.
On January 14, 2013, the Company issued 8,641,253 shares of restricted common stock to RMCF in connection with the Rocky Mountain transaction. The estimated value of the shares issued totaled $879,784 representing the historic cost of net assets acquired.
As a result of the issuance, RMCF owns a 60% controlling interest in the Company
. Additionally, the Company issued a warrant to purchase up to 9,110,250 shares of its common stock to RMCF
to maintain its post-acquisition pro rata ownership interest in the Company upon the exercise of existing stock options and/or warrants. See Note 15.
On January 14, 2013, the Company granted 759,999 shares of restricted common stock to its officers and directors for services. In accordance with the terms of the grant, the shares vest at a rate of 20% per year for a five year period; are subject to forfeiture; and are issued at vesting. The Company has recorded prepaid stock-based compensation of $96,900 representing the estimated fair value on the date of grant, and will amortize the fair market value of the shares to officer compensation expense ratably over the five year vesting period.
The following is a summary of the Company’s 2013 restricted common stock grants that are subject to vesting and forfeiture:
|
|
|
|
Vesting Schedule
|
Date
|
|
Quantity Granted
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2013
|
|
759,999
|
|
151,999
|
|
152,000
|
|
152,000
|
|
152,000
|
|
152,000
|
|
|
759,999
|
|
151,999
|
|
152,000
|
|
152,000
|
|
152,000
|
|
152,000
|
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
The following is a summary of the Company’s non-vested restricted stock activity:
|
Non-vested Shares
|
|
Weighted Average
Grant Date
Fair
Value
|
|
Weighted Average
Remaining Vesting
Period
|
|
|
|
|
|
|
|
Outstanding - December 31, 2011
|
-
|
|
$
|
-
|
|
-
|
Granted
|
-
|
|
|
-
|
|
|
Vested
|
-
|
|
|
-
|
|
|
Forfeited/Cancelled
|
-
|
|
|
-
|
|
|
Outstanding - December 31, 2012
|
-
|
|
|
-
|
|
-
|
Granted
|
759,999
|
|
|
0.1275
|
|
5.00 years
|
Vested
|
-
|
|
|
-
|
|
|
Forfeited/Cancelled
|
-
|
|
|
-
|
|
|
Outstanding - February 28, 2013
|
759,999
|
|
$
|
0.1275
|
|
4.88 years
|
During the two months ended February 28, 2013 and December 31, 2012, the Company expensed $2,501 and $0 related to restricted common stock grants, respectively.
On February 12, 2013, the Company granted 750,000 shares of common stock to various directors for services. The fair market value of the shares on the date of grant totaled $95,625 based on the value of the services provided. As of February 28, 2013 those shares had not been issued and have been recorded to common stock payable.
On June 27, 2007, the stockholders of our Company adopted the 2007 Stock Option Plan which currently permits the granting of options to purchase up to 1,515,208 shares. The 2007 Stock Option Plan will remain in effect until it is terminated by the board of directors except that no incentive stock option will be granted after June 26, 2017. On April 20, 2011, the stockholders of our Company adopted the 2011 Stock Option Plan which permits the granting of options to purchase up to 750,000 shares.
The following is a summary of the Company’s stock option activity:
|
Options
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life
|
|
|
Average
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2011
|
1,230,750
|
|
|
$
|
1.24
|
|
4.58 years
|
|
|
$
|
-
|
Granted
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited/Cancelled
|
(268,750
|
)
|
|
|
4.40
|
|
|
|
|
|
|
Outstanding - December 31, 2012
|
962,000
|
|
|
|
0.36
|
|
3.58 years
|
|
|
|
-
|
Granted
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited/Cancelled
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding - February 28, 2013
|
962,000
|
|
|
$
|
0.36
|
|
3.41 years
|
|
|
$
|
34,830
|
Exercisable - February 28, 2013
|
506,000
|
|
|
$
|
0.34
|
|
3.40 years
|
|
|
$
|
17,415
|
|
|
February 28, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Grant date fair value of stock options
|
|
$
|
233,487
|
|
|
$
|
233,487
|
|
Weighted average grant date fair value
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options held by related parties
|
|
|
847,000
|
|
|
|
847,000
|
|
Exercisable stock options held by related parties
|
|
|
448,500
|
|
|
|
287,500
|
|
Fair value of stock options held by related parties
|
|
$
|
210,399
|
|
|
$
|
210,399
|
|
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
During the two months ended February 28, 2013 and February 29, 2012, the Company expensed $19,050 and $19,457 related to stock option grants, respectively.
During the two months ended February 28, 2013, the Company granted the following stock warrants:
Date
|
|
Quantity Granted
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
|
|
|
|
|
January 2013
|
|
9,110,250
|
|
$ 4.61
|
|
1.44 years
|
The above-referenced warrants were issued to RMCF as part of the Rocky Mountain Transaction. The warrant to purchase up to 9,110,250 shares of restricted common stock
a
llows RMCF to maintain its pro rata ownership interest in the Company if existing stock options and/or warrants are exercised. The warrants are only exercisable
in the event that an existing holder of the Company’s warrants or stock options exercises any such warrant or stock option.
In the event the warrants become exercisable, the fair value of the warrants will be recorded as equity based compensation on the measurement date.
See Note 6.
The following is a summary of the Company’s warrant activity:
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average Remaining
Contractual Life
|
|
Average
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2011
|
5,161,500
|
|
|
$
|
1.80
|
|
2.45 years
|
|
$
|
-
|
Granted
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
(50,000
|
)
|
|
|
7.50
|
|
|
|
|
|
Outstanding - December 31, 2012
|
5,111,500
|
|
|
|
5.31
|
|
1.45 years
|
|
$
|
18,000
|
Granted
|
9,110,250
|
|
|
|
4.61
|
|
|
|
|
|
Exercised
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited/Cancelled
|
(150,000
|
)
|
|
|
6.12
|
|
|
|
|
|
Outstanding - February 28, 2013
|
14,071,750
|
|
|
$
|
4.61
|
|
1.32 years
|
|
$
|
52,245
|
Exercisable - February 28, 2013
|
5,051,500
|
|
|
$
|
5.40
|
|
1.06 years
|
|
$
|
-
|
During the two months ended February 28, 2013 and February 29, 2012, the Company expensed $0 and $0 related to stock warrants issued, respectively.
16. RELATED PARTY TRANSACTIONS
The Company was owed $8,597 and $7,048 as of February 28, 2013 and December 31, 2012, respectively, from a U-Swirl franchisee that is owned and operated by the grandchildren of the Company’s Chief Marketing Officer. The corporate secretary and treasurer of the franchisee is also the Company’s corporate secretary.
As of February 28, 2013 and December 31, 2012, the Company owed $11,792 and $0, respectively, to RMCF for inventories and various operating expenses. See also Note 9, Notes Payable, Related Party.
U-SWIRL, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWO MONTHS ENDED FEBRUARY 28, 2013
As of February 28, 2013 and December 31, 2012, the Company had deferred revenue of $30,000 and $30,000, respectively, from an area developer in which the Company’s Chief Executive Officer and Chief Operating Officer have a minority interest.
17. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. Such matters can be subject to many uncertainties, and outcomes are not predictable with assurance. The Company is not aware of the existence of any such matters at February 28, 2013, and has not provided for any such contingencies, accordingly.
18. SUBSEQUENT EVENTS
Management evaluated all activity of the Company through the issue date of the financial statements and concluded that no other subsequent events have occurred that would require recognition or disclosure in the financial statements.