Quarterly Report (10-q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-53130

U-SWIRL, INC.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

43-2092180

(IRS Employer

Identification No.)

1175 American Pacific, Suite C, Henderson, Nevada 89074

(Address of principal executive offices) (Zip Code)

(702) 586-8700

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 15,152,088 shares of Common Stock, $0.001 par value, as of July 9 , 2013

U-SWIRL, INC.
CONSOLIDATED BALANCE SHEETS

	May 31, 2013			February 28, 2013
ASSETS	Unaudited

Current assets
Cash	$	453,217		$	358,527
Accounts receivable, net		181,988			113,681
Accounts receivable, related party		11,489			8,597
Inventory		101,982			98,511
Prepaid expenses		27,039			24,592
Total current assets		775,715			603,908

Leasehold improvements, property and equipment, net		2,130,138			2,235,716

Other assets
Deposits		43,762			39,086
Franchise rights		800,000			800,000
Other assets		37,627			39,153
Total other assets		881,389			878,239

Total assets	$	3,787,242		$	3,717,863


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable and accrued liabilities	$	528,555		$	653,161
Accounts payable, related party		30,137			11,792
Total current liabilities		558,692			664,953

Deferred rent		106,769			126,792
Deferred revenue		281,500			296,500
Deferred revenue, related party		30,000			30,000
Notes payable, related party		920,942			906,579
Total liabilities		1,897,903			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, 14,402,088 and 14,402,088 shares issued
and outstanding, respectively		14,402			14,402
Common stock payable		750			750
Prepaid equity-based compensation		(89,554	)		(94,399	)
Additional paid-in capital		9,065,487			9,042,111
Accumulated deficit		(7,101,746	)		(7,269,825	)
Total stockholders' equity		1,889,339			1,693,039

Total liabilities and stockholders' equity	$	3,787,242		$	3,717,863

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

U-SWIRL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

	For the Three Months Ended
	May 31, 2013			May 31, 2012

Revenues
Cafe sales, net of discounts	$	1,378,249		$	677,559
Franchise royalties and fees		339,157			124,846
Total revenues		1,717,406			802,405

Cafe operating costs
Food, beverage and packaging costs		451,482			220,252
Labor and related expenses		268,341			133,929
Occupancy and related expenses		248,343			113,564
Marketing and advertising		34,509			13,055
General and administrative		426,711			321,311
Depreciation and amortization		105,578			76,821
Total costs and expenses		1,534,964			878,932
Income (loss) from operations		182,442			(76,527	)

Interest income		-			60
Interest expense		(14,363	)		(112	)

Income (loss) from continuing operations before income taxes		168,079			(76,579	)
Provision for income taxes		-			-
Net income (loss)	$	168,079		$	(76,579	)

Net earnings (loss) per common share, basic and diluted	$	0.01		$	(0.02	)

Weighted average common shares outstanding,
basic and diluted		14,402,088			4,900,401

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

U-SWIRL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

	For the Three Months Ended
	May 31, 2013			May 31, 2012

Cash flows from operating activities:
Net income (loss)	$	168,079		$	(76,579	)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization		105,578			76,821
Accrued interest on notes payable, related party		14,363			-
Amortization of prepaid stock-based compensation		4,845			-
Issuance of common stock as compensation		-			7,920
Amortization of stock-based compensation		23,376			29,186
Changes in operating assets and liabilities:
Accounts receivable, net		(68,307	)		1,139
Inventory		(3,471	)		16,000
Prepaid expenses		(2,447	)		4,772
Deposits		(4,676	)		2,745
Accounts payable and accrued liabilities		(124,606	)		34,369
Accounts payable, related party		18,345			-
Deferred rent		(20,023	)		(20,941	)
Deferred revenue		(15,000	)		(40,000	)
Net cash provided by operating activities		96,056			35,432

Cash flows from investing activities:
Accounts receivable, related party		(2,892	)		1,461
Other assets		1,526			1,525
Net cash (used in) provided by investing activities		(1,366	)		2,986

Cash flows from financing activities:
Payments on capital lease obligation		-			(1,529	)
Net cash (used in) financing activities		-			(1,529	)

Net change in cash		94,690			36,889

Cash, beginning of period		358,527			215,136

Cash, end of period	$	453,217		$	252,025

Supplemental disclosure of cash flow information:
Interest paid	$	-		$	112
Income tax paid	$	-		$	-

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

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

1.	DESCRIPTION OF BUSINESS

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

In September 2008, the Company acquired the worldwide rights to the U-Swirl Frozen Yogurt TM 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 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.

As of May 31, 2013 the Company had the following locations:

	Number of locations
	U-Swirl	Aspen Leaf	Yogurtini	Total
Company-owned cafés	8	6	-	14
Franchised cafés	21	10	26	57
Total	29	16	26	71

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation. The interim results for the three months ended May 31, 2013 are not necessarily indicative of results for the full fiscal year.

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

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

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

Cash - The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of acquisition to be cash equivalents. There were no cash equivalents at May 31, 2013 or February 28, 2013.

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

Inventory - Inventories consisting of food, beverages, and supplies are stated at the lower of cost or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred. The Company did not incur significant charges to cost of sales for spoilage during the periods ended May 31, 2013 and February 28, 2013.

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 May 31, 2013 and February 28, 2013, the Company did not have any construction-in-process.

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

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 May 31, 2013.

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

Franchise Rights - The Company tests franchise rights for impairment annually, and more frequently if impairment indicators are present. Recoverability of the franchise rights is evaluated through comparison of the fair value of each of its reporting units with its carrying value. To the extent that a reporting unit’s carrying value exceeds the implied fair value of its franchise rights, an impairment loss is recognized. Based on its evaluation, the Company has determined that no impairment exists as of May 31, 2013.

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

The difference between the rent expense and the actual amount payable under the terms of the leases is recorded as a leasehold improvement asset and deferred rent liability on the Balance Sheets and as both an investing activity and a component of operating activities on the Statements of Cash Flows.

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

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

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

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

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.

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

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

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

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

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

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

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

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

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

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

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.

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

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 earnings (loss) per share for the periods presented is equivalent since the Company had continuing losses.

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

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

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

3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at May 31, 2013 and February 28, 2013:

	May 31, 2013			February 28, 2013
Accounts receivable	$	251,988		$	153,681
Allowance for doubtful accounts		(70,000	)		(40,000	)
Accounts receivable, net	$	181,988		$	113,681

4. INVENTORY

As of May 31, 2013 and February 28, 2013, inventory consisted of the following:

	May 31, 2013		February 28, 2013
Food and beverages	$	73,631	$	71,026
Paper products		28,351		27,485
Inventory	$	101,982	$	98,511

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

5. LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT

Leasehold improvements, property and equipment consisted of the following as of May 31, 2013 and February 28, 2013:

	May 31, 2013			February 28, 2013
Café equipment	$	1,176,845		$	1,176,845
Signage		112,395			112,395
Furniture and fixtures		308,698			308,698
Computer equipment		146,146			151,563
Vehicles		30,342			30,342
Leasehold improvements		1,578,757			1,578,757
		3,353,183			3,358,600
Less: accumulated depreciation		(1,223,045	)		(1,122,884	)
Leasehold improvements, property and equipment, net	$	2,130,138		$	2,235,716

Depreciation expense for the three months ended May 31, 2013 and 2012 was $105,578 and $76,821, respectively.

6. DEFERRED REVENUE

The Company deferred franchise fee and area development agreement fee income of $311,500 and $326,500 as of May 31, 2013 and February 28, 2013, 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 13.

7. 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 May 31, 2013, notes payable due to RMCF consisted of the following:

	Principal		Accrued Interest		Total

Non-recourse, secured, due 12/14/19	$	400,000	$	8,877	$	408,877
Full-recourse, secured, due 12/14/18		500,000		12,065		512,065
Balance, May 31, 2013	$	900,000	$	20,942	$	920,942

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.

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

The following table summarizes our note payable obligations as of May 31, 2013:

	Amount

2015	$	100,281
2016		148,830
2017		191,080
Thereafter		480,751
Total minimum payments		920,942
Less: current maturities		-

Long-term obligations	$	920,942

8. FRANCHISE ROYALTIES AND FEES

During the three months ended May 31, 2013 and 2012, the Company recognized the following franchise royalties and fees:

	May 31, 2013		May 31, 2012
Royalty income	$	192,006	$	69,002
Franchise fee income		15,000		30,000
Rebate income from purveyors that supply products to franchisees		89,581		25,844
Marketing fees		42,570		-
Franchise royalties and fees	$	339,157	$	124,846

9. OCCUPANCY AND RELATED EXPENSES

Occupancy and related expenses consist of the following for the three months ended May 31, 2013 and 2012:

	May 31, 2013		May 31, 2012
Rent	$	169,597	$	79,131
Real estate taxes, insurance and CAM fees		48,424		16,256
Utilities		30,322		18,177
Occupancy and related expenses	$	248,343	$	113,564

10. STOCKHOLDERS’ EQUITY

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 12.

On January 14, 2013, the Company granted 759,999 shares of restricted common stock to its officers 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.

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

During the two months ended February 28, 2013, the Company granted the following shares of restricted common stock 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

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

	Non-vested Shares	Weighted Average Grant Date Fair Value		Weighted Average Remaining Vesting Period

Outstanding - December 31, 2012	-	$	-	-
Granted	759,999		0.1275	5.00 years
Vested	-		-	-
Forfeited/Cancelled	-		-	-
Outstanding - February 28, 2013	759,999		0.1275	4.88 years
Granted	-		-
Vested	-		-
Forfeited/Cancelled	-		-
Outstanding - May 31, 2013	759,999	$	0.1275	4.63 years

During the three months ended May 31, 2013 and 2012, the Company expensed $4,845 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 May 31, 2013 those shares had not been issued and have been recorded to common stock payable.

11.	STOCK OPTIONS

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

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

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

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Average Intrinsic Value

Outstanding - December 31, 2012	962,000			0.36	3.58 years			-
Granted	-			-
Exercised	-			-
Forfeited/Cancelled	-			-
Outstanding - February 28, 2013	962,000		$	0.36	3.41 years		$	34,830
Granted	-			-
Exercised	-			-
Forfeited/Cancelled	(25,000	)		0.28
Outstanding - May 31, 2013	937,000		$	0.36	3.25 years		$	27,864
Exercisable - May 31, 2013	481,000		$	0.24	3.31 years		$	12,132

During the three months ended May 31, 2013 and 2012, the Company expensed $23,376 and $29,186 related to stock option grants, respectively.

12. WARRANTS

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 consideration paid for the franchise rights to the Aspen Leaf Yogurt and Yogurtini self-serve frozen yogurt chains. 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 share based compensation on the measurement date.

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

	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Average Intrinsic Value

Outstanding - December 31, 2012	5,111,500			5.31	1.45 years		$	18,000
Granted	9,110,250			4.61
Exercised	-			-
Forfeited/Cancelled	(150,000	)		6.12
Outstanding - February 28, 2013	14,071,750		$	4.61	1.32 years		$	52,245

U-SWIRL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MAY 31, 2013

UNAUDITED

	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Average Intrinsic Value

Granted	-			-
Exercised	-			-
Forfeited/Cancelled	(7,691,250	)		8.44
Outstanding - May 31, 2013	6,380,500		$	0.21	2.57 years		$	41,796
Exercisable - May 31, 2013	1,975,000		$	0.67	2.38 years		$	-

During the three months ended May 31, 2013 and 2012, the Company expensed $0 and $0 related to stock warrants issued, respectively.

13. RELATED PARTY TRANSACTIONS

The Company was owed $11,489 and $8,597 as of May 31, 2013 and February 28, 2013, respectively, from a U-Swirl franchisee that is owned and operated by the grandchildren of the Company’s Chief Marketing Officer. The corporate secretary and treasurer of the franchisee is also the Company’s corporate secretary.

As of May 31, 2013 and February 28, 2013, the Company owed $30,137 and $0, respectively, to RMCF for inventories and various operating expenses. See also Note 7, Notes Payable, Related Party.

As of May 31, 2013 and February 28, 2013, the Company had deferred revenue of $30,000 and $30,000, respectively, from an area developer in which the Company’s Chief Executive Officer and Chief Operating Officer have a minority interest.

14. 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.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

History and Overview

We were incorporated under the laws of the state of Nevada on November 14, 2005 to own and operate EVOS fast food franchises as “Healthy Fast Food.” We opened two EVOS locations, using the proceeds from private placements and from our initial public offering that was completed in March 2008.

After experiencing continued operating losses with our EVOS restaurants, we decided to diversify into another healthy fast food concept and acquired the worldwide rights to U-Swirl Frozen Yogurt (“U-Swirl”) on September 30, 2008. We opened our first company-owned U-Swirl café in the Las Vegas MSA in March 2009, and we have since developed five more company-owned cafés in the Las Vegas MSA.

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

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

As of May 31, 2013, we had 14 company-owned cafés and 57 franchised cafés. Between June and July of 2013, we opened 4 additional franchised cafes for a total of 75 cafes in 24 different states. Management is focusing its efforts on nurturing its relationship with the ALY and Yogurtini franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.

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

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

Results of Operations

For the three months ended May 31, 2013, company-owned U-Swirl cafés generated $1,378,249 in sales, net of discounts, as compared to sales of $677,559 for the comparable period in 2012, an increase of 103%. The increase is due primarily to an increase in the number of company-owned locations - 14 for the 2013 period, as compared to 6 for the 2012 period.

Our 2013 café operating costs were $968,166 or 70% of net sales revenues, resulting in café operating profit of $410,083. For 2012, our café operating costs were $467,745, or 69% of net sales revenues, resulting in café operating profit of $209,814.

For 2013, we generated franchise fee income of $15,000, royalty income of $192,006, rebate income of $89,581 and marketing fees of $42,570 as compared to franchise fee income of $30,000, royalty income of $69,002, rebate income of $25,844 and marketing fees of $0 in 2012. During the three months ended May 31, 2013, we had 57 franchised cafés in operation for all or part of that period, as compared to 18 during 2012.

Marketing and advertising expenses were $34,509 for the 2013 period as compared to $13,055 for the 2012 period. This increase is a result of an increased volume of print ads, radio advertising and store promotions offered during 2013 as well as the hiring of a full-time Franchise Business and Marketing Consultant.

For the three months ended May 31, 2013, general and administrative expense increased by $105,400 (33%) due to the hiring of a full-time Senior Vice President of Operations, as well as the retention of a consultant to facilitate the transition of our newly acquired franchisees and recent café openings.

Depreciation and amortization expense increased by $28,757, due to the inclusion of additional fixed assets purchased in connection with the acquisition of six additional company owned cafés in January 2013.

Primarily as a result of the increased revenues, we generated income from operations of $182,442 in 2013, as compared to a loss of $76,527 in 2012.

Interest expense increased by $14,251 for the 2013 period due to the $900,000 in promissory notes delivered to ALY in January 2013 as part of the consideration for the ALY frozen yogurt chain. Interest accrues on those notes at the rate of 6% per annum, compounded annually.

As a result of the factors described above, we generated net income of $168,079 for the 2013 period, as compared to a net loss of $76,579 for the comparable 2012 period.

Liquidity and Financial Condition

At May 31, 2013, we had working capital of $217,023 and cash of $453,217. At February 28, 2013, we had a working capital deficit of $61,045 and cash of $358,527.

For the three months ended May 31, 2013, we had net income of $168,079. Operating activities provided cash of $96,056, with the principal adjustment to reconcile the net income to net cash provided by operating activities being depreciation and amortization of $105,578. During the comparable 2012 period, we had a net loss of $76,579, and operating activities provided cash of $35,432. The principal adjustment to reconcile the net loss to net cash provided by operating activities was depreciation and amortization of $76,821.

During 2013, investing activities used cash of $1,366, primarily due to an increase in amounts due from U Create Enterprises, a related party, for supplies it purchased from us. In comparison, investing activities provided cash of $2,986 during the 2012 period primarily due to the repayment of amounts due from U Create Enterprises.

Financing activities did not provide or use any cash for the three months ended May 31, 2013. During the comparable 2012 period, we used $1,529 for payments on a capital lease obligation.

Accounts receivable increased from $113,681 at February 28, 2013 to $181,988 at May 31, 2013, as a direct result of the increase in rebate and royalty revenues.

Accounts payable, related party, increased from $11,792 at February 28, 2013 to $30,137 at May 31, 2013. These are amounts owed to RMCF for inventories and various operating expenses.

At May 31, 2013 and February 28, 2013, we recorded a total of $311,500 and $326,500 of deferred revenue in connection with the development fees from area development agreements signed prior to those respective dates. Of the total amount deferred, and as reflected on the balance sheets, an allocation has been made to a related party classification. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories.

Contractual Obligations

The following table summarizes our obligations and commitments to make future payments for the periods specified as of May 31, 2013:

	Operating Leases			Notes Payable		Total

2014	$	470,377		$	-	$	470,377
2015		447,589			100,281		547,870
2016		55,402			148,830		204,232
2017		45,037			191,080		236,117
2018		45,973			202,544		248,517
Thereafter		32,806			278,207		311,013
Total minimum payments		1,097,184			920,942		2,018,126
Less: current maturities		(369,219	)		-		(369,219	)

Long-term obligations	$	727,965		$	920,942	$	1,648,907

The above table includes $500,000 in recourse promissory notes and $400,000 in non-recourse notes that we executed and delivered to ALY in January 2013 as part of the consideration for the ALY frozen yogurt chain. Interest accrues on the unpaid principal balances of the notes at the rate of 6% per annum, compounded annually, and the notes require monthly payments of principal and interest over a five-year period beginning January 2014 in the case of the recourse notes and January 2015 in the case of the non-recourse notes. Payment of the notes is secured by a security interest in the six ALY company-owned stores.

Plan of Operations

The amounts set forth in the Contractual Obligations table, together with approximately $135,000 per month to cover our fixed overhead expenses, are what we require to maintain our existing operations, which now include the ALY and Yogurtini chains. Although we have historically experienced losses from operations, including recently, based on our current projections which assume a continued increase in revenues, we believe that the operation of our 14 company-owned cafés and revenues from franchise royalties and fees will provide sufficient cash to maintain our existing operations indefinitely.

For the current fiscal year ending February 2014, we anticipate significantly increased revenues from franchise royalties and fees with the inclusion of the ALY and Yogurtini chains. We expect that our non-café operating expenses will increase over 2012 levels, as we do not anticipate achieving expected economy of scale savings until fiscal 2015 at the earliest. RMCF has agreed to loan us up to $250,000 during each fiscal year to support our working capital needs. Interest would accrue on this loan at the rate of 6% per annum and would be repaid no earlier than March 1, 2014 on terms to be negotiated with RMCF.

Summary of Significant Accounting Policies

Inventories. Inventories consisting of food, beverages and supplies are stated at the lower of cost (FIFO) or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred. We did not incur significant charges to cost of sales for spoilage during the periods ended May 31, 2013 and February 28, 2013.

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

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

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

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

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

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

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

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

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

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

●

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

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

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

●

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

●

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

Recently Issued Accounting Pronouncements

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6.

Exhibits

Regulation S-K Number	Exhibit
2.1	Asset Purchase Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
2.2	Membership Interest Purchase Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
3.1	Amended and Restated Articles of Incorporation (2)
3.2	Amended Bylaws (2)
3.3	Certificate of Amendment to Articles of Incorporation filed April 22, 2011(3)
4.1	Form of common stock certificate (4)
4.2	Form of Class C warrant (included in Exhibit 4.3)
4.3	Form of 2010 Warrant Agreement between the Registrant and Computershare Trust Company, N.A. (5)
4.4	Form of Representative’s Purchase Warrants (6)
4.5	Warrant issued to Rocky Mountain Chocolate Factory, Inc. (1)
10.1	2007 Stock Option Plan, as amended (2)
10.2	2011 Stock Option Plan (3)
10.3	Form of Recourse Notes (1)
10.4	Form of Non-Recourse Notes (1)
10.5	Form of Security Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC (1)
10.6	Investor Rights Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
10.7	Investor Rights Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
10.8	Voting Agreement among U-Swirl, Inc., Henry Cartwright, Ulderico Conte, Terry Cartwright, Rocky Mountain Chocolate Factory, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
10.9	Form of Employment Agreement between U-Swirl, Inc. and its executive officers (1)
10.10	Form of Restricted Stock Agreement (included in Exhibit 10.9)

Regulation

S-K

Number

Exhibit

10.11	Intercompany Advance Agreement between Rocky Mountain Chocolate Factory, Inc. and U-Swirl, Inc. dated March 27, 2013 (7)
31.1	Rule 13a-14(a) Certification of Chief Executive Officer and interim Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and interim Chief Financial Officer
101*	Financial statements from the Quarterly Report on Form 10-Q of U-Swirl, Inc. for the quarterly period ended May 31, 2013, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (iv) the Notes to Financial Statements

_____________________

(1)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed January18, 2013.

(2)	Incorporated by reference to the exhibits to the registrant’s registration statement on Form S-1, file number 333-145360, filed August 13, 2007.

(3)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed April 26, 2011.

(4)	Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed March 11, 2008.

(5)	Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed August 18, 2010.

(6)	Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed October 20, 2010.

(7)	Incorporated by reference to the exhibits to the registrant’s annual report on Form 10-K, file number 0-53130, for the fiscal year ended December 31, 2012, filed March 29, 2013 .

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.