MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and the related notes included in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those projected in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors,” “Business” and elsewhere in this prospectus.
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 (the “Rocky Mountain Transaction”).
In October 2013, we acquired the franchise rights to nine self-serve frozen yogurt cafés, and license agreements to two self-serve frozen yogurt cafés from Josie’s Frozen Yogurt, LLC (“Josie’s”).
In January 2014, we acquired the assets of the CherryBerry and Yogli Mogli frozen yogurt systems, thereby tripling the size of our self-serve frozen yogurt café network. We also acquired the business assets of Fuzzy Peach frozen yogurt system in February 2014.
As of the date of this prospectus, we had 13 company-owned cafés and 273 franchised cafés in 38 different states and four foreign countries. Management is focusing its efforts on nurturing its relationship with the ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.
Management is also continuing its efforts to expand product offerings, including co-branding arrangements. Some of the cafés will have co-branded RMCF products, while others may have co-branding arrangements with different entities.
In addition, we have recently launched the offering of U-Swirl-n-Go Store franchises, which are limited-product stores within non-traditional locations, such as convenience stores, airports, hotels and other mass gathering areas. The initial investment for these franchises is substantially less and more flexible royalty fees, instead of fees based on a percentage of revenues, are offered. We currently anticipate that the first U-Swirl-n-Go location will be opened in mid-2014.
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
Year Ended December 31, 2012.
For the year ended December 31, 2012, our U-Swirl cafés generated $2,280,323 in sales, net of discounts, as compared to sales of $2,342,027 for the prior fiscal year, a decrease of 3%. The decrease in sales was attributable to increased competition in the Las Vegas area and the continuing high rate of unemployment in the area.
Our 2012 café operating costs were $1,751,642 or 77% of net sales revenues, resulting in café operating profit of $528,681. For 2011, our café operating costs were $1,809,582, or 77% of net sales revenues, resulting in café operating profit of $532,445.
For fiscal 2012, we generated franchise fee income of $135,000, royalty income of $266,532, and rebate income of $122,366 as compared to franchise fee income of $182,500 and royalty income of $112,600 in fiscal 2011. During 2012, we opened 7 franchised cafés and had 24 franchised cafés in operation for all or part of that year. In comparison, we opened 13 franchised cafés during 2011 and had 17 franchised cafés for all or part of that year.
Marketing and advertising expenses were $75,291 for the 2012 period as compared to $95,542 for the 2011 period. This decrease is a result of the reduced volume of print ads, radio advertising and store promotions offered during 2012.
For the year ended December 31, 2012, general and administrative expense increased by $111,376 (19%) due to the recognition of a note receivable as uncollectible and also due to franchise consulting, training and development. We recorded an allowance for the full note receivable balance due to a franchisee’s default on the note in January 2013. During the fourth quarter of 2011, we engaged a national operations consultant to assist us with providing support to our franchisees, developing new product offerings, and increasing efficiencies of franchised operations through logistics, purchasing power, and operational improvements. The largest components of general and administrative expenses for the 2012 fiscal year were legal fees ($79,314), bad debt expense ($56,264), insurance ($51,876), accounting fees ($50,950), credit card fees ($47,051), repairs and maintenance ($33,379), cleaning supplies ($31,279), travel ($20,511), and office and postage expense ($19,459). In comparison, the largest components of general and administrative expenses for the 2011 fiscal year were legal fees ($110,251), accounting fees ($47,370), repairs and maintenance ($44,481), credit card fees ($43,921), insurance ($37,432), office and postage expense ($27,261), cleaning supplies ($25,319), and travel ($25,889).
Officer compensation for the 2012 fiscal year decreased by $24,822 (5%), as the value of stock issued for compensation was less in 2012 than in 2011. This expense included $88,930 and $90,440 of stock issued to our officers in 2012 and 2011, respectively.
Depreciation and amortization expense increased slightly (by $1,400), due to the inclusion of vehicles leased in 2012.
As a result of the increased revenues and decreases in operating expenses, our net loss decreased by $158,969 (24%) and our net loss for the year ended December 31, 2012 was $514,425, as compared to a loss of $673,394 for the comparable 2011 period.
Two Months Ended February 28, 2013.
For the two months ended February 28, 2013, company-owned U-Swirl cafés generated $433,084 in sales, net of discounts, as compared to sales of $307,568 for the comparable period in 2012, an increase of 41%. The increase is due primarily to an increase in the number of company-owned locations - 12 for the 2013 period, as compared to 6 for the 2012 period.
Our 2013 café operating costs were $414,587 or 96% of net sales revenues, resulting in café operating profit of $18,497. For 2012, our café operating costs were $264,045, or 86% of net sales revenues, resulting in café operating profit of $43,523.
For 2013, we generated franchise fee income of $0, royalty income of $69,636, rebate income of $45,485 and marketing fees of $15,175 as compared to franchise fee income of $40,000, royalty income of $29,626, rebate income of $12,154 and marketing fees of $0 in 2012. During the two months ended February 28, 2013, we had 58 franchised cafés in operation for all or part of that period, as compared to 18 during 2012.
Marketing and advertising expenses were $9,399 for the 2013 period as compared to $11,778 for the 2012 period. This decrease is a result of the reduced volume of print ads, radio advertising and store promotions offered during 2013.
For the two months ended February 28, 2013, general and administrative expense increased by $274,490 (322%) due to the issuance of shares to our non-employee directors valued at $95,625, legal fees in connection with the acquisition of the Yogurtini and Aspen Leaf franchise systems of $58,706, and consulting fees to facilitate the transition of our newly acquired franchisees of $32,786.
Officer compensation for the 2013 period increased by $5,354 (7%), due to the execution of employment agreements in January 2013 with our Chief Executive Officer, Chief Operating Officer and Chief Marketing Officer which provided increases in the cash and stock components of officer compensation.
Depreciation and amortization expense increased by $18,898, due to the inclusion of additional fixed assets purchased in connection with the acquisition of six additional company owned cafés in January 2013.
As a result of the increased operating expenses, our net loss was $377,584, an increase of $279,244 (284%) over the 2012 net loss of $98,340.
Nine Months Ended November 30, 2013.
For the nine months ended November 30, 2013, company-owned U-Swirl cafés generated $3,374,099 in sales, net of discounts, as compared to sales of $1,877,288 for the comparable period in 2012, an increase of 80%. The increase is due primarily to an increase in the number of company-owned locations - ranging from 8 to 14 for the 2013 period, as compared to 6 for the 2012 period.
Our 2013 café operating costs were $2,665,054 or 79% of net sales revenues, resulting in café operating profit of $709,045. For 2012, our café operating costs were $1,378,552, or 73% of net sales revenues, resulting in café operating profit of $498,736. During this period, several company-owned cafés experienced lower than expected sales while still incurring indirect labor, occupancy and related expenses. As a result, in November 2013, we closed four under-performing Aspen Leaf Yogurt cafés.
For 2013, we generated franchise fee income of $53,111, royalty income of $603,167, rebate income of $317,610 and marketing fees of $101,377 (a total of $1,075,265) as compared to franchise fee income of $95,000, royalty income of $222,297, rebate income of $102,520 and marketing fees of $0 (a total of $419,817) in 2012. During the nine months ended November 30, 2013, we had 77 franchised cafés in operation for all or part of that period, as compared to 24 during 2012.
Marketing and advertising expenses were $162,265 for the 2013 period as compared to $57,249 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 Marketing Consultant and a full-time Marketing Coordinator.
For the nine months ended November 30, 2013, general and administrative expense increased by $341,960 (40%) due to hiring two additional full time Franchise support personnel, as well as one-time costs associated with integration of Yogurtini, Aspen Leaf, and the purchase and integration of Josie’s franchise systems.
Depreciation and amortization expense increased by $41,152 (18%), due to the inclusion of additional fixed assets purchased in connection with the acquisition of additional company owned cafés in January 2013 in the transaction with RMCF, offset by the reduction in fixed assets associated with the closure of four under-performing Aspen Leaf Yogurt cafés in November 2013.
Primarily as a result of the increased revenues, we generated income from operations of $150,909 in 2013, as compared to a loss of $226,720 in 2012.
Interest expense increased by $19,928 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. While $400,000 of these notes were written off, together with accrued interest of $20,991 in November 2013, interest accrued on those notes at the rate of 6% per annum, compounded annually, for most of the period.
As a result of the factors described above, we generated net income of $130,255 for the 2013 period, as compared to a net loss of $226,672 for the comparable 2012 period.
Liquidity and Financial Condition
As of December 31, 2012
. At December 31, 2012, we had working capital of $48,909 and cash of $187,298. At December 31, 2011, we had working capital of $316,215 and cash of $300,637.
During fiscal 2012, we had a net loss of $514,425, and operating activities used cash of $108,111. The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $308,361, issuance of common stock for services of $29,260 and stock-based compensation expense of $116,745. During fiscal 2011, we had a net loss of $673,394, and operating activities used cash of $165,096. The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $306,961, issuance of common stock for services of $43,890, and stock-based compensation of $53,698.
During 2012, investing activities used cash of $587, primarily due to $6,405 used to purchase fixed assets, as compared to $6,499 used in 2011, primarily due to $9,475 used to purchase fixed assets.
Accounts receivable decreased from $117,526 at December 31, 2011 to $73,205 at December 31, 2012, as a few of our franchisees owed royalties and payments for paper products at year-end. We attribute the decrease to arrangements made in 2012 to have our franchisees purchase their paper products directly from the distributor rather than have us purchase the products in bulk and to collect our royalty payments from franchisees via regularly scheduled automatic electronic transfers.
At December 31, 2011, we recorded $320,000 of deferred revenue in connection with the development fees from area development agreement signed prior to that date, as compared to $435,000 at December 31, 2011. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories.
As of February 28, 2013.
At February 28, 2013, we had a working capital deficit of $61,045 and cash of $358,527. At December 31, 2012, we had working capital of $48,909 and cash of $187,298.
For the two months ended February 28, 2013, we had a net loss of $377,584. Operating activities provided cash of $94,164, with the principal adjustments to reconcile the net loss to net cash used by operating activities being issuance of common stock for non-employee services of $95,625 and depreciation and amortization of $70,146. During the comparable 2012 period, we had a net loss of $98,340, and operating activities used cash of $88,612. The principal adjustment to reconcile the net loss to net cash used by operating activities was depreciation and amortization of $51,248.
During 2013, investing activities used cash of $2,719, primarily due to $2,187 used to purchase fixed assets. In comparison, investing activities provided cash of $4,102 during the 2012 period due the repayment of amounts due from U Create Enterprises, a related party, for supplies it had purchased from us.
Financing activities provided cash of $79,784 for the two months ended February 28, 2013, which consisted of the working capital received at the closing of the RMCF transaction. In comparison, we used $991 for payment on a capital lease obligation in 2012.
Accounts receivable increased from $73,205 at December 31, 2012 to $113,681 at February 28, 2013, due to the increased number of franchisees from 24 at December 31, 2012 to 58 at February 28, 2013.
At February 28, 2013, we recorded $326,500 of deferred revenue in connection with the development fees from area development agreements signed prior to that date, as compared to $320,000 at December 31, 2012. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories.
As of November 30, 2013.
At November 30, 2013, we had working capital of $99,044 and cash of $556,053. At February 28, 2013, we had a working capital deficit of $61,045 and cash of $358,527.
For the nine months ended November 30, 2013, we had net income of $130,255. Operating activities provided cash of $347,690, with the principal adjustment to reconcile the net income to net cash provided by operating activities being depreciation and amortization of $272,266. During the comparable 2012 period, we had a net loss of $226,672, and operating activities used cash of $15,835. The principal adjustment to reconcile the net loss to net cash used by operating activities was depreciation and amortization of $231,114.
During 2013, investing activities used cash of $335,322, primarily due to purchases of equipment totaling $337,867. This includes the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés. These co-branded cafés opened in October 2013. In November 2013, we also entered into an agreement with RMCF to purchase certain assets salvaged from the closed company-owned ALY cafés. In comparison, investing activities used cash of $4,141 during the 2012 period primarily due to the purchase of a company vehicle in October 2012.
Financing activities provided cash of $185,158 in 2013, with $126,170 being proceeds of a construction loan from RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés. Interest accrues on those notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction. We also received $63,480 from the exercise of stock options and warrants. During the comparable 2012 period, we used $3,650 for payments on a capital lease obligation.
Accounts receivable increased from $113,681 at February 28, 2013 to $182,758 at November 30, 2013, as a direct result of the increase in rebate and royalty revenues. We increased our allowance for doubtful accounts from $40,000 at February 28, 2013 to $70,000 at November 30, 2013 to reflect the increase in the exposure to losses based on the increase in our franchise base and related receivables.
The increase in prepaid expenses to $131,383 at November 30, 2013 from $24,592 at February 28, 2013 reflects the timing of payment of prepaid rents, insurance premiums and professional fees.
Accounts payable, related party, increased from $11,792 at February 28, 2013 to $145,325 at November 30, 2013 due to an agreement with RMCF to purchase certain assets salvaged from the four under-performing Aspen Leaf Yogurt cafés that we closed in November 2013.
At November 30, 2013 and February 28, 2013, we recorded a total of $316,389 and $326,500 of deferred revenue, respectively, 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 and other criteria listed in Note 2 in the financial statements.
Contractual Obligations
In January 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. Interest accrues on the unpaid principal balances of the notes at the rate of 6% per annum, compounded annually, and the notes require monthly payments of principal and interest over a five-year period beginning January 2014 in the case of the recourse notes and January 2015 in the case of the non-recourse notes. Payment of the notes is secured by a security interest in the six Aspen Leaf Yogurt cafés acquired.
In November 2013, we closed four of our company-owned Aspen Leaf cafés and wrote off $400,000 in non-recourse notes payable together with accrued interest of $20,991. These four cafés
were under-performing at the time of their purchase in the Rocky Mountain Transaction and thus were purchased with non-recourse notes. We entered into an agreement to purchase certain assets salvaged from these closed locations for $177,500 from RMCF, with the goal of deploying these assets in locations which will be profitable.
In July 2013, we executed promissory notes with RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés. Interest accrues on the notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction. The notes require monthly payments of principal and interest over a five-year period beginning in October 2013. Payment of the notes is secured by a security interest in all of the equipment purchased with the proceeds of the notes.
The following table summarizes our obligations and commitments to make future payments for the periods specified as of November 30, 2013:
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For the Fiscal Year Ended February 28 or 29:
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|
Operating Leases
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|
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Notes Payable
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|
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Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
$
|
99,675
|
|
|
$
|
19,829
|
|
|
$
|
119,504
|
|
|
2015
|
|
|
205,413
|
|
|
|
117,315
|
|
|
|
322,728
|
|
|
2016
|
|
|
55,329
|
|
|
|
124,392
|
|
|
|
179,721
|
|
|
2017
|
|
|
44,961
|
|
|
|
131,897
|
|
|
|
176,858
|
|
|
2018
|
|
|
45,894
|
|
|
|
139,854
|
|
|
|
185,748
|
|
|
Thereafter
|
|
|
35,506
|
|
|
|
115,624
|
|
|
|
151,130
|
|
|
Total minimum payments
|
|
|
486,778
|
|
|
|
648,911
|
|
|
|
1,135,689
|
|
|
Less: current maturities
|
|
|
(277,300
|
)
|
|
|
(107,168
|
)
|
|
|
(384,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
209,478
|
|
|
$
|
541,743
|
|
|
$
|
751,221
|
|
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, Yogurtini, and Josie’s Frozen Yogurt chains. Although we have historically experienced losses from operations, including recently, based on our current projections which assume a continued increase in revenues, we believe that the operation of our 12 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, Yogurtini and Josie’s 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.
In January 2014, we acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés. CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of our common stock. Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of our common stock. We also acquired the business assets of another operator and franchisor of self-serve frozen yogurt cafés, Fuzzy Peach Franchising, LLC, in February 2014, thereby adding 17 cafés. We paid $481,000 at closing, plus an earnout, based upon royalty income generated by Fuzzy Peach cafés over the next twelve months, that could increase the purchase
price by up to another $349,000. RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of our assets.
We will continue to look for expansion opportunities through acquisitions, as we believe that the self-serve frozen yogurt industry is fragmented with many small, undercapitalized chains whose owners lack the ability to expand or a viable exit strategy. Such acquisitions may be completed using cash, shares of our stock, or a combination of both for the purchase consideration. In those cases, it is possible that our shares may be valued at less than the then current trading price for the stock.
While we have experienced profitable quarters for the six months ended August 31, 2013, we note that we are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of frozen yogurt have occurred in spring and summer months and our weakest sales have occurred during the winter months. Accordingly, we incurred a net loss of $197,616 for the quarter ended November 30, 2013 and we do not anticipate profitable operations for the quarter ending February 28, 2014. Our new co-branded locations represent our efforts to address the seasonal fluctuations in sales, as demand for gourmet chocolate products is stronger during the fall, winter and spring seasons.
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 November 30, 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:
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The expected option term is computed using the "simplified" method.
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·
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The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.
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·
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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.
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·
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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.
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The forfeiture rate is based on the historical forfeiture rate for our unvested stock options.
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Recently Issued 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. We adopted this guidance in 2013 without material impact on our 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. We adopted this guidance in 2013 without material impact on our financial position, results of operations or cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
BUSINESS
Overview
We are in the business of offering consumers frozen desserts such as yogurt and sorbet. We launched a national chain of self-serve frozen yogurt cafés called U-Swirl Frozen Yogurt and are franchising this concept. We have built and operate cafés owned and operated by the Company (“company-owned”) and franchise to others the right to own and operate U-Swirl cafés.
U-Swirl allows guests a broad choice in frozen yogurt by providing up to 20 non-fat and low-fat flavors, including tart, traditional and no sugar-added options and up to 70 toppings, including seasonal fresh fruit, sauces, candy and granola. Guests serve themselves and pay by the ounce instead of by the cup size. Similar to a coffee shop hangout, locations are furnished with couches and tables and patio seating.
We acquired the U-Swirl Frozen Yogurt concept in September 2008 from U Create Enterprises (formerly U-Swirl Yogurt, Inc.), which is owned by the grandchildren and family of Henry E. Cartwright, our former President, in consideration for 100,000 restricted shares of our common stock. U Create Enterprises continues to operate its frozen yogurt café in Henderson, Nevada, as our franchisee. No franchise fees or royalties are charged with respect to this location, as U Create Enterprises permits us to use the location as a training facility.
We issued a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in certain states which require filing. We opened our first company-owned U-Swirl location in Las Vegas, Nevada, in March 2009 and entered into our first franchise agreement in July 2009 and our first area development agreement for multiple locations in November 2009.
As of December 31, 2012, we owned and operated six U-Swirl Frozen Yogurt cafés in the Las Vegas metropolitan area, and had 24 franchised locations in operation across the country.
In January 2013, we entered into agreements to acquire Aspen Leaf Yogurt (“ALY”) café assets, consisting of leasehold improvements, property and equipment, for six Aspen Leaf Yogurt cafés and the franchise rights to ALY and Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. (“RMCF”) in exchange for a 60% controlling ownership interest in our company, a warrant that allows RMCF to maintain its pro rata ownership interest if existing stock options and/or warrants are exercised, and promissory notes in the aggregate amount of $900,000.
In March 2013 we opened two additional cafés in Reno, Nevada which were previously owned and operated by a U-Swirl franchisee. In July 2013, we transferred the two company-owned Reno cafés to an existing franchisee from New Mexico and executed a new area development agreement covering all three cafés operated by this franchisee.
In October 2013, we acquired the assets of the Josie’s Self-Serve Frozen Yogurt system (“Josie’s”) from OnLincoln, LLC and Josie’s of Nevada, LLC. There are currently eleven Josie’s cafés in operation.
In January 2014, we acquired the business assets of two operators and franchisors of self-serve frozen yogurt cafés, CherryBerry Enterprises, LLC (“CherryBerry”) and Yogli Mogli, LLC (“Yogli Mogli”), thereby adding 182 cafés. CherryBerry and certain affiliates were acquired for approximately $4.25 million in cash and 4,000,000 shares of our common stock. Yogli Mogli was acquired for $2.15 million in cash and 277,778 shares of our common stock. We also acquired the business assets of another operator and franchisor of self-serve frozen yogurt cafés, Fuzzy Peach Franchising, LLC, in February 2014, thereby adding 17 cafés. We paid $481,000 at closing, plus an earnout, based upon royalty income generated by Fuzzy Peach cafés over the next twelve months, that could increase the purchase price by up to another $349,000. RMCF provided the funding for these acquisitions through a convertible note, which is secured by all of our assets.
The following table provides summary detail regarding our locations as of February 25, 2014, 13 of which were company-owned:
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Number of locations
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State/Province/
Foreign Country
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U-Swirl
|
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Aspen
Leaf
|
|
Yogurtini
|
|
Josie’s
|
|
CherryBerry
|
|
Yogli
Mogli
|
|
Fuzzy
Peach
|
|
Total
|
|
|
Arizona
|
5
|
|
|
|
5
|
|
2
|
|
|
|
|
|
|
|
12
|
|
|
Arkansas
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
3
|
|
|
California
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Colorado
|
|
|
4
|
|
3
|
|
|
|
1
|
|
|
|
|
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8
|
|
|
Connecticut
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
5
|
|
|
Florida
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
Georgia
|
|
|
|
|
1
|
|
|
|
2
|
|
21
|
|
|
|
24
|
|
|
Idaho
|
3
|
|
2
|
|
|
|
|
|
|
|
|
|
|
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5
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|
|
Illinois
|
|
|
1
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|
|
|
|
|
8
|
|
2
|
|
|
|
11
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|
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Indiana
|
|
|
|
|
|
|
1
|
|
2
|
|
|
|
|
|
3
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|
|
Iowa
|
|
|
1
|
|
|
|
|
|
11
|
|
|
|
|
|
12
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|
|
Kansas
|
|
|
|
|
2
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|
|
|
4
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|
|
|
|
|
6
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|
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Kentucky
|
|
|
|
|
|
|
|
|
1
|
|
1
|
|
|
|
2
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|
Michigan
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|
|
|
|
|
|
|
|
1
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|
|
|
|
|
1
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Minnesota
|
|
|
|
|
|
|
|
|
34
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|
|
|
|
|
34
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|
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Mississippi
|
2
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|
|
|
|
|
|
|
|
|
|
|
|
|
2
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|
|
Missouri
|
|
|
1
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|
8
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|
|
|
3
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|
|
|
|
|
12
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|
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Montana
|
2
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|
|
|
|
|
|
|
2
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|
|
|
|
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4
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|
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Nebraska
|
|
|
|
|
1
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|
|
|
4
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|
|
|
|
|
5
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|
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Nevada
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9
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|
|
|
|
|
2
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|
|
|
|
|
|
|
11
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|
|
New Jersey
|
|
|
|
|
1
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|
|
|
|
|
|
|
|
|
1
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|
|
New Mexico
|
3
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|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
5
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|
|
New York
|
|
|
|
|
1
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|
|
|
|
|
|
|
|
|
1
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|
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North Carolina
|
|
|
|
|
|
|
|
|
4
|
|
|
|
14
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18
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|
|
North Dakota
|
|
|
|
|
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|
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9
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|
|
|
|
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9
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|
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Nova Scotia
|
|
|
|
|
|
|
|
|
2
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|
|
|
|
|
2
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Ohio
|
1
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|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
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|
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Oklahoma
|
|
|
|
|
|
|
|
|
17
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|
|
|
|
|
17
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|
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Pennsylvania
|
1
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|
|
|
|
|
|
|
|
|
1
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|
|
|
2
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|
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South Carolina
|
|
|
|
|
1
|
|
1
|
|
|
|
|
|
2
|
|
4
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|
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South Dakota
|
|
|
|
|
|
|
|
|
9
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|
|
|
|
|
9
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|
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Tennessee
|
2
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|
|
|
|
|
|
|
|
|
1
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|
|
|
3
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|
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Texas
|
5
|
|
1
|
|
|
|
2
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7
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|
|
|
1
|
|
16
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|
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Utah
|
2
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|
|
|
|
|
|
|
5
|
|
|
|
|
|
7
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|
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Virginia
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|
|
|
|
2
|
|
1
|
|
|
|
|
|
|
|
3
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Washington
|
1
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|
|
|
1
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|
|
|
|
|
|
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|
|
2
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Wisconsin
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|
|
|
|
|
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|
|
18
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|
|
18
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Wyoming
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|
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|
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|
|
1
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|
|
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|
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1
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Pakistan
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|
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|
|
|
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|
|
1
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|
|
1
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Turkey
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|
|
|
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|
|
1
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1
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United Arab Emirates
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|
|
|
|
|
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|
|
1
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|
|
|
|
|
1
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Total
|
37
|
|
11
|
|
27
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|
9
|
|
159
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|
26
|
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17
|
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286
|
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We are currently maintaining all seven franchise systems and providing marketing and franchise support to all existing U-Swirl, ALY, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach franchisees. We are in the process of nurturing our relationship with each of our franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.
We have already been able to secure price reductions from various vendors as well as increase support for the franchisees that were under-performing. Going forward we see value in one cohesive brand and will work to that end. Currently we have decided to terminate the expansion of new locations under the Aspen Leaf and Josie’s brands. We expect to open cafés of acquired brands already under franchise agreement, but not yet opened under those acquired brands.
Pursuant to the terms of acquisition, the former owners of Yogurtini have the right to earn additional compensation based on a formula of total royalty income generated from Yogurtini locations open for more than a year that exceeds a specific threshold. This provides the former Yogurtini owners with a financial incentive to sell and open additional Yogurtini locations. While the number of Yogurtini branded locations may increase as result, we intend to incentivize all prospective franchisees from any brand to open as U-Swirl branded frozen yogurt café.
Our long-term strategy is to expand the U-Swirl brand. The incentives we put in place are both economic incentives for franchisees as well as offering the opportunity to co-brand with Rocky Mountain Chocolate Factory. This co-branding will be available only with U-Swirl branded cafés.
Industry Background
We believe that U-Swirl offers two distinct market opportunities. The first opportunity lies with the increasing awareness among consumers of the connection between diet and good health, as evidenced by the current focus on childhood obesity by Michelle Obama and recent initiatives to improve school lunch programs. We believe that as a result, demand for high-quality healthy foods, in particular healthy fast foods, is increasing and that our U-Swirl cafés will be able to take advantage of this growing demand for healthy food by focusing on foods with lower-fat, higher nutritional content and wholesome, natural food ingredients. The second opportunity lies with the demographic more interested in an indulgent experience, which may be provided by U-Swirl and/or all their brands through co-branding with RMCF.
According to
Ice Cream and Frozen Desserts in the U.S.: Markets and Opportunities in Retail and Foodservice, 6
th
Edition,
published in January 2010 by Packaged Facts (the “Packaged Facts Report”), the frozen dessert industry is a large and growing industry. In 2009, the U.S. market for ice cream and related frozen desserts, including frozen yogurt and frozen novelties, grew two percent to $25 billion. The Packaged Facts Report also mentioned that consumers are in search of value products and products that can benefit their health, such as those that include ingredients such as probiotics. We believe that our self-serve cafés, which offer frozen yogurt carrying the National Yogurt Association’s Live and Active Cultures seal, address this demand. The Packaged Facts Report forecasts that the inclusion of probiotics in frozen yogurt will cause that segment’s sales growth to surpass other frozen dessert categories through 2014.
We believe that women and children/young adults comprise our targeted market based upon the observations of the staff in our U-Swirl cafés.
Competition
We believe that each of the following self-serve frozen yogurt chains provides direct competition to U-Swirl:
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TCBY
– approximately 470 locations in the United States, now offering self-serve franchises
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·
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Menchie’s
– approximately 230 locations in the United States, Canada, Puerto Rico, Trinidad & Tobago, England, France, South Africa, Jordan, Kuwait, Bahrain, United Arab Emirates, Qatar, India, China, Japan and Australia
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·
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Orange Leaf Frozen Yogurt
– approximately 230 locations in the United States and Australia
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·
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Yogurtland
– over 200 locations in the United States, Guam, Mexico, Venezuela and Australia
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Sweet Frog
– over 300 locations in the United States and abroad.
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Several of these competitors have significant competitive advantages over the Company in terms of operating histories, number of locations in operation, number of franchisees and area developers, capital and human and other resources. There are also numerous retail outlets offering self-serve frozen yogurt that are independently owned and operated. We compete not only for customers, but also for management and hourly personnel, suitable real estate sites, investment capital and qualified franchisees. We also compete against frozen yogurt retailers that are not self-serve models.
Further, the food service/restaurant industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Accordingly, there can be no assurances that the Company can successfully compete at a level to achieve our goals.
We have designed U-Swirl cafés to be distinguishable from other frozen yogurt retail outlets and attractive to customers by offering the following:
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inside café-style seating for 50 people and outside patio seating, where feasible and appropriate;
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spacious surroundings of 1,800 to 3,000 square feet;
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16 to 20 flavors of frozen yogurt;
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self-serve format allowing guests to create their own favorite snack; and
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co-branding opportunities with RMCF.
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Management believes that these characteristics may provide us with the ability to compete successfully in this industry. While we continue to pursue locations described above we recognize that our acquisition strategy may lead us to purchase competitors with diverse layouts.
The trade dress of the Aspen Leaf, Yogurtini, Josie’s, CherryBerry, Yogli Mogli and Fuzzy Peach locations are similar to that of U-Swirl, although their locations use different color schemes and are typically smaller than the U-Swirl cafés.
Growth Strategy / Acquisition Strategy
Our growth strategy is to maximize our market share and market penetration through the acquisition of additional self-serve yogurt systems, as well as the acquisition of complementary businesses which may provide economies of scale and vertical integration. Although we believe there are still many geographic opportunities for growth, we feel the self-serve frozen yogurt market has reached a saturation point. In many parts of the country the consolidation of the industry has begun. We believe this consolidation can prove beneficial to us in a number of ways, and we will concentrate a significant amount of our efforts towards the acquisition of additional franchisors of self-serve frozen yogurt. In addition to the acquisition of self-serve frozen yogurt franchisors we see benefits in complementary businesses which provide us with the opportunity for vertical integration. Those opportunities lie in owning specific products which may be sold in our cafés, as well as securing proprietary technology for use by franchisees. We see this as a possibility of adding new revenue streams while expanding into other markets in an efficient and lower risk model.
We intend to grow organically by expanding the number of locations under construction through continued development of the growing franchise base. We intend to incentivize through co-branding with
proprietary concepts, and capitalize on synergistic opportunities for joint-venture cafés. We intend to leverage the RMCF relationship, utilizing its experience in logistics, franchising, and international markets to expand market share. Based on an analysis of population statistics, we believe that an estimated 3,000 U-Swirl franchised cafés could be operated in the United States and abroad. These estimates are based on a variety of factors including total population, population density, drive-time and other factors related to consumer convenience, consumer demand, local market competition and other relevant factors. In addition, we believe that foreign markets represent expansion opportunities as well.
There can be no assurances that we can or will be able to successfully develop and operate the estimated 3,000 potential cafés in the United States. Similarly, other risk factors identified herein could adversely impact our ability to fully develop the forecasted market opportunity.
Franchise Marketing
Initially, our marketing strategy for establishing multi-unit franchises was to contact individuals or entities that had previously developed franchises with our management team in other concepts. We believed it was prudent to leverage established relationships and to create new relationships with management teams with the proper knowledge, experience, and access to financial resources necessary to successfully develop and operate a U-Swirl franchise in a timely fashion. Specifically, Henry Cartwright, our Chief Marketing Officer, has had significant experience in developing franchise concepts and has maintained current contact with former franchisees. We believe that these contacts were useful in identifying qualified candidates to operate multi-unit franchises.
With 13 company-owned cafés and 273 franchised cafés in operation, we now identify qualified candidates through referrals from other franchisees, inquiries on our web site and customers of U-Swirl, Aspen Leaf, Yogurtini, Josie’s, CherryBerry and Yogli Mogli cafés.
We are seeking individuals or groups with the skills and financial strength to operate multi-unit franchise organizations within specific geographic territories. We anticipate a franchise territory will consist of areas that are either cities or counties depending on population.
We will consider the skills and investment capital that each potential multiple franchise owner presents to determine the size and nature of the territory and the minimum number of U-Swirl locations that the franchise owner will be required to maintain in the territory in order keep the exclusive rights to that territory. We consider the appropriate number of locations in an area to be one café per 100,000 people and then set the minimum number of locations at half the amount. For example, a negotiated territory with a population of 2,000,000 should support 20 U-Swirl cafés and a franchisee of that territory would be required to open a minimum of 10 cafés over 5 years to maintain exclusivity. Franchisees will not be restricted from opening additional cafés beyond the minimum for their territory.
After April 30, 2013, Yogurtini discontinued offering area developments and only offers single franchise units.
Area Development Agreements
We have elected to pursue a development strategy focused, where appropriate, on the execution of area development agreements (“ADAs”) with qualified area developers that possess, or have the ability to secure in a timely manner, the experience, knowledge and abilities, established market knowledge and relationships, capital resources, and the skills necessary to develop multiple locations in a market. Prior to the execution of an ADA, we determine the minimum number of cafés that must be developed within a territory. A territory will consist of one or more metropolitan or micropolitan
1
statistical areas. A standard form ADA generally provides for the following:
___________________
1
As defined by the
United States Census Bureau
, a micropolitan area is the area (usually a
county
or grouping of counties) surrounding and including a core city with population between 10,000 and 49,999 (inclusive). Suburbs of
metropolitan areas
are
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·
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Term: Until the end of the development schedule, generally 15 years;
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·
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Development Exclusivity: The ADA provides for limited and conditional development exclusivity for the area covered by the ADA. The exclusivity does not apply to:
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·
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Non-traditional café types (such as shopping mall food court or airport locations), or
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·
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Cafés acquired by the Company pursuant to a merger or acquisition;
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·
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Minimum Development Required: A standard form ADA requires the area developer to develop a pre-determined number of locations within the territory on an annual basis for each year during the term of the ADA; and
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·
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Rights of Renewal: The ADA may be renewed if the area developer has not committed a material breach of the ADA or an underlying franchise agreement.
|
Our requirements for qualified area developers will result in fewer franchisees in our system but we believe that the area developer will generally be able to create more value for the U-Swirl network by implementing more comprehensive, responsive and competitive development, operations and marketing strategy and programs.
Franchise Development and Operations
The estimated initial investment for a U-Swirl franchise is $360,000 to $465,000, exclusive of real estate costs. Franchisees pay an initial franchise fee of $25,000 for a single unit. Area developers pay a development fee of $25,000, which includes the initial franchise fee for the first café, plus $5,000 for each additional café constituting the minimum number of units for an area development agreement. The minimum number is that number of cafés we determine should be opened in the development area. The development fee of $25,000 is applied to the initial franchise fee to be developed under the agreement and for each successive café the franchise fee is $15,000. The development fee is not refundable.
Our existing U-Swirl franchisees pay a royalty ranging from 2% to 5% based on net sales. We have increased the royalty to 5% for new franchisees to our U-Swirl system. To date we have sold one area development agreement with the royalty at 5% and intend to keep that rate for the foreseeable future. The acquired brands are charging the following royalties in their existing franchise and/or license agreements, which we will honor: Yogurtini – 5%, ALY – 4%, Josie’s – 3% to 6%, CherryBerry – 2.5% to 6%, Yogli Mogli - 6%, and Fuzzy Peach - 6%.
The CherryBerry frozen yogurt franchise system offers the opportunity for franchisees to become development agents whereby they can sell franchises and service franchisees within their designated territory for a percentage of the initial fee, usually 50% of the total franchise fee, and a percentage of the monthly royalty fee, usually 33% of the total royalty fee charged. We intend to honor the development agent contracts and offer the ability to continue to expand under the development agent model.
A small number of our U-Swirl franchisees pay a 1% marketing fee based on net sales. We have implemented, as of March 1, 2014, a 1% marketing fee on the entire U-Swirl franchisee base to support national and regional advertising efforts. We require franchisees to dedicate at least 1% of net sales to local advertising. Existing franchisees currently pay a 1% marketing fee and U-Swirl brand franchisees will begin paying the 1% marketing fee as of March 1, 2014. We intend to maintain these terms until we have determined the best course of action. We expect that determination will come once we can better gauge the integration of the existing systems as well as others that may be acquired in the future.
Under the U-Swirl system, each café must conform to a standard of interior design, featuring a distinctive and comfortable décor. The minimum size for a typical U-Swirl café is 1,800 square feet, but cafés in malls, kiosks or other unique locations may be smaller. Under the terms of the franchise agreement, franchisees are required to obtain our approval of the café site, build out the space in
generally not considered to be micropolitan core cities, although they can be if they are in another county from the metropolitan core.
accordance with our standards, satisfactorily complete training, and purchase certain equipment and supplies from us or our approved suppliers. Franchisees are also required to purchase a point-of-sale system that meets U-Swirl system standards and to establish and maintain high-speed Internet access from a service provider meeting the minimum specifications established by us. All goods sold by our franchisees must be purchased through us or through our approved suppliers that have met our specifications and standards. Specifically, the yogurt sold in U-Swirl cafés must meet the criteria established by the National Yogurt Association for live and active culture yogurt.
Currently, all of the frozen yogurt served in our cafés is purchased from YoCream International, Inc. and/or Honey Hill Farms, Inc. U-Swirl will use its commercial best efforts to switch all franchisees to the YoCream International, Inc. product. All of the frozen yogurt dispensing equipment is purchased from Taylor Company and/or Stoelting Food Service Equipment Company. We source toppings and supplies from local area distributors. We believe that all of these items are readily available from other sources.
Each U-Swirl franchise agreement has a 15-year term and may be renewed for up to two additional 15-year terms. There may be circumstances in other brands when terms may differ from a 15-year term. Transfers by the franchisees are permitted with our approval, but we have a first right of refusal to purchase the franchise business. Upon termination of the franchise agreement, we have the option to purchase the assets used in the franchise business at fair market value.
U-Swirl-n-Go
We also intend to offer franchises for a limited-product store (a “U-Swirl-n-Go Store”) within a non-traditional location, such as a convenience store, airport, or hotel. U-Swirl-n-Go Stores will typically offer two to six flavors of self-service yogurt, with customers filing containers with as much of one or more flavors as desired, selecting from over 40 toppings, and then paying by the ounce for the yogurt and toppings or a flat fee, as determined by the franchisee. U-Swirl-n-Go Stores will typically occupy 50 square feet or less within the non-traditional location, and with no dedicated seating.
The total investment necessary to begin operation of a U-Swirl-n-Go Store franchise without an area development agreement is from $71,000 to $115,000. This amount includes $20,000 that must be paid as the initial franchise fee. Instead of a royalty based on a percentage of net sales, the royalty for a U-Swirl-n-Go Store will be $10,000 per year if paid in a lump sum in advance or $1,000 per month. Instead of paying 2% of net sales to support national and regional advertising efforts, franchisees of U-Swirl-n-Go Stores will pay up to $150 per month. The first U-Swirl-n-Go location should open in the summer of 2014. Due to the lack of experience and history in this segment of the industry, all terms of agreement are subject to change based on market conditions.
Market Development
We launched the U-Swirl concept by focusing our development efforts on company-owned cafés in the Las Vegas metropolitan statistical area. We believed that by developing our local area, we would then be able to better monitor café level operations and the effectiveness of various marketing and advertising programs, and market to persons who want to develop multi-unit areas.
We are currently engaged in developing additional market development plans. These plans will be used to develop franchise-owned locations, and grow by acquisition. We are currently reviewing additional markets and will prioritize these markets based on a variety of factors including maximizing distribution channel and management efficiencies, executing area development agreements and other factors.
We launched our new market development initiatives in October 2009 with the expansion of our management team that included professionals experienced in the development of restaurant and retail concepts on a national level. While these professionals are no longer with us, we continue to utilize comprehensive data gathering and analysis, incorporating consumer demographic densities and characteristics, psychographic data, traffic counts and flow, short-term and long-term market development
trends, proximity to community points-of-interest, local competitors and site availability. The recent transaction with RMCF provides us access to 30 years of experience in the retail dessert franchise business. We intend to leverage their experience in retail store marketing, franchise support, logistics, and overall knowledge of the business to expand in to new markets and specifically in identifying new locations within a particular market. Once we identify available sites that meet or exceed our criteria, we apply another round of scrutiny. These criteria include, but are not limited to, site visibility, ingress and egress, size, location within a shopping center, tenant mix and rent factors.
Personnel Development
We believe that a critical factor in the successful development and operation of each U-Swirl café is the development of café personnel. To meet this need, we have developed a comprehensive U-Swirl training program that all café personnel are required to complete. The training requirement applies to all U-Swirl cafés including company-owned, franchise-owned and licensed U-Swirl cafés. The training program addresses all key areas of café operations
In addition to its café personnel, we require that all non-café employees successfully complete the U-Swirl training program. This ensures that all non-café personnel that support our café operations are fully aware of issues relating to successful retail operations and maximizing customer satisfaction. ALY, Yogurtini, Josie’s, CherryBerry and Yogli Mogli implement similar training programs for operations of their respective systems. We have begun the process of comparison for best practice implementation.
Point-of-Sale System
The Company utilizes a point-of-sale (POS) system which provides a vast array of reports that tracks key metrics and performance measures. The Company’s café managers and management team utilize the data to measure and monitor café performance and effectiveness of advertising and promotion programs. The Company continues to refine its reporting package to ensure timely and accurate reporting and trend analysis that is used to accomplish various objectives to maximize profitability, for each café and in the aggregate, including:
|
·
|
Developing and implementing cost-effective new customer acquisition and customer loyalty programs;
|
|
·
|
Achieving and maintaining target cost of sales and labor costs and gross margins;
|
|
·
|
Incorporating café performance analytics with other relevant factors to refine criteria to provide predictive indicators for purposes of site selection for future cafés; and
|
|
·
|
Forecasting future performance.
|
In addition to the U-Swirl POS system, we now have both corporate stores and franchise stores with other POS systems, namely R-Power, Lionwise, and Micros POS system. They will all continue to be part of our operations for the foreseeable future; however, our goal is to identify and create, if necessary, a cohesive, scalable system for the long-term future. We have engaged RMCF for support services related to information technology and financial reporting services. RMCF will provide integration of POS data to legible sales reports for management use. RMCF will utilize reports to execute daily financial reporting services for U-Swirl, including accounts receivable and accounts payable. Beginning April 1, 2014, RMCF will charge us $2,000 for the first month, $3,000 for the second month, $4,000 for the third month, and $5,000 for each month thereafter for as long as the services are provided.
Key data tracked and analyzed includes, but is not limited to:
|
·
|
Product sales and sales mix;
|
|
·
|
Customer and transaction counts; and
|
Trademarks and Copyrights
In connection with our frozen yogurt café operations, the following marks are owned by us and have been registered with the U.S. Patent and Trademark Office:
|
·
|
“u-swirl FROZEN YOGURT and Design”;
|
|
·
|
“U-SWIRL FROZEN YOGURT”
|
|
·
|
“CHERRYBERRY self-serve yogurt bar”; and
|
The “U-SWIRL FROZEN YOGURT and Design” (a logo) is also registered in Mexico and we have a pending application for registration of “U-SWIRL” in Canada.
We are licensed to use the mark “ASPEN LEAF” and will be granted a license to use the registered marks owned by RMCF in co-branded cafés.
Government Regulation
We are subject to various federal, state and local laws affecting our business. Our cafés must comply with licensing and regulation by a number of governmental authorities, which include health, sanitation, safety and fire agencies in the state or municipality in which the café is located. Moreover, federal Food and Drug Administration regulations require yogurt to have two types of bacteria, lactobacillus bulgaricus and streptococcus thermophilus. There are no federal standards for any kind of frozen yogurt, although some have been proposed. A majority of the states have adopted standards that are either specific to frozen yogurt or cover frozen desserts generally. These standards address some or all of the following: milkfat content, milk solid content, acidity, bacteria count and content and weight.
We are also subject to federal and state laws governing employment and pay practices, overtime, tip credits and working conditions. The bulk of our employees are paid on an hourly basis at rates related to the federal and state minimum wages. Additionally, we are subject to federal and state child labor laws which, among other things, prohibit the use of certain “hazardous equipment” by employees 18 years of age or younger. Under the Americans with Disabilities Act, we could be required to expend funds to modify our cafés to better provide service to, or make reasonable accommodation for the employment of disabled persons. We continue to monitor our facilities for compliance with the Americans with Disabilities Act in order to conform to its requirements. We believe future expenditures for such compliance would not have a material adverse effect on our operations.
The franchises that we offer are subject to federal and state laws pertaining to franchising. These laws require that certain information be provided to franchise prospects at certain times and regulate what can be said and done during the offering process. Some states require the FDD to be registered and renewed on an annual basis.
Employees
Our company-owned cafés have approximately 40 full-time employees and 60 part-time employees that work various shifts. The cafés are open seven days per week generally from 11:00 a.m. to late evening. In addition to the employees at the cafés, we had 16 full-time employees as of February
25, 2014, consisting of our Chief Executive Officer, Chief Operating Officer, Chief Marketing Officer and personnel for each of the following functions: national operations, café operations, franchise development, finance, marketing and administration. In addition, we had one part-time employee.
Facilities
Our principal offices are located at 1175 American Pacific, Suite C, Henderson, Nevada 89074, in approximately 5,200 square feet of space leased for a term of five years expiring in July 2018. We pay rent of approximately $2,800 per month.
The leases for our company-owned cafés range from approximately 400 to 3,000 square feet. The leases are generally for five-year terms with options to extend. We currently have 14 leases in place which range between $1,800 and $7,500 per month, inclusive of common area maintenance charges and taxes.
Legal Proceedings
There are no legal proceedings pending or, to the best of our knowledge, contemplated or threatened that are deemed material to our business or us.
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, and their ages as of the date of this prospectus, are as follows:
|
Name
|
Age
|
Position
|
|
Franklin E. Crail
|
71
|
Chairman of the Board
|
|
Ulderico Conte
|
44
|
Chief Executive Officer, Interim Chief Financial Officer and Director
|
|
Terry A. Cartwright
|
51
|
Chief Operating Officer
|
|
Henry E. Cartwright
|
74
|
Chief Marketing Officer
|
|
Scott G. Capdevielle
|
47
|
Director
|
|
Clyde W. Engle
|
70
|
Director
|
|
Bryan J. Merryman
|
53
|
Director
|
|
Lee N. Mortenson
|
77
|
Director
|
The term of office of each director ends at the next annual meeting of our stockholders or when such director’s successor is elected and qualifies. The term of office of each officer ends at the next annual meeting of our Board of Directors, expected to take place immediately after the next annual meeting of stockholders, or when such officer’s successor is elected and qualifies.
Franklin E. Crail
has been the Chairman of the Board since February 2013 and a director since January 2013. Mr. Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. Since RMCF’s incorporation in November 1982, he has served as its Chief Executive Officer, President and as a director, and, from September 1981 to January 2000, he served as its Treasurer. He was elected Chairman of the Board in March 1986. Prior to founding RMCF, Mr. Crail was co-founder and President of CNI Data Processing, Inc., a software firm which developed automated billing systems for the cable television industry. As RMCF’s Chief Executive Officer, President and director since 1982,
Mr. Crail brings his leadership, extensive experience and knowledge of the industry and the investment community to the Board of Directors.
Ulderico Conte
has been our Chief Executive Officer and Interim Chief Financial Officer since April 2011 and a director since November 2010. He served as our Vice President of Franchise Development from April 2007 to April 2011 and was one of our founders. From June 2005 to November 2005, he researched various restaurant concepts before deciding on the EVOS concept and forming the Company. He served as our Vice President, Secretary and a Director from inception to April 2007. Mr. Conte was the President and Principal of PIN Financial LLC, a FINRA member investment banking firm from May 2005 to February 2009. From October 2004 to May 2005, he worked as an institutional trader with Garden State Securities. He served in a similar role with Tradition Aisle Securities from February 2003 to October 2004. Until 2003, Mr. Conte owned and operated Stone Harbor Financial Services, LLC, a securities broker-dealer firm. Following the events of September 11, 2001, he made substantial personal loans to support Stone Harbor and pay its employees. Stone Harbor ceased doing business in 2003 and Mr. Conte filed for personal bankruptcy in October 2003. He received a Bachelor’s degree in Business from Rider University and a Master’s degree in Business Administration from the University of Phoenix. We have concluded that Mr. Conte should serve as a director because of his familiarity with the Company and business development experience.
Terry A. Cartwright
has been our Chief Operating Officer since April 2011 and a director since January 2013. He served as our Vice President of Café Development since April 2007 and was one of our founders. Since May 2002, he has served as President of Gold Key, Inc., d/b/a Monster Framing, a wholesale custom picture and art manufacturing company specializing in hotels, timeshares, condos and retail shops. Since 1989, he has served as Vice President and Director of Operations for MV Entertainment, a franchisee of Blockbuster Entertainment Corp., with stores in Southern California. From 1985 until 1989, he served as the Director of New Store Development for Major Video Corp. Mr. Cartwright attended the University of Nevada at Las Vegas. He is the son of Henry E. Cartwright. We have concluded that Mr. Cartwright should serve as a director because of his previous experience with franchised concepts.
Henry E. Cartwright
has been our Chief Marketing Officer since January 2013. He previously served as our Chairman of the Board and President from April 2007 to January 2013, and as our Chief Executive Officer from April 2007 to April 2011. From October 2002 to April 2007, Mr. Cartwright was semi-retired and a private investor in numerous real estate and lending transactions and other ventures. Mr. Cartwright served as Chairman of the board of directors of Major Video Corp. from December 1982 until its merger with Blockbuster Entertainment Corporation in January 1989. During his tenure, Major Video had over 20 multiple unit franchisees in 28 states and Canada. In September 1993, Mr. Cartwright founded Back to the 50’s, Inc., a company that sold 50’s and 60’s memorabilia through a mail order catalog and showroom. Back to the 50’s, Inc., was acquired by Crowne Ventures, Inc. in November 1995. Mr. Cartwright served as a Director of Crowne Ventures, Inc., from 1995 until he resigned in April 1998. He served as Chairman of the board of directors of Americabilia.com, Inc. (now known as Seaena, Inc.), from September 1999 to October 2002. Americabilia was engaged in direct Internet merchandising of American-themed collectibles, gifts and memorabilia. Mr. Cartwright also had similar management responsibilities with franchised concepts such as Taco Boy, a Mexican fast food company; Olde English Fish and Chips; Mom’s Ice Cream; and Pizza Hut. He is the father of Terry A. Cartwright. We have concluded that Mr. Cartwright should serve as a director because of his previous management experience with franchised concepts.
Scott G. Capdevielle
has been a director since January 2013. He
has served on the RMCF Board of Directors since June 2009. Mr. Capdevielle founded and has served as President, Chief Executive Officer and a member of the Board of Directors of Syndicom, Inc., a software and consulting company, since 2000. Prior to founding Syndicom, Inc., from 1999 to 2000, Mr. Capdevielle was Chief Executive Officer and founder of Untv, Inc., a company pioneering user-generated web video and distribution on the Internet. From 1995 to 1999, Mr. Capdevielle founded and held the position of Chief Technical Officer and a member of the Board of Directors of Andromedia Corporation, a developer of web analytics software to Fortune 1000 companies prior to its sale to Macromedia, Inc. Mr. Capdevielle has
been engaged in the software industry since 1993 and has served on several advisory boards and Board of Directors of technology companies from 1994 to present. He is currently a partner in Incas, LLC, a seed stage investment company focused in the medical device industry. Mr. Capdevielle’s extensive executive and board experience brings operational, investment, strategic, technology and industry expertise to the Board of Directors.
Clyde W. Engle
has been a director since January 2013. He
has served on the RMCF Board of Directors since January 2000, and previously from December 1987 to August 1995. Mr. Engle is currently the Chairman of the Board of Directors, President and Chief Executive Officer of Lincolnwood Bancorp, Inc. (formerly known as GSC Enterprises, Inc.). Lincolnwood Bancorp, Inc. owned the Bank of Lincolnwood until June 2009 when the Bank of Lincolnwood came under control of the Federal Deposit Insurance Corporation (“FDIC”). Mr. Engle’s extensive executive and board experience brings governance, investment and strategic expertise to the Board of Directors.
Bryan J. Merryman
has been a director since January 2013. He joined RMCF in December 1997 as its Chief Financial Officer and Vice President - Finance. Since April 1999, Mr. Merryman has also served as its Chief Operating Officer and as a director, and since January 2000, as its Treasurer. From January 1997 to December 1997, Mr. Merryman was a principal in Knightsbridge Holdings, Inc. (a leveraged buyout firm). Mr. Merryman also served as Chief Financial Officer of Super Shops, Inc., a retailer and manufacturer of after-market auto parts, from July 1996 to November 1997, and prior to July 1996, was employed for more than eleven years by Deloitte and Touche LLP, most recently as a Senior Manager. Mr. Merryman’s extensive operational, accounting and financial expertise, along with his extensive knowledge of our business and broad industry expertise, provides significant value and insights to the Board of Directors.
Lee N. Mortenson
has been a director since January 2013, and has served on the RMCF Board of Directors since 1987. He has been engaged in consulting and investment activities since July 2000 and was a Managing Director of Kensington Partners, LLC (a private investment firm) from June 2001 to April 2006. Mr. Mortenson has been President and Chief Executive Officer of Newell Resources LLC since 2002 providing management consulting and investment services. Mr. Mortenson served as President, Chief Operating Officer and a director of Telco Capital Corporation, a manufacturing and real estate company, from January 1984 to February 2000. He was President, Chief Operating Officer and a director of Sunstates Corporation, a manufacturing and real estate company, from December 1990 to February 2000. Mr. Mortenson was a director of Alba-Waldensian, Inc., an apparel and medical device manufacturing company, from 1984 to July 1999, and also served as its President and Chief Executive Officer from February 1997 to July 1999. Mr. Mortenson’s general business experience and investment expertise provides valuable insight to the Board of Directors with respect to our operations and financial success.
All of our officers work full-time for the company.
Director Independence
Our common stock is not listed on any exchange. As such, we are not currently subject to corporate governance standards of listed companies, which require, among other things, that the majority of the board of directors be independent. Since we are not currently subject to corporate governance standards relating to the independence of our directors, we choose to define an “independent” director in accordance with the NASDAQ Capital Market’s requirements for independent directors (NASDAQ Marketplace Rule 5605). The NASDAQ independence definition includes a series of objective tests, such as that the director is not an employee of the company and has not engaged in various types of business dealings with the company.
Scott G. Capdevielle, Franklin E. Crail, Clyde W. Engle, Bryan J. Merryman and Lee N. Mortenson are considered independent directors under the above definition.
The following directors serve on committees of our Board of Directors:
|
·
|
Audit Committee – Bryan J. Merryman (Chair), Franklin E. Crail and Lee N. Mortenson
|
|
·
|
Compensation Committee – Bryan J. Merryman (Chair), Scott G. Capdevielle and Lee N. Mortenson
|
|
·
|
Nominating and Corporate Governance Committee – Bryan J. Merryman (Chair), Scott G. Capdevielle and Lee N. Mortenson
|
The Board of Directors has determined that each of Bryan J. Merryman, Franklin E. Crail and Lee N. Mortenson meets the audit committee financial expert standards as established by the SEC and the financial sophistication standards as established by the Nasdaq Stock Market.
Limitation of Liability and Indemnification
Our articles of incorporation, as amended, contain provisions that limit the liability of our directors and officers for monetary damages for any breach or alleged breach of fiduciary or professional duty by such person acting in such capacity. Such persons shall not be liable unless it is proven that his act or failure to act constituted a breach of his fiduciary duties and his breach of those duties involved intentional misconduct, fraud, or a knowing violation of law. The articles do not preclude liability for directors for the payment of unlawful distributions in violation of Nevada Revised Statutes Section 78.300.
Our articles of incorporation also provide that we shall indemnify our directors, officers, employees and agents to the fullest extent permitted by Nevada law. Our bylaws provide for the advancement of expenses prior to the final disposition of any action, suit or proceeding. We have obtained directors’ and officers’ liability insurance.
The limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent that we pay costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
Insofar as we may permit indemnification for liabilities arising under the Securities Act of 1933 to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth information about the remuneration of our principal executive officer for services rendered during our last two completed fiscal years and the two-month period ended February 28, 2013, and our other executive officers that had total compensation of $100,000 or more for our last completed full fiscal year (the “Named Officers”). Certain tables and columns have been omitted as no information was required to be disclosed under those tables or columns.
Summary Compensation Table
|
Name and Principal
Position
|
Year (1)
|
Salary ($)
|
Stock Awards
($)
|
Option Awards
($)(2)
|
All Other Compensation
($)(3)
|
Total ($)
|
|
Henry E. Cartwright,
Chief Marketing Officer (4)
|
2013
2012
2011
|
16,100
84,000
84,000
|
834
7,980
11,970
|
4,858
29,141
15,456
|
2,790
16,740
15,732
|
24,582
137,861
127,158
|
|
Name and Principal
Position
|
Year (1)
|
Salary ($)
|
Stock Awards
($)
|
Option Awards
($)(2)
|
All Other Compensation
($)(3)
|
Total ($)
|
|
Ulderico Conte, CEO
|
2013
2012
2011
|
16,100
84,000
84,000
|
834
7,980
11,970
|
4,940
29,643
15,517
|
3,172
22,032
20,676
|
25,046
143,655
132,163
|
|
Terry A. Cartwright, COO
|
2013
2012
2011
|
15,100
60,000
60,000
|
834
13,300
19,950
|
4,940
29,643
15,517
|
3,672
19,032
16,596
|
24,546
121,975
112,063
|
_____________
|
(1)
|
Amounts shown for 2013 are for the two months ended February 28, 2013.
|
|
(2)
|
The option awards were valued using a Black-Scholes option pricing model using the following assumptions: volatility rate of 123.53% - 125.65%; risk-free interest rate of 0.40% - 1.09% based on a U.S. Treasury rate of 3 years; and a 3-year expected option life (simplified method).
|
|
(3)
|
The amounts shown below consist of health insurance and dental insurance premiums paid for these officers and their dependents.
|
|
(4)
|
Mr. Cartwright served as our President during our last two completed fiscal years ended December 31, 2012.
|
Employment Arrangements
From September 1, 2009 through December 31, 2012, we paid the following monthly compensation to officers of the Company:
|
·
|
Henry E. Cartwright - $7,000 and 3,000 shares of common stock;
|
|
·
|
Ulderico Conte - $7,000 and 3,000 shares of common stock; and
|
|
·
|
Terry A. Cartwright - $5,000 and 5,000 shares of common stock.
|
On January 14, 2013, we entered into employment agreements with each of the above named officers. Each agreement has an initial term of two years and will renew automatically for additional one-year terms unless we or the employee notifies the other that it will not renew at least 30 days prior to the end of the current term. For the first year of employment, each officer will receive a monthly base salary of $8,400 and an annual bonus of $30,000 if our earnings for the year ended February 28, 2014, prior to interest, taxes, depreciation and amortization, are at least $712,900. For the second year of employment, each will receive a monthly base salary of $9,240 and an annual bonus of $33,000 if our earnings for the year ended February 28, 2015, prior to interest, taxes, depreciation and amortization, are at least $1,120,400. In addition, each individual was granted 253,333 restricted shares of common stock, which vest at the rate of 20% per year on each anniversary date of the Closing (January 14, 2013). If the bonus goals are achieved during the second year of employment, each will also receive restricted shares of common stock equal to his base salary divided by the fair market value of our common stock on the date of grant, which will vest at the rate of 20% per year on each anniversary of the date the shares are granted. The shares that were issued, as well as those that may be issued under the bonus arrangement, are subject to the terms of a restricted stock agreement.
The following table sets forth information regarding the outstanding equity awards as of February 28, 2013 for our Named Officers.
Outstanding Equity Awards At Fiscal Year-End
|
Name
|
Option Awards
|
Stock awards
|
|
Number of
Securities
Underlying Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying Unexercised
Options (#) Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
Number of
shares or
units of stock
that have not
vested (#)
|
Market value
of shares or
units of stock
that have not
vested ($)
|
|
Henry E. Cartwright
|
-0-
-0-
|
175,000 (1)
59,000 (2)
|
0.42
0.28
|
5/16/2016
11/17/2016
|
253,333
|
32,300
|
|
Ulderico Conte
|
-0-
-0-
|
175,000 (1)
59,000 (2)
|
0.42
0.28
|
5/16/2016
11/17/2016
|
253,333
|
32,300
|
|
Name
|
Option Awards
|
Stock awards
|
|
Number of
Securities
Underlying Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying Unexercised
Options (#) Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
Number of
shares or
units of stock
that have not
vested (#)
|
Market value
of shares or
units of stock
that have not
vested ($)
|
|
Terry A. Cartwright
|
-0-
-0-
|
175,000 (1)
50,000 (2)
|
0.42
0.28
|
5/16/2016
11/17/2016
|
253,333
|
32,300
|
_______________
|
(1)
|
These options were granted on May 16, 2011. Half of the options granted vested May 16, 2012 and the remaining half vested May 16, 2013.
|
|
(2)
|
These options were granted on November 17, 2011. Half of the options granted vested November 17, 2012 and the remaining half vest November 17, 2013
|
During the fiscal year ended December 31, 2012 and the two-month period ended February 28, 2013, there were no exercises of stock options by the Named Officers.
Compensation of Directors
Each of our non-employee directors receives reimbursement for expenses incurred as a result of attendance at any meetings of the Board or the committees of the Board. Prior to February 12, 2013, we did not pay any cash compensation to any of our non-employee directors for their service on the board. We did not pay compensation of any kind to our non-employee directors for services rendered during the year ended December 31, 2012.
On February 12, 2013, we adopted a Non-Employee Director Compensation Program which sets forth the following compensation:
|
·
|
Annual cash compensation of $6,000 to each of the Audit Committee Chair, Compensation Committee Chair and Nominating and Corporate Governance Committee Chair
|
|
·
|
Annual cash compensation of $2,000 to each member of the Audit Committee and Nominating and Corporate Governance Committee
|
|
·
|
Annual cash compensation of $3,000 to each member of the Compensation Committee
|
|
·
|
Per meeting cash compensation to each member of the Audit Committee of $250 for each meeting attended by phone and $500 for each meeting attended in person
|
|
·
|
Stock grant of 150,000 shares of common stock upon first being appointed or elected to the Board, which shares vest on the grant date
|
|
·
|
Stock grant of 50,000 shares of common stock immediately after each annual meeting of stockholders beginning with the 2013 annual meeting, which shares vest on the grant date
|
The following table sets forth the compensation paid to our non-employee directors for services rendered during the two months ended February 28, 2013:
Director Compensation
|
Name
|
Fees Earned or Paid
in Cash ($)
|
Stock Awards ($)
|
Total ($)
|
|
Scott G. Capdevielle
|
-0-
|
19,125 (1)
|
19,125
|
|
Franklin E. Crail
|
-0-
|
19,125 (1)
|
19,125
|
|
Clyde W. Engle
|
-0-
|
19,125 (1)
|
19,125
|
|
Bryan J. Merryman
|
-0-
|
19,125 (1)
|
19,125
|
|
Lee N. Mortenson
|
-0-
|
19,125 (1)
|
19,125
|
_____________
|
(1)
|
The grant date fair value of these shares was computed in accordance with FASB Topic 718.
|
Stock Option Plans
2007 Stock Option Plan
. Our stockholders adopted the 2007 Stock Option Plan (the “2007 Plan”) on June 27, 2007, which currently permits the granting of options to purchase up to 1,515,208 shares. This amount adjusts at the beginning of each of our fiscal quarters to a number equal to 10% of the number of shares of common stock outstanding at the end of our last completed fiscal quarter, or 470,000 shares, whichever is greater, and provided further that such number will be increased by the number of shares of option stock that we subsequently may reacquire through repurchase or otherwise. Options may be granted to officers, directors, employees, and consultants on a case-by-case basis. The 2007 Plan will remain in effect until it is terminated by the board of directors or, if so appointed by the board, a committee of two or more disinterested directors administering the 2007 Plan, except that no incentive stock option will be granted after June 26, 2017.
The 2007 Plan is intended to (i) encourage ownership of shares by our employees and directors and certain consultants to the company; (ii) induce them to work for the benefit of the company; and (iii) provide additional incentive for such persons to promote the success of the company.
The board of directors or committee may amend, suspend or discontinue the 2007 Plan at any time or from time to time; provided that no action of the board will cause incentive stock options granted under the 2007 Plan not to comply with Section 422 of the Internal Revenue Code unless the board specifically declares such action to be made for that purpose and provided further that without the approval of our stockholders, no such action may: (i) materially increase the maximum aggregate number of shares that may be issued under options granted pursuant to the 2007 Plan, (ii) materially increase the benefits accruing to 2007 Plan participants, or (iii) materially modify eligibility requirements for the participants. Moreover, no such action may alter or impair any option previously granted under the 2007 Plan without the consent of the holder of such option.
The 2007 Plan contains provisions for proportionate adjustment of the number of shares for outstanding options and the option price per share in the event of stock dividends, recapitalizations, stock splits or combinations.
Each option granted under the 2007 Plan will be evidenced by a written option agreement between us and the optionee. The option price of any incentive stock option or non-qualified option may be not less than 100% of the fair market value per share on the date of grant of the option; provided, however, that any incentive stock option granted to a person owning more than 10% of the total combined voting power of the common stock will have an option price of not less than 110% of the fair market value per share on the date of grant. “Fair Market Value” per share as of a particular date is defined in the 2007 Plan as the closing price of our common stock as reported on a national securities exchange or the last transaction price on the reporting system or, if none, the average of the closing bid and asked prices of our common stock in the over-the-counter market or, if such quotations are unavailable, the value determined by the board in its discretion in good faith.
The exercise period of incentive stock options or non-qualified options granted under the 2007 Plan may not exceed ten years from the date of grant thereof. Incentive stock options granted to a person owning more than ten percent of the total combined voting power of our common stock will be for no more than five years.
The right to exercise an option granted under the 2007 Plan will be subject to the following vesting periods, subject to the optionee continuing to be an eligible participant and the occurrence of any other event (including the passage of time) that would result in the cancellation or termination of the option:
|
(i)
|
no portion of the option will be exercisable prior to four (4) months from the grant date;
|
|
(ii)
|
upon and after the expiration of one year from the grant date, the optionee may exercise up to one-half of the option granted; and
|
|
(iii)
|
the option will become exercisable on a cumulative basis as to the remaining half of the total option granted, two years from the grant date, so that the option will have become fully exercisable, subject to the optionee’s remaining an eligible participant, on the second anniversary of such grant date; and
|
|
(iv)
|
such additional vesting periods as may be determined by the board or committee in its sole discretion.
|
To exercise an option, the optionee must pay the full exercise price in cash, by check or such other legal consideration as may be approved by the committee. Such other consideration may consist of shares of common stock having a fair market value equal to the option price, cashless exercise, a personal recourse note, or in a combination of cash, shares, cashless exercise and a note, subject to approval of the committee.
An option may not be exercised unless the optionee then is an employee, consultant, officer, or director of our company or its subsidiaries, and unless the optionee has remained continuously as an employee, consultant, officer, or director of our company since the date of grant of the option. If the optionee ceases to be an employee, consultant, officer, or director of our company or its subsidiaries other than by reason of death, disability, or for cause, all options granted to such optionee, fully vested to such optionee but not yet exercised, will terminate three months after the date the optionee ceases to be an employee, consultant, officer or director of our company.
If the employee is terminated “for cause” (as that term is defined in the 2007 Plan), such employee’s options will terminate immediately on the date the optionee ceases employment or association.
If an optionee dies while an employee, consultant, officer or director of our company, or if the optionee’s employment, consultant, officer, or director status terminates by reason of disability, all options theretofore granted to such optionee, whether or not otherwise exercisable, unless earlier terminated in accordance with their terms, may be exercised at any time within one year after the date of death or disability of said optionee, by the optionee or by the optionee’s estate or by a person who acquired the right to exercise such options by bequest or inheritance or otherwise by reason of the death or disability of the optionee.
As of February 28, 2013, 212,000 options were outstanding under the 2007 Plan.
2011 Stock Option Plan
. Our stockholders adopted the 2011 Stock Option Plan (the “2011 Plan”) on April 20, 2011, which permits the granting of options to purchase up to 750,000 shares. The terms and provisions of the 2011 Plan are identical to the 2007 Plan, except that the 2011 Plan provides for the granting of “formula options” to purchase 25,000 shares of common stock to our non-employee directors on the date on which such directors are first appointed by the board or elected by the stockholders. Immediately after the completion of each annual meeting of the stockholders of the Company, each non-employee member of the board will be awarded a formula option to purchase 25,000 shares of common stock. Formula options will have an option price equal to the fair market value of the common stock as of the date of such grant. The terms of the 2011 Plan, including the vesting provisions described above, will apply to all formula options granted. Formula options to purchase a total of 50,000 shares of common stock were granted on April 26, 2011, of which half vested April 20, 2012 and the remaining half vests April 20, 2013.
In addition, options to purchase a total of 700,000 shares of common stock were granted on May 16, 2011 and on November 17, 2011, of which one-half vested on the one-year anniversary of the grant date and the remaining half will vest on the two-year anniversary of the grant date.
As of February 28, 2013, 750,000 options were outstanding under the 2011 Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information regarding the beneficial ownership of our common stock, as of February 25, 2014 by (i) each person whom we know owned, beneficially, more than 5% of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of our named executive officers, and (iv) all of the current directors and executive officers as a group.
We believe that, except as otherwise noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed. Unless otherwise indicated herein, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares beneficially owned.
A person is also deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of that security within 60 days of February 25, 2014 through the exercise of options or warrants, vesting of restricted stock, or through the conversion of another security. For purposes of calculating each person’s or group’s percentage ownership, shares of our common stock issuable upon the exercise of options or warrants, vesting of restricted stock or through conversion of another security within 60 days of February 25, 2014 are included as outstanding and beneficially owned for that person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.
|
Beneficial Owner
|
Number of Shares
Beneficially Owned
|
Percent of Class (1)
|
|
5%Stockholders
|
|
|
|
|
Rocky Mountain Chocolate Factory, Inc. (2)(3)(4)
|
8,341,253
|
|
54.0%
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
Terry A. Cartwright (4)(5)(6)(7)
|
798,833
|
|
5.0%
|
|
Ulderico Conte (4)(5)(6)(8)
|
784,333
|
|
5.0%
|
|
Henry E. Cartwright (4)(5)(6)(9)
|
691,333
|
|
4.4%
|
|
Franklin E. Crail (2)
|
150,000
|
|
1.0%
|
|
Scott G. Capdevielle (2)
|
130,000
|
|
0.8%
|
|
Bryan J. Merryman (2)
|
84,900
|
|
0.6%
|
|
Clyde W. Engle (2)
|
56,000
|
|
0.4%
|
|
Lee N. Mortenson (2)
|
49,656
|
|
0.3%
|
|
All directors and officers as a group
(8 persons)(10)
|
2,745,055
|
|
17.0%
|
_____________
|
(1)
|
Based on 15,440,029 shares outstanding.
|
|
(2)
|
The address for this stockholder is
265 Turner Drive, Durango, Colorado 81303.
|
|
(3)
|
Excludes shares of Series A Convertible Preferred Stock into which this stockholder’s revolving line of credit is convertible. The Series A Convertible Preferred Stock may in turn be converted into shares of common stock. Also excludes shares issuable upon the exercise of warrants which become exercisable immediately upon the exercise of our currently outstanding warrants and options.
|
|
(4)
|
This stockholder entered into a Voting Agreement dated January 14, 2013, pursuant to which it agreed to vote its/his shares in order to ensure that, among other things, (i) the size of the U-Swirl board shall be eight directors; (ii) Henry Cartwright, Terry Cartwright and Ulderico Conte remain on the U-Swirl board for at least the first full year after the date of the Voting Agreement, and (iii) for so long as RMCF continues to beneficially own at least 10% of our outstanding common stock, at least a majority of the board shall consist of directors designated by RMCF. Neither the number of shares shown to be owned beneficially by this stockholder nor the percent of class gives effect to the Voting Agreement, which gives the parties to that agreement the shared power to direct the voting of the shares owned by the parties.
|
|
(5)
|
The address for this stockholder is 1175 American Pacific #C, Henderson, Nevada 89074.
|
|
(6)
|
Includes 253,333 shares which are subject to forfeiture and vest at the rate of 20% per year beginning January 14, 2014. The shares may be voted while subject to the vesting requirements.
|
|
(7)
|
Includes 200,000 shares held of record by Gold Key Management Corp., 234,000 shares issuable upon the exercise of options that have vested or will vest within 60 days, and 12,500 shares issuable upon the exercise of warrants.
|
|
(8)
|
Includes 25,000 shares held by Mr. Conte’s wife, 234,000 shares issuable upon the exercise of options that have vested or will vest within 60 days, and 5,000 shares issuable upon the exercise of warrants.
|
|
(9)
|
Includes 234,000 shares issuable upon the exercise of options that have vested or will vest within 60 days.
|
|
(10)
|
Includes 702,000 shares issuable upon the exercise of options that have vested or will vest within 60 days and 12,500 shares issuable upon the exercise of warrants.
|
Changes in Control
There are no agreements known to management that may result in a change of control of our company.
Equity Compensation Plan Information
The following table sets forth information as of the end of the most recently completed fiscal year, February 28, 2013:
|
Plan category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance
|
|
Equity compensation plans approved by security holders
|
962,000
|
$0.36
|
288,084
|
|
Equity compensation plans not approved by security holders
|
-0-
|
--
|
-0-
|
|
Total
|
962,000
|
$0.36
|
288,084
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Purchase of U-Swirl Frozen Yogurt Concept
On September 30, 2008, we acquired the worldwide rights to the U-Swirl Frozen Yogurt concept in exchange for 100,000 restricted shares of our common stock from a company then known as U-Swirl Yogurt, Inc. (now known as U Create Enterprises), which is owned by the grandchildren and family of Henry E. Cartwright. The shares were valued at $180,000, based on the fair market value of the stock on the date of acquisition. U Create Enterprises operates a frozen yogurt café in Henderson, Nevada, as our franchisee. As part of the terms of the acquisition, we agreed that no franchise fees or royalties would be charged with respect to this location, as it will permit us to use the location as a training facility. We did not obtain a formal valuation on the use of the Henderson location for training purposes, but we believed that being able to have our initial U-Swirl employees trained there and utilize the past experience of that location with respect to restaurant operation procedures and staffing, inventory and advertising was critical to us at the time. In addition, we granted U Create Enterprises the right to open additional locations in Henderson, Boulder City and Pahrump, Nevada. U Create Enterprises will pay an initial franchise fee of $5,000 for each location and a 3% royalty on net sales. We were owed $8,597 and $7,048 as of February 28, 2013 and December 31, 2012, respectively, by U Create Enterprises.
Area Development Agreement with RMR Group, LLC
On February 15, 2010, we entered into an area development agreement with RMR Group, LLC for the Monmouth County, New Jersey, development area. American Pacific Investments, Limited, which owns one-third of RMR Group, is a Nevada limited liability company whose members are Ulderico Conte, Terry A. Cartwright, Paul Heroy and Stan Cartwright. Ulderico Conte and Terry Cartwright are directors and officers of the Company, and Terry Cartwright and Stan Cartwright are the adult children of Henry E.
Cartwright. RMR Group paid a $30,000 development fee, which was derived in accordance with our then existing policy of $15,000 plus $5,000 times the minimum number of units for an area development agreement. The minimum number of units for the Monmouth County area was determined to be three. We have entered into an amendment to the area development agreement to delay the development schedule by one year. RMR Group has identified a location for its initial café that has been involved in various construction delays which have further stalled the development of the area.
Area Development Agreement with Trust Owned by Director
On May 20, 2011, we entered into an area development agreement with Jimmy D. Sims and Nancy M. Sims 2001 Revocable Trust for the Colorado Springs, Colorado metropolitan statistical area (“Colorado Springs MSA”). Mr. Sims was a director when we entered into that agreement. The Trust paid a development fee of $30,000, which was derived in accordance with our then existing policy of $15,000 plus $5,000 times the minimum number of units for an area development agreement. The minimum number of units for the Colorado Springs MSA was determined to be three. The Trust has not committed to any café locations and may be open to transferring the area to a new area developer.
Loan and Security Agreement with Rocky Mountain Chocolate Factory
On January 16, 2014, we entered into a loan and security agreement (the “Loan Agreement”) with RMCF, our majority owner, pursuant to which RMCF agreed to loan us up to $7,750,000. As of February 25, 2014, the outstanding principal balance under this Loan Agreement was $6,715,762. Interest accrues on the unpaid principal balances of the loans at the rate of 9% per annum, and the principal and accrued interest shall be due January 16, 2016. Payment of the loans is secured by a security interest in all of our assets and our wholly-owned subsidiary guaranteed payment of the loans. RMCF charged an origination fee of $542,500, which accrued to the loans.
All payments of principal, interest and fees are payable in cash, shares of Series A Convertible Preferred Stock (the “Preferred Stock”), or a combination thereof, at the option of RMCF. The Preferred Stock to be designated will pay cumulative dividends equal to 9% of the stated value of the Preferred Stock, have a liquidation preference, vote with our common stock on all matters submitted for a vote of holders of common stock, and be convertible at the option of the holder into shares of our common stock.
We may prepay up to $2,100,000 of the outstanding amounts due to RMCF under the Loan Agreement at our option and without penalty in cash from the proceeds raised from (i) advances on rebates from its yogurt suppliers; and (ii) the exercise of outstanding stock options and warrants. We also have the option to redeem all of the amounts owed under the Loan Agreement at any time after January 16, 2015 at the rate of 108% of the total amounts owed, by making payment in cash, shares of Preferred Stock, or a combination thereof, at the option of RMCF.
Mandatory prepayment of the loans is required upon the receipt of proceeds from the disposition of any of our assets, the issuance of any equity securities by us (other than upon exercise of outstanding stock options or warrants), the issuance of any debt securities by us, or the receipt of insurance proceeds.
In the event of default, RMCF may charge interest on all amounts due under the Loan Agreement at the default rate of 15% per annum, accelerate payment of all amounts due under the Loan Agreement, and foreclose on its security interest.
Future Transactions
All future affiliated transactions will be made or entered into on terms that are no less favorable to us than those that can be obtained from any unaffiliated third party. A majority of the independent, disinterested members of our board of directors will approve future affiliated transactions, and we will maintain at least two independent directors on our board of directors to review all material transactions with affiliates.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value, and 25,000,000 shares of preferred stock, $0.001 par value. As of February 25, 2014, we had 15,440,029 shares of common stock and no shares of preferred stock outstanding.
The following is a summary of the rights of our capital stock as provided in our articles of incorporation and bylaws. For more detailed information, please see our articles of incorporation and bylaws, which have been filed as exhibits to the registration statement of which this prospectus is a part.
The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. We do not have cumulative voting rights in the election of directors. Subject to preferences that may be granted to any then outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available therefor as well as any distributions to the shareholders. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of our assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no preemptive or other subscription of conversion rights. There are no redemption or sinking fund provisions applicable to the common stock.
General
.
The Class C warrants may be exercised during the period commencing any time after they become separately quotable until the expiration date, which is October 13, 2015. Each Class C warrant entitles the holder to purchase one share of common stock at an exercise price of $0.60 per share. This exercise price will be adjusted if specific events, summarized below, occur. A holder of warrants will not be deemed a holder of the underlying stock for any purpose until the warrant is exercised. If at their expiration date the Class C warrants are not currently exercisable, the expiration date will be extended for 30 days following notice to the holders of the warrants that the warrants are again exercisable. If we cannot honor the exercise of Class C warrants and the securities underlying the warrants are listed on a securities exchange or if there are three independent market makers for the underlying securities, we may, but are not required to, settle the warrants for a price equal to the difference between the closing price of the underlying securities and the exercise price of the warrants. Because we are not required to settle the warrants by payment of cash, and because there is a possibility that warrant holders will not be able to exercise the warrants when they are in-the-money or otherwise, there is a risk that the warrants will never be settled in shares or payment of cash. This may have an adverse effect on the demand for the warrants and the prices that can be obtained from reselling them.
Redemption
.
We will have the right to redeem the Class C warrants a price of $0.05 per warrant, after providing 30 days prior written notice to the Class C warrant holders, at any time after the closing price of our common stock, as reported on the OTC Bulletin Board, equals or exceeds $0.80 for five consecutive trading days. We will send a written notice of redemption by first class mail to holders of the Class C warrants at their last known addresses appearing on the registration records maintained by the transfer agent and by publication of a press release. No other form of notice or publication will be required. If we call the warrants for redemption, the holders of the warrants will then have to decide whether to sell warrants, exercise them before the close of business on the business day preceding the specified redemption date or hold them for redemption. The right to exercise the Class C warrants will be forfeited unless it is exercised before the date specified in the notice of redemption.
Exercise
.
The holders of the warrants may exercise them only if an appropriate registration statement is then in effect. To exercise a warrant, the holder must deliver to our transfer agent the warrant certificate on or before the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise
price for the number of warrants being exercised. Fractional shares of common stock will not be issued upon exercise of the warrants.
Adjustments in Certain Events
.
We will make adjustments to the terms of the warrants if certain events occur. If we distribute to our stockholders additional shares of common stock through a dividend or distribution, or if we effect a stock split of our common stock, we will adjust the total number of shares of common stock purchasable on exercise of a warrant so that the holder of a warrant thereafter exercised will be entitled to receive the number of shares of common stock the holder would have owned or received after such event if the warrant holder had exercised the warrant before the event causing the adjustment. The aggregate exercise price of the warrant will remain the same in that circumstance, but the effective purchase price per share of common stock purchasable upon exercise of the warrant will be proportionately reduced because a greater number of common stock shares will then be purchasable upon exercise of the adjusted warrant. We will make equivalent changes in warrants if we effect a reverse stock split.
In the event of a capital reorganization or reclassification of our common stock, the warrants will be adjusted so that thereafter each warrant holder will be entitled to receive upon exercise the same number and kind of securities that such holder would have received if the warrant had been exercised before the capital reorganization or reclassification of our common stock.
If we merge or consolidate with another corporation, or if we sell our assets as an entirety or substantially as an entirety to another corporation, we will make provisions so that warrant holders will be entitled to receive upon exercise of a warrant the kind and number of securities, cash or other property that would have been received as a result of the transaction by a person who was our stockholder immediately before the transaction and who owned the same number of shares of common stock for which the warrant was exercisable immediately before the transaction. No adjustment to the warrants will be made, however, if a merger or consolidation does not result in any reclassification or change in our outstanding common stock.
Our Board of Directors is authorized by our articles of incorporation to establish classes or series of preferred stock and fix the designation, powers, preferences and rights of the shares of each such class or series and the qualifications, limitations or restrictions thereof without any further vote or action by our stockholders. Any shares of preferred stock so issued would have priority over our common stock with respect to dividend or liquidation rights. Any future issuance of preferred stock may have the effect of delaying, deferring or preventing a change in our control without further action by our stockholders and may adversely affect the voting and other rights of the holders of our common stock. At present we have no plans to issue any additional shares of preferred stock or to adopt any new series, preferences or other classification of preferred stock, other than the Series A Convertible Preferred Stock described below. No preferred stock is being registered in the registration statement of which this prospectus is part.
All payments of principal, interest and fees due to RMCF under its loan and security agreement are payable in cash, shares of Series A Convertible Preferred Stock (the “Preferred Stock”), or a combination thereof, at the option of RMCF. The Preferred Stock to be designated will pay cumulative dividends equal to 9% of the stated value of the Preferred Stock, have a liquidation preference, vote with our common stock on all matters submitted for a vote of holders of common stock, and be convertible at the option of the holder into shares of our common stock.
The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable a holder to block such a transaction. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of holders of our common stock. Although our Board of Directors is required to make any determination to issue preferred stock based on its judgment as to the
best interests of our stockholders, our Board could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which such stockholders might receive a premium for their stock over the then market price of such stock. Our Board presently does not intend to seek stockholder approval prior to the issuance of currently authorized stock, unless otherwise required by law or applicable stock exchange rules.
Underwriter’s Warrants
We issued underwriter’s warrants in connection with our October 2010 public offering that permit the holders thereof to purchase up to an aggregate of 150,000 units, each unit consisting of one share of our common stock and one redeemable Class C warrant. The underwriter’s warrants are exercisable at $0.48 per unit and expire on October 13, 2015. We have agreed to register the securities underlying the underwriter’s warrants until October 13, 2015. The common stock and warrants issued upon exercise of these underwriter’s warrants will be freely tradable.
Other Warrants
In addition to the stock options and warrants described above, we have issued warrants to purchase a total of 100,000 shares of common stock as follows:
|
Number of Shares
Purchasable
|
Exercise Price
|
Issuance Date
|
Expiration Date
|
|
100,000
|
$2.20
|
November 20, 2006
|
January 24, 2016
|
Neither the warrants nor the common stock issuable upon exercise of the warrants is being registered in the registration statement of which this prospectus is part.
Warrant Issued to Rocky Mountain Chocolate Factory, Inc.
On January 14, 2013, as partial consideration for the assets acquired in the Acquisition, we issued RMCF a warrant to purchase up to 1.5 times the number of shares issued upon exercise of our outstanding stock options and warrants on the same terms of those outstanding options and warrants, so as to enable RMCF to maintain its 60% pro rata ownership in us obtained through the Acquisition.
Our 2007 Stock Option Plan currently authorizes the grant of up to 1,515,208 shares of common stock (subject to adjustment for stock splits and similar capital changes) in connection with restricted stock awards, incentive stock option grants and non-qualified stock option grants. Employees and, in the case of nonqualified stock options, directors, consultants or any affiliate are eligible to receive grants under our plans. As of February 28, 2013 there were options to purchase 212,000 shares outstanding under our 2007 Stock Option Plan. The exercise of these options could have dilutive effect on our common stock. Neither the options nor the common stock issuable upon exercise of the options is being registered in the registration statement of which this prospectus is part.
Our 2011 Stock Option Plan currently authorizes the grant of up to 750,000 shares of common stock (subject to adjustment for stock splits and similar capital changes) in connection with restricted stock awards, incentive stock option grants and non-qualified stock option grants. Employees and, in the case of nonqualified stock options, directors, consultants or any affiliate are eligible to receive grants under our plans. As of February 28, 2013 there were 750,000 options outstanding under our 2011 Stock Option Plan. Neither the options nor the common stock issuable upon exercise of the options is being registered in the registration statement of which this prospectus is part.
Authorized but Unissued Shares
The authorized but unissued shares of common and preferred stock are available for future issuance without stockholder approval. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares could hinder or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Anti-Takeover Effects of Certain Provisions of Nevada Law and Our Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws contain a number of provisions that could make our acquisition by means of a tender or exchange offer, a proxy contest or otherwise more difficult. These provisions are summarized below.
Special Meetings.
Our Bylaws provide that special meetings of stockholders can be called by the Chairman of the Board, the President, a majority of the Board, or the Secretary at the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting.
Undesignated Preferred Stock.
The ability to authorize undesignated preferred stock makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. The ability to issue preferred stock may have the effect of deterring hostile takeovers or delaying changes in control or management of our company.
Advance Notice Procedure for Director Nominations and Stockholder Proposals
. Our Bylaws provide that adequate notice must be given to nominate candidates for election as directors or to make proposals for consideration at annual meetings of stockholders. Notice of a stockholder’s intent to nominate a director must be delivered to or mailed and received at our principal executive offices as follows:
|
·
|
for an election to be held at the annual meeting of stockholders, not later than 90 calendar days prior to the anniversary date of the immediately preceding annual meeting of stockholders; and
|
|
·
|
for an election to be held at a special meeting of stockholders, not later than the later of (1) 90 calendar days prior to the special meeting or (2) 10 calendar days following the public announcement of the special meeting.
|
Notice of a stockholder’s intent to raise business at an annual meeting must be received at our principal executive offices not later than 90 calendar days prior to the anniversary date of the preceding annual meeting of stockholders.
These procedures may operate to limit the ability of stockholders to bring business before a stockholders’ meeting, including the nomination of directors and the consideration of any transaction that could result in a change in control and that may result in a premium to our stockholders.
Transfer Agent, Warrant Agent and Registrar
The transfer agent, warrant agent and registrar for our common stock is Computershare Trust Company, N.A. Its address is 350 Indiana Street, Suite 800, Golden, Colorado 80401, and its telephone number is (303) 262-0600.
LEGAL MATTERS
Dill Dill Carr Stonbraker & Hutchings, P.C., Denver, Colorado, has passed upon the validity of the securities offered by this prospectus on our behalf.
EXPERTS
Our financial statements as of and for the two months ended February 28, 2013 and year ended December 31, 2012 included in this prospectus have been audited by L.L. Bradford & Company, LLC, an independent registered public accounting firm, to the extent set forth in its report, and are set forth in this prospectus in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
In connection with the securities offered by this prospectus, we have filed a registration statement on Form S-1 under the Securities Act with the SEC. This prospectus, filed as part of the registration statement, does not contain all of the information included in the registration statement and the accompanying exhibits and schedules. For further information with respect to our securities, and us you should refer to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract or any other document are not necessarily complete, and you should refer to the copy of the contract or other document filed as an exhibit to the registration statement.
We are subject to the information reporting requirements of the Securities Exchange Act of 1934, and accordingly we are required to file annual, quarterly and special reports, proxy statements and other information with the SEC. You may inspect these documents filed with the SEC, as well as a copy of the registration statement and the accompanying exhibits and schedules, without charge at the SEC’s public reference facility, 100 F Street, NE, Washington, D.C. 20549, and you may obtain copies of these documents from this office for a fee. You may obtain information on the operation of the public reference facility by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically. The address of the site is
http://www.sec.gov
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You should rely only on the information contained in this prospectus and in any free writing prospectus that states that it has been provided with our approval. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this prospectus may only be accurate as of the date appearing on the cover page of this prospectus, regardless of the time this prospectus is delivered or our securities are sold.
We are not making an offer to sell the securities in any jurisdiction where the offer or sale is not permitted. No action is being taken in any jurisdiction outside the United States to permit a public offering of our securities or the possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside of the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable in that jurisdiction.