Item 1.
Business
We are in the business of offering consumers frozen desserts such as yogurt and sorbet. We are launching 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.
We currently own and operate six U-Swirl Frozen Yogurt cafés in the Las Vegas metropolitan area, and have 20 franchised locations in operation across the country. 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.
The following table provides summary detail regarding our current locations:
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 President, in consideration for 100,000 restricted shares of our common stock. U Create Enterprises continues to operate its frozen yogurt café in Henderson, Nevada, as our franchisee. No franchise fees or royalties are charged with respect to this location, as U Create Enterprises permits us to use the location as a training facility.
We opened our first company-owned U-Swirl location in Las Vegas, Nevada, in March 2009, and currently there are 26 U-Swirl cafés that have been opened including six company-owned cafés and 20 franchisee-owned cafés. We plan to have at least 31 U-Swirl cafés operating by the end of 2012 and
have entered into agreements for the third party development of an additional 18 cafés by the end of 2013.
We issued a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in certain states which require filing. In July 2009, we entered into a franchise agreement for a café in Reno, Nevada, which opened in October 2009. Our franchisee in Reno opened a second location in October 2010, and a third café in June 2011. We recently entered into franchise agreements for locations in Marietta, Georgia; Waco, Texas; and Philadelphia, Pennsylvania. The Waco, Texas café opened in September 2011. In addition, we have signed area development agreements as follows:
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Phoenix, Arizona for the development of a minimum of seven cafés by November 2011 (of which three have been opened in 2011), three more cafés by November 2012 and a total of 23 cafés by November 2019;
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Monmouth County, New Jersey for the development of a minimum of one café by February 2012, one more café by February 2013 and a total of three cafés by February 2014 (pursuant to an amended development schedule);
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Las Vegas, Nevada for the development of a minimum of one café by April 2011, one more café by April 2012 and a total of four cafés by April 2013;
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Boise, Idaho for the development of a minimum of one café by June 2011 (which opened in November 2010) and a total of two cafés by June 2012 (the second café having opened in June 2011 and the third café having opened in July 2011);
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Tucson, Arizona for the development of a minimum of one café by October 2011 (which opened in July 2011), one more café by October 2012 and a total of five cafés by October 2015;
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Orlando, Florida for the development of a minimum of one café by December 2011 (which opened in July 2011), one café by December 2012 and a total of four cafés by December 2014;
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Northern California for the development of a minimum of one café by January 2012 (which opened in June 2011) and a total of five cafés by January 2014;
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New Mexico for the development of a minimum of one café by May 2012 (which opened in February 2012) and a total of ten cafés by May 2015 (the second café having opened in March 2012);
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Colorado Springs, Colorado for the development of a minimum of one café by May 2012 and a total of three cafés by May 2014;
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Montana for the development of a minimum of one café by June 2012 (which opened in January 2012) and a total of four cafés by June 2014;
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Salt Lake City, Provo and Ogden, Utah for the development of a minimum of one café by September 2012 and a total of two cafés by September 2013 (with a total of three cafés being opened in 2011) ; and
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Houston, Texas for the development of a minimum of two cafés by December 2012 and a total of ten cafés by December 2015.
In some cases, our area developers have encountered delays with lease negotiations, licensing and permitting issues, and construction schedules. We have chosen to continue to work with the developers, rather than enforce the development schedules contained in their respective agreements, in an effort to promote and support our franchising efforts.
Industry Background
We believe that there is an 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.
According to Ice Cream and Frozen Desserts in the U.S.: Markets and Opportunities in Retail and Foodservice, 6th 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 frozen yogurt franchises may provide competition to U-Swirl:
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TCBY - approximately 470 locations worldwide; some self-serve locations
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Pinkberry - approximately 170 locations in Alabama, Arizona, California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Michigan, New York, North Carolina, Ohio, Rhode Island, Tennessee, Texas, Virginia, Canada, Peru, Philippines, Russia, United Kingdom, and several countries in the Middle East; not self-serve
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Golden Spoon - approximately 120 locations in Arizona, California, Colorado, Nevada, Utah, Canada, Japan and the Philippines; not self-serve
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Red Mango - approximately 140 locations in Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, Texas, Utah, Virginia, Washington and Wisconsin; some self-serve locations
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Yogurtland - approximately 170 locations in Alaska, Arizona, California, Colorado, Florida, Georgia, Guam, Hawaii, Louisiana, Missouri, Nevada, New Jersey, Oregon, Texas, Utah, Washington, Mexico and Japan; self-serve
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Menchie’s - approximately 160 locations in Alabama, Alaska, Arizona, California, Colorado, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wyoming, and 18 countries around the world; self-serve
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Orange Leaf - approximately 130 locations in Alabama, Arkansas, Arizona, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Massachusetts, Mississippi, Missouri, Nebraska, New York, North Carolina, Ohio, Oklahoma, Tennessee, Texas, Utah and Washington; self-serve
Many 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 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. 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 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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up to 70 toppings; and
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self-serve format allowing guests to create their own favorite snack.
Management believes that these characteristics may provide us with the ability to compete successfully in this industry.
Growth Strategy
The Company’s growth strategy is to maximize its market share and market penetration through the development of company-owned, franchise-owned and joint-venture cafés. Based on an analysis of population statistics, the Company believes that an estimated 3,000 U-Swirl cafés could be opened in the United States. 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
Our marketing strategy for establishing multi-unit franchises was initially 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 President and Chief Executive 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 six company-owned cafés and 20 franchised cafés in operation, we now identify qualified candidates through referrals from other franchisees, inquiries on our web site and customers of U-Swirl 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.
Area Development Agreements
We have elected to pursue a development strategy focused, where appropriate, on the execution of area development agreements (“ADAs”) with qualified area developers that possess, or have the ability to secure in a timely manner, the experience, knowledge and abilities, established market knowledge and relationships, capital resources, and the skills necessary to develop multiple locations in a market. Prior to the execution of an ADA, we determine the minimum number of cafés that must be developed within a territory. A territory will consist of one or more metropolitan or micropolitan1 statistical areas. A standard form ADA generally provides for the following:
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Term: Until the end of the development schedule, generally ten years;
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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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Non-traditional café types (such as shopping mall food court or airport locations), or
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Cafés acquired by the Company pursuant to a merger or acquisition;
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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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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.
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1 As defined by the United States Census Bureau, a micropolitan area is the area (usually a county or grouping of counties) surrounding and including a core city with population between 10,000 and 49,999 (inclusive). Suburbs of metropolitan areas are generally not considered to be micropolitan core cities, although they can be if they are in another county from the metropolitan core.
Our existing franchisees pay a 3% royalty on monthly net sales and may pay an additional 2% to support national and regional advertising efforts once we determine that the system has grown to a sufficient size to warrant these efforts. We expect to increase the royalty to 5% for new franchisees to our system within the next few months. We require franchisees to dedicate at least 1% of net sales to local advertising.
Under the U-Swirl system, each café must conform to a standard of interior design, featuring a distinctive and comfortable décor. The minimum size for a typical U-Swirl café is 1,800 square feet, but cafés in malls, kiosks or other unique locations may be smaller. Under the terms of the franchise agreement, franchisees are required to obtain our approval of the café site, build out the space in accordance with our standards, satisfactorily complete training, and purchase certain equipment and supplies from us or our approved suppliers. Franchisees are also required to purchase a point-of-sale system that meets U-Swirl system standards and to establish and maintain high-speed Internet access from a service provider meeting the minimum specifications established by us. All goods sold by our franchisees must be purchased through us or through our approved suppliers that have met our specifications and standards. Specifically, the yogurt sold in U-Swirl cafés must meet the criteria established by the National Yogurt Association for live and active culture yogurt.
Currently, all of the frozen yogurt served in our cafés is purchased from YoCream International, Inc. and 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 franchise agreement has a 15-year term and may be renewed for up to two additional 15-year terms. 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.
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 company-owned, franchise-owned and joint-venture locations and possibly 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. 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
The Company believes 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, the Company has 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, the Company requires 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.
Point-of-Sale System
The Company utilizes a point-of-sale 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:
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Developing and implementing cost-effective new customer acquisition and customer loyalty programs;
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Achieving and maintaining target cost of sales and labor costs and gross margins;
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Incorporating café performance analytics with other relevant factors to refine criteria to provide predictive indicators for purposes of site selection for future cafés; and
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Forecasting future performance.
Key data tracked and analyzed includes, but is not limited to:
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Product sales and sales mix;
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Customer and transaction counts; and
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Employee labor hours.
Trademarks and Copyrights
In connection with our U-Swirl operations, the following marks have been registered with the U.S. Patent and Trademark Office:
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“u-swirl FROZEN YOGURT and Design”;
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“U-SWIRL FROZEN YOGURT”;
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“U-SWIRL”;
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“U and Design”; and
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“WORTH THE WEIGHT”.
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 U-Swirl cafés have approximately five full-time employees and 35 part-time employees that work various shifts. The cafés are open seven days per week generally from 11:00 a.m. to 11:00 p.m. or midnight. In addition to the employees at the cafés, we had 4 full-time employees as of December 31 2011, consisting of our chief executive officer and one person for each of the following functions: café site selection and build out, franchise sales, café operations and administration. In addition, we had 3 part-time employees and a consultant who serves as our National Operations Consultant.
Item 1A.
Item 1A.
Risk Factors
Not required for smaller reporting companies.
Item 1B.
Item 1B.
Unresolved Staff Comments
Not required for smaller reporting companies.
Item 2.
Item 2.
Properties
Facilities
Our principal offices are located at 1175 American Pacific, Suite C, Henderson, Nevada 89074, in approximately 5,200 square feet of space leased for a term of three years expiring in July 2013. We pay rent of $2,743 per month.
The leases for our café operations range from approximately 1,600 to 3,000 square feet. The leases are generally for five-year terms with options to extend. We currently have six leases in place which range between $1,109 and $7,074 per month, inclusive of common area maintenance charges and taxes.
Item 3.
Item 3.
Legal Proceedings
On June 21, 2010, Katherine Hemingway, our former Vice President of Marketing and Communications, filed a Notice of Charge of Discrimination against us with the United States Equal Employment Opportunity Commission (“EEOC”), asserting that she was denied equal terms and conditions of employment and compensation. She sought monetary damages and an unspecified amount of stock. We entered into a settlement agreement with Ms. Hemingway in February 2012 and paid the first installment of the $22,500 settlement. Ms. Hemingway is married to Gregory Janson, a former director.
There are no other legal proceedings pending or, to the best of our knowledge, contemplated or threatened that are deemed material to our business or us.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our common stock are quoted on the OTC Markets - OTCQB under the symbol “SWRL.” In addition, our shares were quoted on the OTC Bulletin Board from April 17, 2008 to August 9, 2010.
The following table sets forth the range of high and low bid quotations for our common stock for each fiscal quarter for the fiscal years ended December 31, 2010 and 2011. These quotations reflect inter-dealer prices quoted on the OTC Bulletin Board and OTCQB without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions.
On March 12, 2012, the closing price for the common stock on the OTCQB was $0.165 per share.
Holders and Dividends
As of March 12, 2012, there were 45 record holders of our common stock. To date, we have not declared or paid any dividends on our common stock. We do not intend to declare or pay any dividends on our common stock in the foreseeable future, but rather to retain any earnings to finance the growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual and legal restrictions and other factors the board of directors deems relevant.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2011, we issued 33,000 shares of common stock to three officers for services valued at $9,570. We relied upon the exemption from registration contained in Section 4(2) of the Securities Act, as these persons were deemed to be sophisticated with respect to the investment in the securities due to their financial condition and involvement in our business and had access to the kind of information which registration would disclose.
Use of Proceeds
On October 21, 2010, we completed a secondary offering for net proceeds of $410,704. All of the expenses of the offering, totaling $279,296, were direct or indirect payments to persons other than officers, directors, affiliates or more than 10% shareholders.
Through December 31, 2011, all of the net proceeds had been used towards corporate overhead.
Item 6.
Item 6.
Selected Financial Data
Not required for smaller reporting companies.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and the related notes included in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those projected in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors,” “Business” and elsewhere in this report.
History and Overview
We were incorporated under the laws of the state of Nevada on November 14, 2005 to own and operate EVOS fast food franchises as “Healthy Fast Food.”
Shortly after signing a franchise agreement in December 2005 to operate an EVOS restaurant in Henderson, Nevada, we engaged in a private placement to raise the capital necessary to open the restaurant. We sold 300,000 shares of common stock in the private placement, resulting in net proceeds of $544,878. These proceeds, together with loans from related parties, were used to build out, open and operate the restaurant, which opened in October 2006.
In December 2006, we entered into an area representative agreement that gave us the exclusive right to develop EVOS restaurants in a 12-state territory. To maintain our exclusivity in the territory, we were required to open a minimum number of restaurants within certain timeframes through 2016. These restaurants could be opened by us or by franchise owners that we identified and solicited. From December 2006 to June 2007, we engaged in a second private placement of 389,450 shares of common stock, resulting in net proceeds of $1,552,127. These proceeds were used to repay related party loans, pay some of the expenses of our initial public offering, fund our efforts to solicit franchise owners for our territory, and open another restaurant.
In March 2008, we completed an initial public offering of 1,000,000 units, each unit consisting of one share of common stock, one Class A warrant and two Class B warrants, resulting in gross proceeds of $5,100,000 and net proceeds of $4,002,840. The net proceeds of the offering were intended to be used to open company-owned EVOS restaurants in the Las Vegas metropolitan statistical area (the “Las Vegas MSA”) during the following 12 to 18 months, as well as for marketing expenses, franchise development and working capital. We opened our second restaurant in the Las Vegas MSA in December 2008, and our EVOS sub-franchisee in California opened its first restaurant in November 2008.
After experiencing continued operating losses with our EVOS restaurants, we decided to diversify into another healthy fast food concept and acquired the worldwide rights to U-Swirl Frozen Yogurt (“U-Swirl”) on September 30, 2008. We opened our first company-owned U-Swirl café in the Las Vegas MSA in March 2009, and we have since developed five more company-owned cafés in the Las Vegas MSA. In addition, the original U-Swirl café in Henderson, Nevada, continues to operate as a franchisee.
We issued a Franchise Disclosure Document (the “FDD”) in November 2008 and filed it in certain states which require filing. In July 2009, we entered into a franchise agreement for a café in Reno, Nevada, which opened in October 2009. Our franchisee in Reno opened a second location in October 2010, and a third café in June 2011. We recently entered into franchise agreements for locations in Marietta, Georgia; Waco, Texas; and Philadelphia, Pennsylvania. The Waco, Texas café opened in September 2011. In addition, we have signed area development agreements as follows:
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Phoenix, Arizona for the development of a minimum of seven cafés by November 2011 (of which three have been opened in 2011), three more cafés by November 2012 and a total of 23 cafés by November 2019;
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Monmouth County, New Jersey for the development of a minimum of one café by February 2012, one more café by February 2013 and a total of three cafés by February 2014 (pursuant to an amended development schedule);
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Las Vegas, Nevada for the development of a minimum of one café by April 2011, one more café by April 2012 and a total of four cafés by April 2013;
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Boise, Idaho for the development of a minimum of one café by June 2011 (which opened in November 2010) and a total of two cafés by June 2012 (the second café having opened in June 2011 and the third café having opened in July 2011);
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Tucson, Arizona for the development of a minimum of one café by October 2011 (which opened in July 2011), one more café by October 2012 and a total of five cafés by October 2015;
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Orlando, Florida for the development of a minimum of one café by December 2011 (which opened in July 2011), one café by December 2012 and a total of four cafés by December 2014;
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Northern California for the development of a minimum of one café by January 2012 (which opened in June 2011) and a total of five cafés by January 2014;
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New Mexico for the development of a minimum of one café by May 2012 (which opened in February 2012) and a total of ten cafés by May 2015 (the second café having opened in March 2012);
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Colorado Springs, Colorado for the development of a minimum of one café by May 2012 and a total of three cafés by May 2014;
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Montana for the development of a minimum of one café by June 2012 (which opened in January 2012) and a total of four cafés by June 2014;
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Salt Lake City, Provo and Ogden, Utah for the development of a minimum of one café by September 2012 and a total of two cafés by September 2013 (with a total of three cafés being opened in 2011); and
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Houston, Texas for the development of a minimum of two cafés by December 2012 and a total of ten cafés by December 2015.
We were not successful with the EVOS concept and ceased operating those restaurants under the EVOS concept in July 2009. After briefly operating under a concept known as “Fresh and Fast,” we closed the two restaurants in August 2009, and have reflected activities related to this concept as discontinued operations in our financial statements. Prior periods have been restated to conform to the current presentation. We changed our name to “U-Swirl, Inc.” effective May 16, 2011.
Results of Operations
For the year ended December 31, 2011, our U-Swirl cafés generated $2,342,027 in sales, net of discounts, as compared to sales of $2,546,038 for the prior fiscal year, a decrease of 8%. 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 2011 café operating costs were $1,809,582 or 77% of net sales revenues, resulting in cafe operating profit of $532,445. For 2010, our café operating costs, excluding pre-opening expenses attributable to training, supplies and various grand-opening promotions including product giveaways, were $1,856,134, or 73% of net sales revenues, resulting in café operating profit of $689,904. Like other retail food operations, we were adversely affected by food costs that increased during 2011 due to the rising fuel and transportation costs. We also experienced increased occupancy expenses, which reflected increased amounts for utilities and lease rent.
For fiscal 2011, we generated franchise fee income of $182,500 and royalty income of $112,600, as compared to franchise fee income of $32,500 and royalty income of $31,670 in fiscal 2010. During 2011, we opened 13 franchised cafés and had 17 franchised cafés in operation for all or part of that year. In comparison, we opened two franchised cafés during 2010 and had four franchised cafés for all or part of that year.
Marketing and advertising expenses were $95,542 for the 2011 period as compared to $86,582 for the 2010. With the increased competition in the Las Vegas area, we needed to increase our marketing and advertising efforts.
For the year ended December 31, 2011, general and administrative expense increased by $108,336 (22%) due to the settlement with Kate Hemingway (as described in Item 3 above), a consulting agreement that started in October 2011 with our National Operations Consultant, the fair market value of stock options granted in April 2011, an allowance for doubtful accounts receivable that was charged beginning in 2011, and an increase in repairs and maintenance on café equipment. 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). In comparison, the largest components of general and administrative expenses for the 2010 fiscal year were legal fees ($84,957), accounting fees ($50,513), credit card fees ($40,215), insurance ($39,753), repairs and maintenance ($32,589), cleaning supplies ($29,284), and travel ($28,038).
Officer compensation for the 2011 fiscal year decreased slightly by $4,007 (1%), as the value of stock issued for compensation was less in 2011 than in 2010. This expense included $90,440 and $110,160 of stock issued to our officers in 2011 and 2010, respectively.
Investor relations fees were $-0- in 2011 and $104,050 in 2010, of which $44,050 was the value of stock issued to the investor relations firm as part of its compensation.
Depreciation and amortization expense increased by $9,606 (3%), due to the inclusion of corporate office signage, furniture and equipment purchased in 2011.
As a result of the increased revenues and decreases in café operating expenses, our operating loss decreased by $64,274 (9%).
As described above, we accounted for the “Fresh and Fast” concept divestiture as “discontinued operations.” We wrote off all of our assets related to the EVOS restaurant concept, such as leasehold improvements, rent deposits, prepaid franchise fees and inventory, resulting in a loss on disposal of assets of $1,119,451 and a total loss on discontinued operations of $1,223,672 in 2009. In 2010, we had a gain on discontinued operations of $74,481 due to the settlement of one abandoned restaurant and the write-off of the present value of discounted future rent commitments for that abandoned leased store.
As a result of the above, our net loss for the year ended December 31, 2011 was $673,394, as compared to a loss of $663,783 for the comparable 2010 period.
Liquidity and Financial Condition
At December 31, 2011, we had working capital of $316,215 and cash of $300,637. At December 31, 2010, we had working capital of $495,063 and cash of $477,734. In 2010, we completed a secondary public offering of 1,725,000 units, consisting of 1,725,000 shares of common stock and Class C warrants to purchase 1,725,000 shares, for net proceeds of $410,704.
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, share-based compensation of $43,890, and stock-based compensation of $53,698. During fiscal 2010, we had a net loss of $663,783, and operating activities used cash of $264,659. The principal adjustments to reconcile the net loss to net cash used by operating activities were depreciation and amortization of $297,355 and share-based compensation of $154,210.
During fiscal 2011, investing activities used cash of $6,499, primarily due to $9,475 used to purchase fixed assets. During fiscal 2010, we used $251,063 for investing activities, of which $244,126 was used to purchase fixed assets and $10,881 for deposits on leased premises for the one café opened in 2010.
Accounts receivable increased from $42,864 at December 31, 2010 to $117,526 at December 31, 2011, as a few of our franchisees owed royalties and payments for paper products at year-end. Subsequent to year-end, we have arranged to have our franchisees purchase their paper products directly from the distributor rather than have us purchase the products in bulk. We are also in the process of implementing a system to collect our royalty payments from franchisees via regularly scheduled automatic electronic transfers.
At December 31, 2011, we recorded $435,000 of deferred revenue in connection with the development fees from area development agreement signed prior to that date, as compared to $277,500 at December 31, 2010. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories.
Going Concern
In its report prepared in connection with our 2011 financial statements, our independent registered public accounting firm included an explanatory paragraph stating that, because of our net loss of $673,394 for the year ended December 31, 2011 and accumulated losses of $6,377,816 since inception, there is substantial doubt about our ability to continue as a going concern. Our continued existence will depend on the duration of the current economic downturn, our future performance, and our ability to successfully implement our business and growth strategies. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Contractual Obligations
The following table summarizes our obligations and commitments to make future payments for the periods specified as of December 31, 2011:
Plan of Operations
The amounts set forth in the Contractual Obligations table, together with approximately $95,000 per month to cover our fixed overhead expenses, are what we require to maintain our existing operations. 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 six 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, we anticipate increased revenues from franchise royalties and fees, while holding our non-café operating expenses to fiscal 2010 levels. To the extent that actual revenues fall short of our projections, we will decrease our fixed overhead expenses. Any decreases, however, are likely to impair our ability to market and sell franchises, as the expense reductions are likely to occur in the area of public relations, marketing and advertising. We hope that as the number of franchised cafés in operation increases, our business will have more visibility to prospective franchisees, thereby mitigating the effects of reducing our public relations, marketing and advertising expenses. In contrast to 2010, 2011 was a year of significant franchise expansion. We must carefully manage expansion opportunities and optimize existing café performance. By doing this, we believe our cash position will improve and the trend of losses will dissipate.
The net proceeds from our secondary public offering were $410,704. We had planned to use these proceeds to open one company-owned U-Swirl café in the southeastern area of the United States, thereby providing greater exposure for our U-Swirl brand. However, since the completion of that offering, we have entered into a franchise agreement for a U-Swirl café in Marietta, Georgia, and an area development agreement for Orlando, Florida. We believe that franchised cafés in these locations will provide adequate exposure in the southeastern United States. Accordingly, we are now looking at other areas of the United States for a company-owned or joint venture-owned café or possibly expanding through acquisition.
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 have no minimum purchase commitments with our vendors. As of December 31, 2011 and 2010, inventories consisted of the following: food and beverages $31,441 and $27,139, and non-foods $54,225 and $41,284, respectively. We did not incur any significant charges to cost of sales for spoilage during fiscal 2011 or 2010.
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. All deposits are carried at the lower of fair value or cost.
Revenue recognition policy. Revenue from U-Swirl café sales is recognized when food and beverage products are sold. We reduce revenues by sales returns and sales discounts.
Revenue earned as a U-Swirl Frozen Yogurt franchisor will be derived from cafés in U-Swirl International, Inc.’s worldwide territory and will include initial franchise fees, continuing service fees and royalties. Continuing service fees and royalties will be recognized in the period in which they are earned. FASB ASC 952-605-25 stipulates that initial franchise fee revenue from a franchise sale should be recognized when the franchisor has substantially performed or satisfied all material services or conditions relating to the sale. Substantial performance has occurred when the franchisor has: (a) no remaining obligations or intent to refund any cash received or to forgive any unpaid notes or receivables; (b) performed substantially all of the initial services required by the franchise agreement (such as providing assistance in site selection, obtaining facilities, advertising, training, preparing operating manuals, bookkeeping, or quality control); and (c) met all other material conditions or obligations. We defer revenue from the initial franchise fee until commencement of operations by the franchisee, at which time all of our services and obligations are substantially complete.
Costs and expenses are recognized during the period in which they are incurred.
Share-based Compensation. We recognize share-based payments, including stock option grants and warrants, 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 period, which is generally the vesting period.
When computing fair value, we have considered the following variables:
·
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
·
The Company has not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the forseeable future.
·
The expected option term is computed using the "simplified" method as permitted under the provisions of Staff Accounting Bulletin ("SAB") 107. SAB 107's guidance was extended indefinitely by SAB 110.
·
The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.
·
The forfeiture rate is based on the historical forfeiture rate for our unvested stock options.
Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8.
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of U-Swirl, Inc.
Henderson, Nevada
We have audited the accompanying consolidated balance sheets of U-Swirl, Inc. (“the Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2011. U-Swirl, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U-Swirl, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses and lower-than-expected sales, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
U-SWIRL, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
1. DESCRIPTION OF BUSINESS
U-Swirl, Inc., formerly Healthy Fast Food, Inc., (the “Company”) was incorporated in the state of Nevada on November 14, 2005.
U-Swirl Concept - In September 30, 2008, the Company acquired the worldwide rights to the U-Swirl Frozen YogurtSM concept through its wholly-owned subsidiary, U-Swirl International, Inc. The U-Swirl concept allows guests a broad choice in frozen yogurt by providing 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. As of December 31, 2011, U-Swirl International, Inc. owned and operated six U-Swirl Yogurt cafes, sold twelve franchise area development agreements including the first franchise agreement under the area development agreement, sold four single unit franchise agreements without an area development agreement, and sold one license agreement that was converted to a franchise agreement.
Discontinued Operations - Fresh and Fast (formerly EVOS) Concept - For purposes of determining discontinued operations, the Company has determined that the “concept” level is a component of the entity within the context of FASB ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”. A component of an entity comprises of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. The Company routinely evaluates its concept base and closes non-performing concepts. The Company evaluates the results of operations of the concept both quantitatively and qualitatively to determine if appropriate for reporting as discontinued operations.
The Company owned and operated two fast food restaurants located in Henderson and Las Vegas, Nevada under the “Fresh and Fast” Concept. The restaurants were formerly operated under franchise rights and “EVOS” branding purchased from EVOS USA, Inc. Effective March 1, 2009, the Company notified EVOS USA, Inc. of its intent to terminate the franchise and area development agreements. Effective July 1, 2009, the Company ceased conducting business under the EVOS USA, Inc. franchise and area development agreements and converted the restaurants to the “Fresh and Fast” Concept. Effective August 1, 2009, the Company determined to cease conducting business under the “Fresh and Fast” Concept altogether in order to focus on its U-Swirl Yogurt Concept, and has accordingly accounted for the “Fresh and Fast” Concept divestiture as discontinued operations. See Note 8 for further discussion.
Accounting Policy for Ownership Interests in Investees - The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary corporation, after elimination of all material intercompany accounts, transactions, and profits. Investments in unconsolidated subsidiaries representing ownership of at least 20% but less than 50% are accounted for under the equity method. Nonmarketable investments in which the Company has less than 20% ownership and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist primarily of cash on deposit, certificates of deposit, money market accounts, and investment grade commercial paper that are readily convertible into cash and purchased with original maturities of three months or less.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
Concentration of Credit Risk for Cash Held at Banks - The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The Company believes it is not exposed to any significant credit risk on cash and short-term investments due to the temporary unlimited deposit insurance coverage at all FDIC-insured depository institutions through December 31, 2012.
Accounts Receivable, net - The Company monitors its exposure to losses on accounts receivable and maintains an allowance for potential losses or adjustments. The Company reserves an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. Past due accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due. Allowance for doubtful accounts totaled $29,000 and $0 at December 31, 2011 and 2010, respectively.
Inventories - Inventories consisting of food, beverages, and supplies are stated at the lower of cost (FIFO) or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred. The Company has no minimum purchase commitments with its vendors. As of December 31, 2011 and 2010, inventories consisted of the following: food and beverages of $31,441 and $27,139 and non-foods of $54,225 and $41,284, respectively. The Company did not incur significant charges to cost of sales for spoilage during the periods then ended.
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.
The estimated useful lives are:
U-Swirl cafés currently under development are accounted for as construction-in-process. Construction-in-process is recorded at acquisition cost, including leasehold improvements, equipment expenditures, professional fees and interest expenses capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-process is transferred to an appropriate asset. Construction in process is valued at the lower of cost or market. As of December 31, 2011 and 2010, we did not have any construction-in-process.
Impairment of Long-lived Assets - The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of leasehold improvements, property and equipment or whether the remaining balance of property and equipment should be evaluated for possible impairment.
Deposits - Deposits consist of security deposits for multiple locations and a sales tax deposit held with the state of Nevada. All deposits are carried at the lower of fair value or cost.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
Revenue Recognition Policy - Revenue from U-Swirl café sales is recognized when food and beverage products are sold. The Company reduces revenue by sales returns and sales discounts.
Revenue earned as a U-Swirl Frozen Yogurt franchisor will be derived from cafés in U-Swirl International, Inc.’s worldwide territory and will include initial franchise fees, continuing service fees, and royalties. Continuing service fees and royalties will be recognized in the period in which they are earned. FASB ASC 952-605-25 stipulates that initial franchise fee revenue from a franchise sale should be recognized when the franchiser has substantially performed or satisfied all material services or conditions relating to the sale. Substantial performance has occurred when the franchisor has: (a) no remaining obligations or intent to refund any cash received or to forgive any unpaid notes or receivables; (b) performed substantially all of the initial services required by the franchise agreement (such as providing assistance in site selection, obtaining facilities, advertising, training, preparing operating manuals, bookkeeping, or quality control); and (c) met all other material conditions or obligations. The Company defers revenue from the initial franchise fee until commencement of operations by the franchisee, at which time all services and obligations of the Company are substantially complete.
Costs and expenses are recognized during the period in which they are incurred.
Rent - Rent expense for Company leases, which provide for escalating rents over the terms of the leases, is recorded on a straight-line basis over the lease terms. The lease terms began when the Company had the right to control the use of the property, which was before rent payments were actually due under the leases. The difference between the rent expense and the actual amount payable under the terms of the leases is recorded as deferred rent in the financial statements pursuant to the FASB ASC 840 “Accounting for Rental Costs Incurred During the Construction Period”.
On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles in the United States of America (“GAAP”). Management has determined that the appropriate interpretation of FASB ASC 840-20-25, “Issues Relating to Accounting for Leases,” requires these allowances to be recorded as a leasehold improvement asset and deferred rent liability on the Balance Sheet and as both an investing activity (addition to property and equipment) and a component of operating activities on the Statements of Cash Flows. As of December 31, 2011 and 2010, the Company recorded deferred rent of $238,906 and $318,166, respectively, on its Balance Sheets to reflect the unamortized portion of tenant improvement allowances and deferred rent liabilities for the existing leases.
Marketing and Advertising Expense - The Company recognizes marketing and advertising expense as incurred. The Company recognized marketing and advertising expense of $95,542 and $86,582 for the year ended December 31, 2011 and 2010, respectively.
Share-based Compensation - The Company recognizes share-based payments, including stock option grants and warrants, 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.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
When computing fair value, the Company has considered the following variables:
·
The risk-free interest rate assumption is based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant.
·
The Company has not paid any dividends on common stock since our inception and do not anticipate paying dividends on our common stock in the forseeable future.
·
The expected option term is computed using the "simplified" method as permitted under the provisions of Staff Accounting Bulletin ("SAB") 107. SAB 107's guidance was extended indefinitely by SAB 110.
·
The expected volatility is based on the historical volatility of our common stock based on the daily quoted closing trading prices.
·
The forfeiture rate is based on the historical forfeiture rate for our unvested stock options.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.
Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.
Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the statements of operations.
Earnings (Loss) per Share - Basic earnings (loss) per share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed using the weighted-average number of outstanding common stock during the applicable period. Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.
Fair Value of Financial Instruments - FASB ASC 825, “Disclosure About Fair Value of Financial Instruments,” requires the Company to disclose, when reasonably attainable, the fair market values of its assets and liabilities which are deemed to be financial instruments. As of December 31, 2011 the carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature of such financial instruments.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
Risks and Uncertainties - The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks and the potential risk of business failure. Also see Note 2 regarding liquidity and management’s plan.
Concentration of Risk - The Company’s operations and future business model are dependent in a large part on U-Swirl International, Inc.’s ability to execute its company-owned store and franchising business model. U-Swirl International, Inc.’s inability to meet its obligations as company-owned store operator and franchisor may have a material adverse effect on the Company’s financial condition.
Geographic Concentration - As of December 31, 2011, all of the Company’s cafe sales are derived from its restaurants located in Southern Nevada, which may be impacted in the event of a decline in the local economy.
New Accounting Pronouncements - In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
2. GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company incurred a net loss of $673,394 for the year ended December 31, 2011, and has accumulated net losses totaling $6,377,816 since inception.
The Company has been developing company-owned stores, as well as a franchise network through the sale of franchises and establishment of area development agreements. It has relied on fund raising and the sales of new franchises to augment the cash flow it receives from operating its company-owned stores. The current economic conditions have resulted in lower-than-expected sales of new franchises, which have resulted in a significant decrease in its cash position.
The Company’s ability to fund its operations will depend on the length of time of the current economic downturn, its future performance, and its ability to successfully implement its business and growth strategies. In the event that it needs additional capital and is unable to obtain it, the Company could be left without sufficient liquidity. The Company will continually monitor its operating and overhead expenses and reduce those expenses to match the revenue flow. However, realization of a return on investment on company-owned stores, a significant portion of the assets in the accompanying balance sheet, is dependent on Company management’s ability to reach consistent and sustainable profitability. The Company is also dependent on management’s ability to increase sales of new franchises and/or their ability to raise additional capital through a placement of its securities.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
3. LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT
Leasehold improvements, property and equipment consist of the following as of December 31, 2011 and 2010:
Depreciation and amortization expense for the year ended December 31, 2011 and 2010 totaled $306,961 and $297,355, respectively.
4. CAPITAL LEASE
The Company leases its vehicle under an agreement that is classified as a capital lease. The cost of equipment under capital leases is included in the Balance Sheet as leasehold improvements, property, and equipment and was $23,937 and $23,937 at December 31, 2011, and 2010, respectively. Accumulated amortization of the leased equipment at December 31, 2011, and 2010, was $20,346 and $15,559, respectively. Amortization of assets under capital leases is included in depreciation expense.
The future minimum lease payments required under the capital lease as of December 31, 2011, are as follows:
5. FRANCHISE FEE AND ROYALTY INCOME AND DEFERRED REVENUE
The Company recognized $182,500 and $32,500 in franchise fee income for the year ended December 31, 2011 and 2010, respectively.
The Company recognized $112,600 and $31,670 in royalty income for the year ended December 31, 2011 and 2010, respectively.
The Company deferred franchise fee and area development agreement fee income of $435,000 and $277,500 as of December 31, 2011 and 2010, respectively. Per the terms of the agreements, the Company will recognize franchise fee revenue upon the opening of each restaurant within the respective territories.
An area developer has encountered delays in meeting the requirements of the area development agreement and the Company is planning on entering into negotiations to resolve the delinquency. The area developer has outstanding receivables of approximately $48,000 and deferred revenue of $75,000 as of December 31, 2011.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
6. OCCUPANCY AND RELATED EXPENSES
Occupancy and related expenses consists of the following for year ended December 31, 2011 and 2010:
7.
INTEREST INCOME AND EXPENSE
Interest income for the year ended December 31, 2011 and 2010 totaled $0 and $34, respectively.
Interest expense for the year ended December 31, 2011 and 2010 totaled $1,257 and $1,887 respectively.
8.
DISCONTINUED OPERATIONS - FRESH AND FAST (FORMERLY EVOS) CONCEPT
During August 2009, the Company closed its two Fresh and Fast (formerly EVOS) restaurants. As a result of the closures, activities of the Fresh and Fast concept have been accounted for as discontinued operations. These results are presented as net amounts in the Consolidated Statements of Operations, with prior periods restated to conform to the current presentation. Selected operating results for these discontinued operations are presented in the following table for the year ended December 31, 2011 and 2010:
Net assets and liabilities of the Fresh and Fast concept operations, which are presented as separately stated amounts in the Consolidated Balance Sheets at December 31, 2011 and 2010, were as follows:
EVOS Severance Agreement - As of December 31, 2011, the Company was under continued negotiations to sever its franchisee relationship with EVOS USA, Inc. A formal severance agreement has yet to be accepted by both parties. The Company continues to record royalty fee payable as of December 31, 2011, until such time as both parties have accepted a formal agreement which officially terminates the franchise and area development agreements.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
9. INCOME TAXES
The Company accounts for its income taxes in accordance with FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2011 and 2010 are as follows:
At December 31, 2011 and 2010, a valuation allowance has been recorded to offset the deferred tax assets, including those related to the net operating losses. During the years ended December 31, 2011 and 2010, the Company determined that it was more likely than not that it would not realize its deferred tax assets and a valuation allowance was recorded. At December 31, 2011 and 2010, the Company had approximately $5,597,458 and $5,021,652 of federal and state net operating losses, respectively. The net operating loss carry forwards, if not utilized will begin to expire in 2024.
Reconciliations of the U.S. federal statutory rate to the actual tax rate follows for the years ended December 31, 2011 and 2010 are as follows:
10.
STOCKHOLDERS’ EQUITY
During the year ended December 31, 2011, the Company granted 132,000 shares of its $0.001 par value common stock to officers as share-based compensation. The fair market value of the shares on the dates of grant totaled $43,890.
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
11.
STOCK OPTIONS
The Company had the following stock option grants during 2011:
The Black-Scholes assumptions used are as follows:
The following is a summary of the Company’s stock option activity:
During 2010, 31,250 options were canceled due to the termination of a former director in accordance with the termination provision of the stock option agreement.
At December 31, 2011 and 2010, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.
12.
WARRANTS
The following is a summary of the Company’s warrant activity:
U-Swirl, Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2011 and 2010
All warrants outstanding are exercisable as of December 31, 2011.
At December 31, 2011 and 2010, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
13. RELATED PARTY TRANSACTIONS
The Company paid $0 and $10,000 in rent for office space and inventory storage for the year ended December 31, 2011 and 2010, respectively, to a company which is wholly owned by the Company’s officers/shareholders.
The Company was owed $6,765 and $3,639 as of December 31, 2011 and 2010, respectively, from U-Create Enterprises, a company which is a U-Swirl franchisee and is owned and operated by the grandchildren of the Company’s Chief Executive Officer. The corporate secretary/treasurer of U-Create Enterprises is also the Company’s corporate secretary.
14. LEGAL PROCEDINGS
On June 21, 2010, Katherine Hemingway, our former Vice President of Marketing and Communications, filed a Notice of Charge of Discrimination against us with the United States Equal Employment Opportunity Commission (“EEOC”), asserting that she was denied equal terms and conditions of employment and compensation. She sought monetary damages and an unspecified amount of stock. We entered into a settlement agreement with Ms. Hemingway in February 2012 and paid the first installment of the $22,500 settlement. Ms. Hemingway is married to Gregory Janson, a former director.
There are no other legal proceedings pending or, to the best of our knowledge, contemplated or threatened that are deemed material to our business or us.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. Such matters can be subject to many uncertainties, and outcomes are not predictable with assurance. The Company is not aware of the existence of any such matters at December 31, 2011, and has not provided for any such contingencies, accordingly.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Rule 13a-15 under the Exchange Act, requires us to carry out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011, being the date of our most recently completed fiscal year end. This evaluation was implemented under the supervision and with the participation of our President, Chief Executive Officer and interim Chief Financial Officer, Henry R. Cartwright. Based on this evaluation, this officer has concluded that the design and operation of our disclosure controls and procedures are not effective since the following material weaknesses exist:
·
Since the resignation of our chief financial officer in October 2009, we rely on external consultants for the preparation of our financial statements and reports. As a result, our officers may not be able to identify errors and irregularities in the financial statements and reports.
·
Our disclosure procedures are not followed consistently throughout the organization.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13-a-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our officer has assessed the effectiveness of our internal controls over financial reporting as of December 31, 2011. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In conducting his evaluation, our officer noted the following material weaknesses in our internal controls over financial reporting:
·
While accounting procedures have been adopted, compliance with such procedures has been inconsistent, particularly with regard to appropriate documentation at the entry level.
·
While the board of directors has established an Audit Committee, it has not functioned as a separate committee. Accordingly, the entire board, rather than an independent body, has reviewed our financial statements.
·
Since we use external consultants to prepare our financial statements and provide sufficient documentation of such preparation and review procedures, our officers must rely on such documentation.
As a result of these deficiencies in our internal controls, our officer concluded further that the design and operation of our disclosure controls and procedures may not be effective and that our internal control over financial reporting was not effective.
During fiscal 2012, we will implement appropriate changes as they are identified, including changes to remediate material weaknesses in our internal controls.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
During the period covered by this annual report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Our directors, executive officers and key employees, and their ages as of the date of this report, are as follows:
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.
Henry E. Cartwright has been our Chairman of the board of directors and President and Chief Executive Officer since April 2007 and was one of our founders. He also served 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 and Dana Cartwright. We have concluded that Mr. Cartwright should serve as a director because of his previous management experience with franchised concepts.
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. 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 and the brother of Dana Cartwright.
Dana Cartwright has been our Corporate Trainer since October 2006. From January 1991 to October 2006, she was the Secretary and Manager of MV Entertainment, Inc., a Blockbuster video store franchisee located in Henderson, NV. She is the daughter of Henry E. Cartwright and the sister of Terry A. Cartwright.
Sam D. Dewar has been a director since June 2007. He has been the President and CEO of Natural Harmony Foods, Inc., since he founded that company in January 2002. Mr. Dewar filed for personal bankruptcy in June 2010. Natural Harmony Foods is an independent food company based in Fort Lauderdale, FL, that develops and markets natural meat products blended with soy protein that are lower in fat. Mr. Dewar has been involved in the food industry since 1970. His experience includes ten years with Campbell Soup Company as the General Manager of the Pepperidge Farm Biscuit Division from 1970 to 1980, and eight years with Mars, Inc. as the President of the Snackmaster division from 1980 to 1988. He received a Bachelor’s degree from Duke University and a Master’s degree in business
from the University of Pennsylvania Wharton School. We have concluded that Mr. Dewar should serve as a director because of his experience in the food industry and his training in business.
Jimmy D. Sims has been a director since November 2010. He is retired after having been involved in Pizza Hut operations from 1965 to 1997. He started his career as a store manager, became an area general manager, and then became a franchise owner from 1972 to 1997. Mr. Sims currently manages his stock and real estate investment portfolio. He received an associate’s degree from Porterville College. We have concluded that Mr. Sims should serve as a director because of his experience with franchised concepts and in the restaurant industry.
No directorships are held by any director in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or any company registered as an investment company, under the Investment Company Act of 1940.
All of our officers work full-time for the company.
Nominees to the Board of Directors
Since our last proxy statement, we have not made any material changes to the procedures by which stockholders may recommend nominees to our board of directors.
Committees
As Sam D. Dewar and Jim Sims are considered our only independent directors at this time, the entire board of directors, rather than committees, acts on various items. The board of directors has determined that it does not have an audit committee financial expert. The board expects to identify a fifth director who will be independent and have the requisite financial experience and background to serve as audit committee chair and audit committee financial expert and serve on these committees, together with Messrs. Dewar and Sims.
Conflicts of Interest
Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to us. Accordingly, direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.
Code of Ethics
We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, principal accounting officer or controller, or persons performing similar functions.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors, and persons who beneficially own more than 10% of our common stock to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (“SEC”). Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us, or written representations that no Form 5 filings were required, we believe that during the fiscal year ended December 31, 2011, there was compliance with all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners.
Item 11.
Item 11.
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 our other executive officers that had total compensation of $100,000 or more for our last completed 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
______________
(1)
Consists of health insurance and dental insurance premiums paid for Mr. Cartwright.
(2)
Consists of health insurance and dental insurance premiums paid for Mr. Conte and his family.
(3)
Consists of health insurance and dental insurance premiums paid for Mr. Cartwright and his spouse.
Employment Arrangements
The Company’s officers are each considered an employee-at-will, and neither the Company nor its officers are obligated to the other party for the continuation of employment or the payment of compensation or benefits.
We have been paying the following monthly compensation to officers of the Company since September 1, 2009:
·
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.
Prior to September 1, 2009, we paid only cash compensation.
There are no written employment agreements with any of these officers. The shares granted as compensation are not subject to any vesting requirements.
The following table set forth information regarding the outstanding equity awards as of December 31, 2011 for our Named Officers.
Outstanding Equity Awards At Fiscal Year-End
_______________
(1)
These options were granted on June 30, 2007. Half of the options granted vested March 1, 2008 and the remaining half vested March 1, 2009.
(2)
These options were granted on May 16, 2011. Half of the options granted vest May 16, 2012 and the remaining half vest May 16, 2013.
(3)
These options were granted on November 17, 2011. Half of the options granted vest November 17, 2012 and the remaining half vest November 17, 2013
During the fiscal year ended December 31, 2011, there were no exercises of stock options by the Named Officers.
Compensation of Directors
Each of our non-employee directors receives reimbursement for expenses of attendance for each scheduled meeting that requires physical attendance. We do not pay any cash compensation to any of our non-employee directors for their service on the board. In 2007, we granted each of our non-employee directors options to purchase up to 25,000 shares of common stock, exercisable at $4.40 per share. The options are exercisable until June 30, 2012 and vested as to 25% upon date of grant (June 30, 2007) and 75% one year from date of grant (June 30, 2008). We did not pay any compensation to our directors for the fiscal years ended December 31, 2008, 2009 and 2010.
Beginning with the adoption of our 2011 Stock Option Plan on April 20, 2011, non-employee directors are granted options to purchase 25,000 shares of common stock on the date on which such directors are first appointed by the Board or elected by the stockholders. Immediately after the completion of each annual meeting of the stockholders of the Company, each non-employee member of the Board will be awarded a formula option to purchase 25,000 shares of common stock. Formula options will have an option price equal to the fair market value of the common stock as of the date of such grant. The terms of the 2011 Stock Option Plan, including the vesting provisions described below, will apply to all formula options granted.
The following table sets forth the compensation paid to our non-employee directors for services rendered during the year ended December 31, 2011.
Director Compensation
Name
Fees Earned or
Paid in Cash ($)
Stock Awards ($)
Options Awards
($)
All Other
Compensation ($)
Total ($)
Sam Dewar
2,592
2,592
Jim Sims
2,592
2,592
__________________
(1)
The Company granted 25,000 options to each non-employee director on April 20, 2011 that were valued at $0.27 per share which represents the FAS 123(R) value of the option on that date. Under FAS 123(R), the grant date fair value of each stock option award is calculated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes model was used with the following assumptions: volatility rate of 125.7%; risk-free interest rate of 1.09% based on a U.S. Treasury rate of 3 years; and a 5-year expected option life. The options vest 50% one year from date of grant
and 50% on the two-year anniversary of the grant date. The options are exercisable at $0.42 per share and expire five years from the grant date. The Company also granted 25,000 options to each non-employee director on November 17, 2011 that were valued at $0.20 per share which represents the FAS 123(R) value of the option on that date. Under FAS 123(R), the grant date fair value of each stock option award is calculated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes model was used with the following assumptions: volatility rate of 123.5%; risk-free interest rate of 0.40% based on a U.S. Treasury rate of 3 years; and a 5-year expected option life. The options vest 50% one year from date of grant and 50% on the two-year anniversary of the grant date. The options are exercisable at $0.28 per share and expire five years from the grant date.
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 486,683 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 December 31, 2011, 480,750 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 vests 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 will vest 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 December 31, 2011, 750,000 options were outstanding under the 2011 Plan.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Set forth below is information regarding the beneficial ownership of our common stock, as of March 19, 2012 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. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days of March 19, 2012 are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
*less than 1%
_____________________
(1)
With the exception of High Capital Funding, LLC and Chester L.F. Paulson and Jacqueline M. Paulson, the address of those listed is c/o U-Swirl, Inc., 1175 American Pacific #C, Henderson, Nevada 89074. High Capital Funding’s address is 333 Sandy Springs Circle, Suite 230, Atlanta, Georgia 30328. Paulson’s address is 811 SW Naito Parkway, Suite 200, Portland, Oregon 97204.
(2)
Based on 4,890,836 shares outstanding.
(3)
Due to their relationship to certain entities, including Paulson Investment Company, Inc., the solicitation agent ("PICI"), Chester L.F. Paulson and Jacqueline M. Paulson (together, the “Paulsons”) are deemed to be the indirect beneficial owners of warrants to purchase up to 517,376 shares of our common stock (the "IPO Warrants"). The Paulsons control and are the managing partners of the Paulson Family LLC ("PFAM"), which is the controlling shareholder of Paulson Capital Corp. ("PLCC"). As the controlling shareholder of PLCC, PFAM is deemed to be the indirect beneficial owner of any securities held by PLCC. As the parent of PICI, PLCC is deemed to be the indirect beneficial of any securities held by PICI. PICI is the direct beneficial owner of the IPO Warrants.
(4)
Includes 225,000 shares issuable upon the exercise of warrants.
(5)
Includes 25,000 shares held by Mr. Conte’s wife, 118,750 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.
(6)
Includes 150,000 shares held of record by Gold Key Management Corp., 118,750 shares issuable upon the exercise of options that have vested or will vest within 60 days, and 14,000 shares issuable upon the exercise of warrants.
(7)
Includes 193,750 shares issuable upon the exercise of options that have vested or will vest within 60 days.
(8)
Includes 37,500 shares issuable upon the exercise of vested options.
(9)
Includes 5,000 shares held of record by Jimmy D. Sims & Nancy M. Sims 2001 Revocable Trust UAD 2-28-01, 12,500 shares issuable upon the exercise of vested options, and 15,000 shares issuable upon the exercise of warrants.
(10)
Includes 506,250 shares issuable upon the exercise of options that have vested or will vest within 60 days and 34,000 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, December 31, 2011:
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Office Space and Compensation
Our principal offices are located at 1175 American Pacific, Suite C, Henderson, Nevada 89074. Prior to July 2010, our offices were located in space leased by a company owned by Terry A. Cartwright, one of our founders. While we had used this space beginning in 2007, we did not begin paying rent until 2009. For the years ended December 31, 2011 and 2010, we paid -0- and $10,000, respectively, to Mr. Cartwright for rent, at the rate of $2,000 per month.
We pay Terry A. Cartwright monthly compensation of $5,000 and 5,000 shares of common stock. Dana Cartwright is paid $4,000 per month. Both are the adult children of Henry E. Cartwright. Dixie Cartwright, the wife of Henry E. Cartwright, serves as our corporate secretary and is paid $1,500 per month. None of these persons has an employment agreement with us. All are “at will” employees.
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 $6,765 and $3,639 as of December 31, 2011 and 2010, 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 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.
Paulson Investment Company
Paulson Investment Company, Inc., the underwriter of our secondary offering, holds warrants to purchase up to 306,000 shares of our common stock, which as of December 31, 2010 constituted 6.1% of the shares outstanding as computed for purposes of the ownership table under "Security Ownership of Certain Beneficial Owners and Management." Pursuant to the terms of the underwriting agreement, Paulson Investment Company was paid $18,000, which was a non-accountable expense allowance equal to 3% of the gross proceeds from the sale of the units in the secondary offering, and was granted, for a period of 36 months beginning October 13, 2010, the right of first refusal to act as lead underwriter for any and all of our future public and private equity and debt offerings that gross up to $20 million, excluding ordinary course of business financings. Also, we issued underwriter warrants to purchase up to 150,000 units at $0.48. The underwriter’s warrants are exercisable at any time beginning October 13, 2011, and will expire on October 13, 2015. We sold the units to Paulson Investment Company, as the underwriter, at an initial offering price of $0.36 per unit, which represented the initial public offering price of the units less the 10% underwriting discount.
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 has been one of our directors since November 2010. 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.
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.
Director Independence
As of the date of this annual report, 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(a)(2)). 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.
Sam D. Dewar and Jimmy D. Sims are considered independent directors under the above definition. As they are considered our only independent directors at this time, the entire board of directors, rather than committees, acts on various items.
Item 14.
Item 14.
Principal Accounting Fees and Services
The fees billed for professional services rendered by our principal accountant are as follows:
The audit-related fees were incurred in connection with the comfort letter for the underwriter of our initial public offering and review of the registration statement covering the securities offered in the initial public offering.
Pre-Approval Policies and Procedures
The board of directors must pre-approve any use of our independent accountants for any non-audit services. All services of our auditors are approved by our whole board and are subject to review by our whole board.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
Regulation
S-K Number
Exhibit
______________
(1)
Incorporated by reference to the exhibits to the registrant’s registration statement on Form S-1, file number 333-145360, filed August 13, 2007.
(2)
Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed April 26, 2011.
(3)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed March 11, 2008.
(4)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed March 25, 2008.
(5)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-145360, filed February 8, 2008.
(6)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed August 18, 2010.
(7)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed October 20, 2010.
(8)
Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K, file number 0-53130, filed September 22, 2008.
(9)
Incorporated by reference to the exhibits to the registrant’s annual report on Form 10-K, file number 0-53130, for the fiscal year ended December 31, 2009, filed March 31, 2010.
(10)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed June 25, 2010.
(11)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed May 26, 2010.
(12)
Incorporated by reference to the exhibits to the registrant’s annual report on Form 10-K, file number 0-53130, for the fiscal year ended December 31, 2008, filed March 27, 2009.
(13)
Incorporated by reference to the exhibits to the registrant’s amended registration statement on Form S-1, file number 333-164096, filed December 31, 2009.
*In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.