U-Swirl 10Q 2015 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2014

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from to

Commission file number0-53130

U-SWIRL, INC.

(Exact name of registrant as specified in its charter)

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

265 Turner Dr, Durango, CO 81303

(Address of principal executive offices, including zip code)

(702) 586-8700

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

On December 31, 2014, the registrant had outstanding 17,815,484 and commitments to issue an additional 4,885,776 shares of its common stock, $.001 par value

U-SWIRL, INC.

CONSOLIDATED BALANCE SHEETS

	November 30, 2014			February 28, 2014
	(Unaudited)
Assets
Current Assets
Cash	$	2,748,048		$	701,748
Accounts Receivable, less allowance for doubtful accounts of $88,000 and $10,000, respectively		495,506			1,418,960
Accounts Receivable, related party		-			11,989
Notes Receivable, including current maturities		81,626			-
Inventory		97,835			118,219
Deferred Tax Assets, Current		62,018			-
Prepaid Expenses		22,140			18,182
Total Current Assets		3,507,173			2,269,098

Leasehold Improvements, Property and Equipment, net		1,615,670			2,939,820

Other Assets
Notes Receivable, less current portion and valuation allowance of $15,000 and $0, respectively		169,047			-
Deposits		80,715			72,185
Goodwill and other intangible assets, net		9,883,357			10,243,522
Other assets		333,632			541,645
Total Other Assets		10,466,751			10,857,352

Total Assets	$	15,589,594		$	16,066,270

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable and accrued liabilities	$	2,513,438		$	2,346,572
Accounts Payable, related party		136,271			290,978
Current Portion of long-term debt, related party		24,623			22,837
Total Current Liabilities		2,674,332			2,660,387

Deferred Rent		43,183			105,031
Deferred Income Taxes		48,790			-
Deferred Revenue		1,188,779			1,688,647
Notes Payable, related party		7,133,492			8,607,196
Total Liabilities		11,088,576			13,061,261

Stockholders’ Equity
Preferred stock; $0.001 par value; 25,000,000 sharesAuthorized, no shares issued and outstanding		-			-
Common stock; $0.001 par value; 100,000,000 shares Authorized, 17,815,484 and 15,440,029 shares issued and Outstanding, respectively		17,815			15,440
Common Stock Payable, 4,885,776 and 4,277,778 shares issuable, respectively		4,886			4,278
Additional paid-in Capital		13,424,030			12,381,600
Accumulated deficit		(8,945,713	)		(9,396,309	)
Total Stockholders’ Equity		4,501,018			3,005,009
Total Liabilities and Stockholders’ Equity	$	15,589,594		$	16,066,270

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

U-SWIRL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

	For the three months ended						For the nine months ended
	November 30, 2014			November 30, 2013			November 30, 2014			November 30, 2013

Revenues
Café Sales, net of discounts	$	696,142		$	742,377		$	3,479,598		$	3,374,099
Franchise Royalties and fees		732,849			297,121			2,942,395			1,075,265
Total Revenues		1,428,991			1,039,498			6,421,993			4,449,364

Café Operating Costs
Food, beverage and packaging costs		240,866			277,008			1,201,178			1,106,674
Labor and related expenses		228,830			256,127			839,774			874,976
Occupancy and related expenses		152,752			202,777			558,622			683,404
Franchise development		165,898			-			389,419			-
Marketing and advertising		85,546			73,511			397,045			162,265
General and Administrative		456,288			372,740			1,643,794			1,198,870
Depreciation and Amortization		199,788			61,318			632,623			272,266
Restructuring and Asset Acquisition Expenses		-			-			628,077			-
Fair Value Adjustment		(92,402	)		-			(333,193	)		-
Total costs and expenses		1,437,566			1,243,481			5,957,339			4,298,455

Income (Loss) from Operations		(8,575	)		(203,983	)		464,654			150,909

Other Income (Expense)
Interest Expense		(8,183	)		-			(20,718	)		(20,654	)
Interest Income		4,112			6,367			6,659			-
Other Expense, net		(4,071	)		6,367			(14,059	)		(20,654	)

Income from continuing operations before income taxes		(12,646	)		(197,616	)		450,595			130,255

Provision for income taxes		-			-			-			-

Net income (Loss)	$	(12,646	)	$	(197,616	)	$	450,595		$	130,255

Net income (loss) per common share, basic	$	0.00		$	(0.01	)	$	0.02		$	0.01
Net income (loss) per common share, diluted	$	0.00		$	(0.01	)	$	0.02		$	0.01

Weighted average common shares outstanding and common stock payable		22,454,052			15,393,297			21,717,994			14,730,088
Dilutive effect of stock options and warrants		848,107			3,548,509			1,667,987			2,072,405
Weighted average common shares outstanding and common stock payable, assuming dilution		23,302,159			18,941,806			23,385,981			16,802,493

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

U-SWIRL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

	For the nine months ended
	November 30, 2014			November 30, 2013
Cash flows from operating activities
Net income	$	450,595		$	130,255
Adjustments to reconcile net income to net cash used by operating activities
Depreciation and amortization		632,623			317,021
Fair value adjustment on notes payable, related party		(333,193	)		-
Accrued interest on notes payable, related party		-			41,645
Stock-based compensation		152,518			53,512
Asset Impairment		243,000			-
Provision for loss on accounts receivable		93,000			-
Gain on sale of property and equipment		(9,277	)		(65,746	)
Changes in operating assets and liabilities
Accounts receivable, net		844,473			(69,077	)
Inventory		14,951			23,204
Prepaid expenses		(4,225	)		(106,791	)
Deposits		(8,530	)		(366	)
Accounts payable and accrued liabilities		235,346			(48,528	)
Accounts payable, related party		(92,207	)		133,533
Deferred Rent		(61,848	)		(50,861	)
Deferred Revenue		(499,868	)		(10,111	)
Deferred Taxes		(81,708	)		-
Net cash provided by operating activities		1,575,650			347,690

Cash flow from investing activities
Accounts receivable, related party		11,989			(2,032	)
Proceeds received on Notes Receivable		28,742			-
Additions to Notes Receivable		(13,000	)		-
Other Assets		214,596			4,577
Proceeds from sale of assets		530,000
Purchases of property and equipment		(55,847	)		(337,867	)
Net cash provided (used) by investing activities		716,480			(335,322	)

Cash flows from financing activities
Proceeds from exercise of stock warrants		892,895			-
Proceeds from notes payable, related party		-			126,170
Proceeds from issuance of common stock		-			63,480
Payments on long term debt		(1,138,725	)		(4,492	)
Net cash provided (used) by financing activities		(245,830	)		185,158

Net change in cash		2,046,300			197,526

Cash, beginning of period		701,748			358,527

Cash, end of period	$	2,748,048		$	556,053

Supplemental disclosure of cash flow information
Interest Paid		4,922			118
Income tax paid		-			-
Sale of assets and inventory to buyers for notes receivable:
Long-lived assets		275,000			-
Inventory		5,433			-
Accounts receivable		981			-

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

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

1.	DESCRIPTION OF BUSINESS

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

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

In January 2013, the Company entered into agreements to acquire Aspen Leaf Yogurtcafé assets, consisting of leasehold improvements, property and equipment, for six Aspen Leaf Yogurt cafés and the franchise rights to Yogurtini self-serve frozen yogurt chains from Rocky Mountain Chocolate Factory, Inc. (“RMCF”) in exchange for a 60% controlling ownership interest in the Company, a warrant that allows RMCF to maintain its pro rata ownership interest if existing stock options and/or warrants are exercised, and notes payable totaling $900,000 (the “Rocky Mountain Transaction”). As of November 30, 2014 RMCF held approximately 39% of our outstanding common stock.

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

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

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the nine months ended November 30, 2014 are not necessarily indicative of the results to be expected for the entire fiscal year.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the fiscal year ended February 28, 2014.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

As of November 30, 2014 the Company had the following locations:

	Locations
Company-owned Cafés
CherryBerry		1
Yogli Mogli		1
U-Swirl		6
Aspen Leaf Yogurt		1
Franchised and licensed Cafés
Fuzzy Peach		20
Josie’s		5
CherryBerry		139
Yogli Mogli		24
U-Swirl		32
Aspen Leaf Yogurt		7
Yogurtini		26
Total		262

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Cash - The Company considers all highly liquid instruments purchased with a maturity of three months or less at date of acquisition to be cash equivalents. There were no cash equivalents at November 30, 2014 or February 28, 2014.

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

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

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

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

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

Company-owned cafés under development are accounted for as construction-in-process. Construction-in-process is recorded at acquisition cost, including leasehold improvements, equipment expenditures, professional fees and interest expense capitalized during the course of construction for the purpose of financing the project. Upon completion and readiness for use of the project, the cost of construction-in-process is transferred to the appropriate asset group. As of November 30, 2014 and February 28, 2014, the Company did not have any construction-in-process.

The Company reviews its long-lived assets through analysis of fair value whenever events or changes indicate the carrying amount of such assets may not be recoverable. The Company’s policy is to review the recoverability of all assets, at a minimum, on an annual basis. Based on its evaluation, the Company has determined that an impairment of $243,000 exists as of November 30, 2014.

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

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

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

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

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

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

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

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

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

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

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

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

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

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

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

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

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

●

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

●

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

●

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

●

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

●

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

Income Taxes - The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company has significant net operating loss carryovers. In accordance with section 382 of the Internal Revenue Code, deductibility of net operating loss carryovers may be subject to annual limitation in the event of a change in control. We have performed a preliminary evaluation as to whether a change in control has taken place, and have concluded that there was a change of control with respect to the net operating losses when 60% of the Company was acquired in January 2013. Our effective income tax rate may increase in future periods, or for the full year as a result of estimates related to the income tax liability arising from the income before income taxes of U-Swirl, Inc.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

Earnings (Loss) per Share - Basic earnings (loss) per share is computed as net earnings (losses) divided by the weighted average number of common shares outstanding and common stock payable during each year. Diluted earnings (loss) per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and restricted stock units. Common stock payable is considered in the calculation of earnings (loss) per share when the Company believes that all conditions of the issuance have been met, or are reasonably likely to be met. For the period ended November 30, 2014 the Company included 4,885,776 shares of common stock payable in the calculation of earnings (loss) per common share.

Fair Value Election - As discussed in Note 8, the Company entered into a convertible note agreement with RMCF in January 2014 (the “Convertible Note”). The Convertible Note contains a compound embedded derivative that requires separate accounting from the host debt instrument. The Company elected the fair value option for the Convertible Note as management believes recording the note at fair value better reflects the underlying economics of the transaction.

Fair Value Measurements - Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities;

Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

The valuation policies are determined by the Chief Financial Officer (the “CFO”). Each quarter, the CFO will update the inputs used in the fair value calculations and internally review the changes from period to period for reasonableness.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

The Company has consistently applied the valuation techniques discussed below in all periods presented. The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of November 30, 2014 and February 28, 2014 by level within the fair value hierarchy:

February 28, 2014	Level 1		Level 2		Level 3		Total

Liabilities

Convertible Note	$	-	$	-	$	7,970,666	$	7,970,666

November 30, 2014	Level 1		Level 2		Level 3		Total

Liabilities

Convertible Note	$	-	$	-	$	6,515,747	$	6,515,747

The Company determined the fair value of the Convertible Note using the income valuation technique. Because of the hybrid nature of the Convertible Note, the Company first valued the debt host contract, or straight “bond”, component using a discounted cash flow analysis, and then valued the compound embedded derivative features using a Flexible Monte Carlo simulation. See Note 8 for discussion of the embedded features. Significant inputs to the valuation model include the coupon rate, effective yield, volatility, expected return and implied equity value. In addition, the following inputs were used in the Flexible Monte Carlo simulation to value the compound embedded derivative scenarios using different conversion dates, conversion rates, likelihood of default, conversion behavior and dilution of stock price on conversion.

The Company’s Convertible Note is included in the Level 3 fair value hierarchy because not all the significant inputs are directly or indirectly observable.

The following table summarizes the valuation techniques, models and significant unobservable inputs used for the Company’s Convertible Note (broken into its components), categorized within Level 3 of the fair value hierarchy:

Liabilities at Fair Value	Fair Value at November 30, 2014		Fair Value at February 28, 2014		Valuation Techniques / Model	Unobservable Inputs

Bond component	$	5,344,777	$	6,177,626	Income approach using discounted cash flow model	Effective yield ranging from 12.5%-20%
						Expected return ranging from 5% - 10%
Embedded conversionfeatures	$	1,153,907	$	1,791,773	Income approach using flexible Monte Carlo simulation	Implied Equity Value ranging from 5% - 10%

Significant increases (decreases) in the unobservable inputs used in the fair value measurements would result in a significantly lower (higher) fair value measurement.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

The following table sets forth a reconciliation of changes in the fair value of the Convertible Note classified as Level 3 in the fair value hierarchy:

Balance, February 28, 2014	$	7,970,666
Purchases		372,007
Payments		(1,509,529	)
Unrealized gain		(333,193	)
Subtotal		6,499,951
Undrawn commitment fees		15,796
Balance, November 30, 2014	$	6,515,747

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

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

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern.” This guidance that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. If such conditions or events exist, disclosures are required that enable users of the financial statements to understand the nature of the conditions or events, management's evaluation of the circumstances and management's plans to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. We will be required to perform an annual assessment of our ability to continue as a going concern when this standard becomes effective for us in the first quarter of our fiscal year ended February 28, 2017. The adoption of this guidance is not expected to impact our financial position, results operations or cash flows.

3.	ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at November 30, 2014 and February 28, 2014:

	November 30, 2014			February 28, 2014
Accounts receivable, trade	$	263,926		$	175,348
Allowance for doubtful accounts		(88,000	)		(10,000	)
Accounts receivable, other		319,580			1,253,612

Accounts receivable, net	$	495,506		$	1,418,960

Accounts receivable, related party	$	-		$	11,989

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

INVENTORY

As of November 30, 2014 and February 28, 2014, inventory consisted of the following:

	November 30, 2014		February 28, 2014
Food and beverages	$	57,173	$	61,108
Paper products/Supplies		40,662		57,111
Inventory	$	97,835	$	118,219

5.	LEASEHOLD IMPROVEMENTS, PROPERTY AND EQUIPMENT

Leasehold improvements, property and equipment consisted of the following as of November 30, 2014 and February 28, 2014:

	November 30, 2014			February 28, 2014
Café equipment	$	1,311,176		$	1,580,650
Furniture and fixtures		497,133			573,421
Computer equipment		158,281			184,646
Vehicles		-			30,342
Leasehold improvements		1,666,030			2,079,227
Provision for asset impairment		(243,000	)
		3,389,620			4,448,286
Less: accumulated depreciation		(1,773,950	)		(1,508,466	)
Leasehold improvements, property and equipment, net	$	1,615,670		$	2,939,820

Depreciation expense for the nine months ended November 30, 2014 and 2013 was $358,458 and $272,266, respectively.

6.	GOODWILL AND INTANGIBLE ASSETS

Intangible assets at November 30, 2014 and February 28, 2014 consist of the following:

				November 30, 2014				February 28, 2014
	Amortization Period (years)			Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Intangible assets subject to amortization
Trademark/Non competition agreements	5	-	20		590,000		28,745		590,000		5,226
Franchise Rights		20			6,580,034		341,432		6,580,034		90,786
Total					7,170,034		370,177		7,170,034		96,012
Intangible assets not subject to amortization
Franchising segment-
Company stores goodwill					23,000		-		109,000		-
Franchising goodwill					3,060,500		-		3,060,500		-
Total Goodwill					3,083,500		0		3,169,500		0

Total intangible assets				$	10,253,534	$	370,177	$	10,339,534	$	96,012

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

Amortization expense related to intangible assets totaled $274,165 and $0 during the nine months ended November 30, 2014 and 2013, respectively.

At November 30, 2014, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following:

2015	$	97,655
2016		411,477
2017		457,050
2018		479,809
2019		492,502
Thereafter		4,861,364
Total	$	6,799,857

7.	DEFERRED REVENUE

The Company deferred franchisee fees, area development agreement fees and rebate income of $1,188,779 and $1,688,647 as of November 30, 2014 and February 28, 2014, respectively.

8.	NOTES PAYABLE, RELATED PARTY

In July 2013, the Company executed promissory notes with RMCF for the purchase and installation of equipment necessary to convert two company-owned cafés into co-branded RMCF and U-Swirl cafés. Interest accrues on the notes at the rate of 6% per annum, compounded annually and capitalized during the course of construction. The notes require monthly payments of principal and interest over a five-year period beginning in October 2013. Payment of the notes is secured by a security interest in all of the equipment purchased with the proceeds of the notes.

On January 16, 2014, the Company entered into a loan and security agreement (the “Loan Agreement”) with RMCF pursuant to which RMCF agreed to loan the Company up to $7,750,000. As of November 30, 2014, the Company had borrowed $8,038,616 under this Loan Agreement and repaid $2,497,529, for a net principal balance of $5,541,087. Interest accrues on the unpaid principal balances of the loans at the rate of 9% per annum, and is included in the principal balance. Principal and interest are due January 16, 2016. The outstanding principal and interest is convertible at prices of $0.90 and $0.45 per share of preferred stock, respectively, subject to adjustments upon the occurrence of certain events. Payment of the loans is secured by a security interest in all of the Company’s assets.

All payments of principal, interest and fees are payable in cash, shares of Series A Convertible Preferred Stock (the “Preferred Stock”), or a combination thereof, at the option of RMCF. The Preferred Stock to be designated will pay cumulative dividends equal to 9% of the stated value of the Preferred Stock, have a liquidation preference, vote with the Company’s common stock on all matters submitted for a vote of holders of common stock, and be convertible at the option of the holder into shares of the Company’s common stock.

The Company may prepay up to $2,100,000 of the outstanding amounts due to RMCF under the Loan Agreement at its option and without penalty in cash from the proceeds raised from (i) advances on rebates from its yogurt suppliers; and (ii) the exercise of outstanding stock options and warrants. The Company also has the option to redeem all of the amounts owed under the Loan Agreement at any time after January 16, 2015 at the rate of 108% of the total amounts owed, by making payment in cash, shares of Preferred Stock, or a combination thereof, at the option of RMCF.

Mandatory prepayment of the loans is required upon the receipt of proceeds from the disposition of any of the Company’s assets, the issuance of any equity securities by the Company (other than upon exercise of outstanding stock options or warrants), the issuance of any debt securities by the Company, or the receipt of insurance proceeds.

In the event of default, RMCF may charge interest on all amounts due under the Loan Agreement at the default rate of 15% per annum, accelerate payment of all amounts due under the Loan Agreement, and foreclose on its security interest.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

As discussed in Note 2, the Convertible Note contains a compound embedded derivative related to the conversion feature, equity indexed interest payments, down-round protection default conversion option, default interest and optional redemption feature. The Company records the Convertible Note at fair value.

The unrealized gain of $333,193 is recorded as the fair value adjustment in the accompanying Consolidated Statements of Operations. The fair value adjustment includes interest payable under the Convertible Note.

The Company is required to pay an undrawn commitment fee equal to 0.10% multiplied by the average daily difference between the loan commitment and the aggregate outstanding loan. The undrawn commitment fee is payable in cash or preferred stock at $0.45 per share.

RMCF may convert outstanding principal, or any portion thereof, into shares of preferred stock by dividing the principal to be converted by $0.90 per share. The conversion price is subject to adjustment for traditional recapitalizations. In the event of default, RMCF has the right to convert the Convertible Note into shares of preferred stock at the lesser of $0.45 or the implied equity value, as defined in the loan agreement, multiplied by 3.

RMCF also entered into a management services agreement with the Company for $542,500 which will be due on January 16, 2016 and the expense associated with this service agreement will be expensed until the fee is due. The management fee is convertible into preferred stock at $0.45 per share. The management services agreement is for services to be provided through January 16, 2016. The amount due is included in Notes Payable Related Party.

As of November 30, 2014 and February 28, 2014, notes payable due to RMCF consisted of the following:

	November 30, 2014			February 28, 2014

Convertible note, secured, due 1/16/16 - principal	$	5,558,150		$	6,679,876
Construction Loans, secured, due 9/15/18 - principal		99,868			116,867
Management services payable		542,500			542,500
Fair value adjustment		957,597			1,290,790
Balance, principal	$	7,158,115		$	8,630,033
Less: current maturities		(24,623	)		(22,837	)
Long-term obligations	$	7,133,492		$	8,607,196

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

The following table summarizes annual maturities of our notes payable as of November 30, 2014:

	Amount

2015	$	5,838
2016		7,082,493
2017		25,741
2018		27,329
Thereafter		16,714
Total minimum payments		7,158,115
Less: current maturities		(24,623	)

Long-term obligations	$	7,133,492

9.	FRANCHISE ROYALTIES AND FEES

During the nine months ended November 30, 2014 and 2013, the Company recognized the following franchise royalties and fees:

	November 30, 2014		November 30, 2013
Royalty income	$	1,917,518	$	603,167
Franchise fee income		212,250		53,111
Rebate income from purveyors thatsupply products to franchisees		450,895		317,610
Marketing fees		361,732		101,377
Franchise royalties and fees	$	2,942,395	$	1,075,265

10.	OCCUPANCY AND RELATED EXPENSES

Occupancy and related expenses consist of the following for the nine months ended November 30, 2014 and 2013:

	November 30, 2014		November 30, 2013
Rent	$	349,453	$	464,425
Real estate taxes, insurance and CAM fees		93,454		108,156
Utilities		115,715		110,823
Occupancy and related expenses	$	558,622	$	683,404

11.	STOCKHOLDERS’ EQUITY

During the nine months ended November 30, 2014 the Company issued 250,000 shares of restricted common stock to its non-employee directors for services pursuant to its Non-Employee Director Compensation Program (the “Program”). Stock granted pursuant to the Program is immediately vested on the grant date. Associated with this award the Company has recorded stock-based compensation expense of $77,500, representing the estimated fair value on the date of grant. There were no shares awarded to non-employee directors during the nine months ended November 30, 2013.

The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes option pricing model. Options awarded in November 2011 and expensed until vested, in November 2013, were valued using the following assumptions: volatility rate of 123.53% - 125.65%; risk-free interest rate of 0.40% - 1.09% based on a U.S. Treasury rate of 3 years; and a 3-year expected option life (simplified method). During the nine months ended November 30, 2014, the Company recognized $75,019 of expense associated with previously awarded restricted stock, compared to $14,535 of expense recognized in the nine months ended November 30, 2013.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

During the nine months ended November 30, 2014 the Company did not recognize any expense associated with stock options, compared to $38,977 recognized in the nine months ended November 30, 2013.

On January 14, 2013, the Company granted 759,999 shares of restricted common stock to its officers and directors for services. During the nine months ended November 30, 2014 the Company recognized all unamortized expense associated with non-vested restricted stock units. This expense was accelerated associated with restructuring activities as described in Note 15 to these financial statements. As of November 30, 2014 there was no amount remaining of unamortized expense associated with restricted stock units.

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

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

Outstanding - February 28, 2014		607,998			0.1275		3.88
Granted		-			-
Vested		(607,998	)		0.1275
Forfeited/Cancelled		-			-
Outstanding - November 30, 2014		-		$	-		-

12.	STOCK OPTIONS

On June 27, 2007, the stockholders of our Company adopted the 2007 Stock Option Plan which currently permits the granting of options to purchase up to 1,544,002 shares. The 2007 Stock Option Plan will remain in effect until it is terminated by the board of directors except that no incentive stock option will be granted after June 26, 2017. On April 20, 2011, the stockholders of our Company adopted the 2011 Stock Option Plan which permits the granting of options to purchase up to 750,000 shares.

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

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Average Intrinsic Value

Outstanding - February 28, 2014		762,000		$	0.38		2.37	$	360,840
Granted		-			-
Exercised		-			-
Forfeited/Cancelled		(15,000	)		0.28
Outstanding - November 30, 2014		747,000		$	0.38		1.61	$	6,660
Exercisable - November 30, 2014		747,000		$	0.38		1.61	$	6,660

During the nine months ended November 30, 2014 and 2013, the Company expensed $0 and $38,977 related to stock option grants, respectively.

U-SWIRL, INC.

NOTES TO THE INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2014

13.

WARRANTS

In April 2014, the Company called its outstanding Class C Warrants for redemption. Pursuant to a notice of redemption, the holders of the Class C Warrants were given until the close of business on May 22, 2014 to exercise their outstanding warrants at $0.60 per share. Thereafter, any remaining unexercised warrants were cancelled and represented only the right to receive a redemption price of $0.05 per warrant. During the quarter ended May 31, 2014 a total of 1,515,882 Class C Warrants and 44,312 underwriter’s warrants were exercised for gross proceeds of $930,799. The Company deposited$11,343 with the warrant redemption agent to pay the warrant redemption price for the 226,865 Class C Warrants that were not exercised prior to the redemption date.

On April 21, 2014, the Company and RMCF agreed to modify the warrant issued to RMCF in January 2013, which allowed RMCF to maintain its pro-rata ownership interest if existing stock options and/or warrants were exercised. Under that warrant, RMCF had the right to purchase 1.5 times the number of shares of common stock issued upon exercise of the Company’s Class C warrant. Pursuant to the modification, RMCF agreed to exercise that portion of the warrant which corresponded to the exercise of the Class C warrant to the fullest extent possible on a “cashless exercise” basis immediately after the redemption date for the Class C Warrants. A total of 565,261 shares of common stock were issued to RMCF as a result.

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

	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Average Intrinsic Value
Outstanding - February 28, 2014		6,023,247		$	0.62		1.80	$	1,751,764
Granted		-			-
Exercised		(4,032,397	)		0.60
Forfeited/Cancelled		(320,350	)		0.58
Outstanding - November 30, 2014		1,670,500		$	0.66		1.46	$	11,115
Exercisable - November 30, 2014		333,532		$	0.96		1.15	$	1,125

During the nine months ended November 30, 2014 and 2013, the Company expensed $0 and $0 related to stock warrants issued, respectively.

14.	RELATED PARTY TRANSACTIONS

As of November 30, 2014 and February 28, 2014, the Company owed $136,271 and $290,978, respectively, to RMCF for inventories and various operating expenses. During the first quarter of fiscal year 2014 the Company entered into a management agreement with RMCF for certain services pertaining to finance and information technology. The Company pays a monthly amount to RMCF for these services. See also Note 8, Notes Payable, Related Party.

15.	RESTRUCTURING AND ACQUISITION RELATED CHARGES

On January 17, 2014, the Company entered into an Asset Purchase Agreement with CherryBerry, which was the franchisor of self-serve frozen yogurt retail stores branded as “CherryBerry.” Pursuant to the CherryBerry Purchase Agreement, the Company purchased certain assets of CherryBerry used in its business of franchising frozen yogurt stores, including all of its franchise rights and one company-owned store. The Company also entered into an Asset Purchase Agreement with Yogli Mogli, which was the franchisor of self-serve frozen yogurt retail stores branded as “Yogli Mogli”. Pursuant to the Yogli Mogli Purchase Agreement, the Company purchased certain assets of Yogli Mogli used in its business of franchising frozen yogurt stores, including all of its franchise rights and four company-owned stores. On February 20, 2014 the Company entered into an Asset Purchase Agreement to acquire the business assets of Fuzzy Peach Franchising, LLC. The acquisition of all intellectual property and worldwide franchise and license rights includes the rights associated with 17 Fuzzy Peach Frozen Yogurt stores. The Company recorded net restructuring charges of $124,551 during the nine months ended November 30, 2014 associated with these acquisitions.

Associated with the management changes announced in September 2014, U-Swirl announced an operational restructuring that is designed to enhance U-Swirl’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of the employment agreements with the named officers, severance payments for other employees and expense associated with the impairment of certain leasehold improvements, property and equipment. The Company recorded restructuring charges of $503,526 during the nine months ended November 30, 2014 associated with these transactions.

Restructuring and acquisition charges incurred were comprised of the following for the nine months ended November 30:

	2014
Professional fees	$	104,876
Severance/transitional compensation		211,747
Accelerated restricted stock unit vesting		65,329
Leasehold improvements, property and equipment Impairment		243,000
Other		3,125

Total	$	628,077

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

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

History and Overview

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

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

We began marketing franchises in November 2008. Beginning in 2011, we recognized that (1) the frozen yogurt retail market was experiencing an influx of small chains; (2) if we could grow by acquisition, we could achieve profitability by attaining an economy of scale with respect to our operations; and (3) we could use our common stock, rather than cash, to make these acquisitions. We entered into acquisition discussions with several frozen yogurt retail operators and our discussions culminated with the closing of the RMCF transaction in January 2013 in which we acquired six Aspen Leaf cafés and the franchise rights to Aspen Leaf Yogurt (“ALY”) and Yogurtini self-serve frozen yogurt chains from RMCF in exchange for a 60% controlling ownership interest in our company, promissory notes in the aggregate amount of $900,000, and a warrant that allows RMCF to maintain its pro rata ownership interest if any of our existing stock options and/or warrants are exercised.

As of November 30, 2014, we had 9 company-owned cafés and 253 franchised cafés. Management is focusing its efforts on nurturing its relationship with new franchisees, studying each franchise system in order to identify the best practices from each, and integrating these best practices into a single system which will be implemented in the future.

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

Results of Operations

Three Months Ended November 30, 2014 Compared to the Three Months Ended November 30, 2013

For the three months ended November 30, 2014, company-owned U-Swirl cafés generated $696,142 in sales, net of discounts, as compared to sales of $742,377 for the comparable period in 2013, a decrease of 6.2%. The decrease is due primarily to the closing of underperforming locations in the prior fiscal year and the sale of one location. There were 9 company-owned cafés at November 30, 2014, as compared to 8 at November 30, 2013.

Our café operating costs in the three months ended November 30, 2014 were $622,448 or 89.4% of net sales revenues, resulting in café operating margin of $73,694. For the three months ended November 30, 2013, our café operating costs were $735,912, or 99.1% of net sales revenues, resulting in café operating margin of $6,465.

For the three months ended November 30, 2014, we generated franchise fee and license fee income of $108,000, royalty income of $430,724, rebate income of $113,813 and marketing fees of $80,312 as compared to franchise fee income of $4,750, royalty income of $162,387, rebate income of $106,672 and marketing fees of $23,312 during the three months ended November 30, 2013. During the three months ended November 30, 2014, we had 253 franchised cafés in operation for all or part of that period, as compared to 77 during the three months ended November 30, 2013.

Franchise development expense increased to $165,898 in the three months ended November 30, 2014, compared to no amount in the three months ended November 30, 2013. This increase is the result of an increase in franchise units outstanding and the costs associated with supporting these franchise systems.

Marketing and advertising expenses were $85,546 for the three months ended November 30, 2014 as compared to $73,511 for the three months ended November 30, 2013. This increase is a result of acquiring additional yogurt brands and the increased expenses related to having more franchised cafés in our network.

For the three months ended November 30, 2014, general and administrative expense increased by $83,548 from $372,740 in the three months ended November 30, 2013 to $456,288 in the three months ended November 30, 2014, due primarily to increased professional fees and an increase in expense associated with a reserve for uncollectable accounts receivable.

Depreciation and amortization expense increased by $138,470 to $199,788 in the three months ended November 30, 2014 from $61,318 in the three months ended November 30, 2013, due primarily to the amortization of franchise rights and trademarks associated with business acquisitions that occurred in January 2014.

During the three months ended November 30, 2014 we recognized a favourable adjustment to the fair value of our note payable to Rocky Mountain Chocolate Factory of $92,402 compared with no adjustment recognized in the three months ended November 30, 2013.

We generated a loss from operations of $8,575 in the three months ended November 30, 2014, as compared to a loss from operations of $203,983 in the three months ended November 30, 2013. The decrease in loss from operations is primarily a result of increased revenues associated with the acquisition of franchise locations, and cost savings due to restructuring, partially offset by higher costs associated with the increase in franchise units.

Other expense increased by $10,438 for the 2014 period due to the addition of interest income from notes receivable, more than offset by the monthly payments on our loans for café remodels.

As a result of the factors described above, we generated a net loss of $12,646 for the 2014 period, as compared to a net loss of $197,616 for the comparable 2013 period.

Nine Months Ended November 30, 2014 Compared to the Nine Months Ended November 30, 2013

For the nine months ended November 30, 2014, company-owned U-Swirl cafés generated $3,479,598 in sales, net of discounts, as compared to sales of $3,374,099 for the comparable period in 2013, an increase of 3%. The increase is due primarily to the closing of underperforming locations in the prior fiscal year, which was more than offset by the acquisition of additional locations in January 2014. There were 9 company-owned cafés at November 30, 2014, as compared to 8 at November 30, 2013.

Our café operating costs in the nine months ended November 30, 2014 were $2,599,574 or 74.7% of net sales revenues, resulting in café operating margin of $880,024. For the nine months ended November 30, 2013, our café operating costs were $2,665,054, or 79.0% of net sales revenues, resulting in café operating margin of $709,045.

For the nine months ended November 30, 2014, we generated franchise fee income of $212,250, royalty income of $1,917,518, rebate income of $450,895 and marketing fees of $361,732 as compared to franchise fee income of $53,111, royalty income of $603,167, rebate income of $317,610 and marketing fees of $101,377 during the nine months ended November 30, 2013. During the nine months ended November 30, 2014, we had 253 franchised cafés in operation for all or part of that period, as compared to 77 during the nine months ended November 30, 2013.

Franchise development expense increased to $389,419 in the nine months ended November 30, 2014, compared to no amount in the nine months ended November 30, 2013. This increase is the result of an increase in franchise units outstanding and the costs associated with supporting these franchise systems.

Marketing and advertising expenses were $397,045 for the nine months ended November 30, 2014 as compared to $162,265 for the nine months ended November 30, 2013. This increase is a result of acquiring additional yogurt brands and the increased expenses related to having more franchised cafés in our network.

For the nine months ended November 30, 2014, general and administrative expense increased by $444,924, from $1,198,870 during the nine months ended November 30, 2013 to $1,643,794 during the nine months ended November 30, 2014, due primarily to the award of stock to directors, costs associated with the reserve for uncollectable accounts receivable and costs and service fees payable for services provided by RMCF.

Depreciation and amortization expense increased by $360,357 from $272,266 during the nine months ended November 30, 2013 to $632,623 during the nine months ended November 30, 2014, due primarily to the amortization of franchise rights and trademarks associated with business acquisitions that occurred in January 2014.

Restructuring and acquisition related charges increased by $628,077 due to certain expenses being incurred related to management changes, the closure or sale of certain assets and the acquisitions of CherryBerry, Yogli Mogli and Fuzzy Peach in January and February 2014.

During the nine months ended November 30, 2014 we recognized a favourable adjustment to the fair value of our note payable to Rocky Mountain Chocolate Factory of $333,193 compared with no adjustment recognized in the nine months ended November 30, 2013.

We generated income from operations of $464,654 in the nine months ended November 30, 2014, as compared to $150,909 in the nine months ended November 30, 2013. The increase in income from operations is primarily a result of increased franchise royalties and fees.

Other expense decreased by $6,595 for the 2014 period due to the closure of four non-recourse financed locations in the prior fiscal year and the associated elimination of those notes payable, partially offset by the monthly payments on our loans for café remodels.

As a result of the factors described above, we generated net income of $450,595 for the 2014 period, as compared to $130,255 for the comparable 2013 period.

Liquidity and Financial Condition

At November 30, 2014, we had working capital of $832,841 and cash of $2,748,048. At February 28, 2014, we had a working capital deficit of $391,289 and cash of $701,748.

For the nine months ended November 30, 2014, we had net income of $450,595. Operating activities provided cash of $1,575,650, with the principal adjustment to reconcile the net income to net cash provided by operating activities being the change in accounts receivable of $844,473 and depreciation and amortization of $632,623. During the comparable 2013 period, we had net income of $130,255, and operating activities provided cash of $347,690. The principal adjustment to reconcile the net income to net cash provided by operating activities was depreciation and amortization of $317,021.

During 2014, investing activities provided cash of $716,480, primarily due to proceeds from the sale of assets partially offset by a decrease in other assets. In comparison, investing activities used cash of $335,322 during the 2013 period primarily due to $337,867 used for the purchase and installation of equipment necessary to convert two Company-Owned cafés into co-branded RMCF and U-Swirl cafés.

Financing activities used cash of $245,830 during the nine months ended November 30, 2014 primarily due to payments on long term debt partially offset by proceeds from the exercise of stock warrants. During the comparable 2013 period financing activities provided cash of $185,158, with $126,170 being proceeds of a construction loan from RMCF for the purchase and installation of equipment necessary to convert two Company-owned cafés into co-branded RMCF and U-Swirl cafés.

Accounts receivable decreased from $1,418,960 at February 28, 2014 to $495,506 at November 30, 2014, due primarily to the receipt of gift card funds receivable at February 28, 2014.

Accounts payable and accrued liabilities increased $166,866 from $2,346,572 at February 28, 2014 to $2,513,438 at November 30, 2014, due primarily to an increase in gift card liabilities.

Accounts payable, related party, decreased from $290,978 at February 28, 2014 to $136,271 at November 30, 2014. These are amounts owed to RMCF for inventories and various operating expenses. The decrease is primarily the result of professional fees payable to RMCF at February 28, 2014 being applied to our Promissory Note with this related party as well as some prior store assets being sold to another party and the proceeds being paid to RMCF.

At November 30, 2014 we recorded $1,188,779 of deferred revenue compared to $1,688,647 at February 28, 2014. This deferred revenue is in connection with the development fees from area development agreements signed prior to those dates and advances received on rebate income from suppliers to our network of franchise locations. Pursuant to the terms of the agreements, we will recognize franchise fee revenue upon the opening of each café within the respective territories. We recognize the rebate revenue when product is sold to participating locations and our rebate becomes earned.

Plan of 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 company-owned cafés and revenues from franchise royalties and fees will provide sufficient cash to maintain our existing operations indefinitely.

On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors of U-Swirl, Inc. In addition, Messrs. Conte, H. Cartwright and T. Cartwright resigned as officers of U-Swirl, Inc. effective October 6, 2014. Their resignations were not due to a disagreement with the Company. Also on September 4, 2014, the Board of Directors of the Company appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company’s parent, Rocky Mountain Chocolate Factory, Inc.

For the current fiscal year ending February 28, 2015, we anticipate significantly increased revenues from franchise royalties and fees with the inclusion of the additional yogurt chains. We expect that our non-café operating expenses will increase over fiscal year 2014 levels, however, we believe we have achieved economies of scale, through business acquisitions, to more than offset the additional expenses in the current fiscal year.

The next phase in our consolidation strategy involves taking the appropriate steps to maximize the returns on our investments in these acquisitions. We intend to do this by rationalizing the expense structures of the acquired companies; eliminating duplicative personnel, responsibilities and positions; taking advantage of volume purchasing discounts for raw materials and supplies; and working more closely with Rocky Mountain Chocolate Factory regarding franchisee support programs and marketing strategies.

We will continue to look for expansion opportunities through acquisitions, as we believe that the self-serve frozen yogurt industry is fragmented with many small, undercapitalized chains whose owners lack the ability to expand or a viable exit strategy. Such acquisitions may be completed using cash, shares of our stock, or a combination of both for the purchase consideration. In those cases, it is possible that our shares may be valued at less than the then current trading price for the stock.

We note that we are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of frozen yogurt have occurred in spring and summer months and our weakest sales have occurred during the winter months. Our new co-branded locations with RMCF represent our efforts to address the seasonal fluctuations in sales, as demand for gourmet chocolate products is stronger during the fall, winter and spring seasons.

Summary of Significant Accounting Policies

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

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

Leasehold improvements, property and equipment.Leasehold improvements, property and equipment are 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 and utility deposits for multiple locations and a sales tax deposit held with the state of Nevada.

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

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

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

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

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

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

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

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

We also recognize a marketing and promotion fee of one percent of net café sales which are included in franchise royalties and fees.

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

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

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

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

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

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

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

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

Recently Issued Accounting Pronouncements

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act. Based upon this evaluation as of November 30, 2014, our management has concluded that those disclosure controls and procedures are effective.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Regulation S-K Number	Exhibit
2.1	Asset Purchase Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
2.2	Membership Interest Purchase Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
2.3	Asset Purchase Agreement among U-Swirl, Inc., CherryBerry Enterprises LLC, CherryBerry Corporate LLC, and CherryBerry LLC, dated January 17, 2014 (2)
2.4	Asset Purchase Agreement among U-Swirl, Inc., Yogli Mogli Franchise LLC, Yogli Mogli LLC, Yogli Mogli Newnan LLC, Yogli Mogli Enterprises LLC, and Yogli Mogli Wheaton, LLC dated January 17, 2014 (2)
3.1	Amended and Restated Articles of Incorporation (3)
3.2	Amended Bylaws (3)
3.3	Certificate of Amendment to Articles of Incorporation filed April 22, 2011(4)
4.1	Form of common stock certificate (5)
4.2	Warrant issued to Rocky Mountain Chocolate Factory, Inc. (1)
4.3	Letter modifying Warrant issued to Rocky Mountain Chocolate Factory, Inc. (6)
10.1	2007 Stock Option Plan, as amended (3)
10.2	2011 Stock Option Plan (4)
10.3	Form of Recourse Notes (1)
10.4	Form of Non-Recourse Notes (1)
10.5	Form of Security Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC (1)
10.6	Investor Rights Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 14, 2013 (1)
10.7	Investor Rights Agreement between U-Swirl, Inc. and Aspen Leaf Yogurt, LLC dated January 14, 2013 (1)
10.8	Intercompany Advance Agreement between Rocky Mountain Chocolate Factory, Inc. and U-Swirl, Inc. dated March 27, 2013 (7)
10.9	Secured Promissory Notes dated July 16, 2013 to Rocky Mountain Chocolate Factory, Inc. (8)
10.10	Loan and Security Agreement between U-Swirl, Inc. and Rocky Mountain Chocolate Factory, Inc. dated January 16, 2014 (2)

Regulation S-K Number	Exhibit
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer
101*	Financial statements from the Quarterly Report on Form 10-Q of U-Swirl, Inc. for the quarterly period ended November 30, 2014, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (iv) the Notes to Financial Statements

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

(2)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed January 22, 2014.

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

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

(5)	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.

(6)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K, file number 0-53130, filed April 22, 2014.

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

(8)	Incorporated by reference to the exhibits to the registrant’s quarterly report on form 10-Q for the quarter ended August 31, 2013, file number 0-53130, filed October 15, 2013.

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

SIGNATURES

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

		U-SWIRL, INC.


January 14, 2015	By:	/s/ Bryan J. Merryman
		Bryan J. Merryman, Chief Executive Officer

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U-Swirl (SWRL) Inactive 10-Q2015 Q3 Quarterly report

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