NOTE 9 – RESTRUCTURING AND ACQUISITION RELATED CHARGES
Restructuring and acquisition charges consisted of lease settlement costs of $60,000 during the nine months ended November 30, 2016, relating to the closure of an ALY Company-owned location.INCOME TAXES
The Company did not record any restructuring chargesprovides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not.
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the threeappropriate tax jurisdictions, in future years, to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. valuation allowance to reduce the carrying amount of deferred income tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and nine monthsexpectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
During the three month ended November 30, 2017.August 31, 2022 the Company incurred a significant loss before income taxes, primarily as a result of substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. Management evaluated recent losses before income taxes and determined that it is no longer more likely than not that our deferred income taxes are fully realized. Because of this determination, the Company reserved for $1,964,107 of deferred tax assets. As of August 31, 2022, the Company has a full valuation allowance against its deferred tax assets.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SALE OR DISTRIBUTION OF ASSETS
During the nine months ended November 30, 2017, the Company acquired two franchise stores in satisfaction of certain receivables due by the franchisees to the Company. The Company subsequently sold one of the stores and is planning to operate the other store as a Company-owned store. During the nine months ended November 30, 2016, the Company sold two Company-owned U-Swirl locations and financed the transfer of a franchised Rocky Mountain Chocolate Factory location. Associated with these asset disposal activities, the Company recorded the following in the nine months ended November 30, 2017 and 2016:
| | | 2017 | | | 2016 | |
Notes receivable | | $ | 56,610 | | | $ | 145,585 | |
NOTE 11 – NOTE PAYABLE
The Company’s long-term debt is comprised of a promissory note, the proceeds of which were loaned to SWRL and used to finance SWRL’s business acquisitions.
As of November 30, 2017 and February 28, 2017, notes payable consisted of the following:
| | | November 30, 2017 | | | February 28, 2017 | |
Promissory note | | $ | 2,859,320 | | | $ | 3,831,741 | |
Less: current maturities | | | (1,340,010 | ) | | | (1,302,501 | ) |
Long-term obligations | | $ | 1,519,310 | | | $ | 2,529,240 | |
The following table summarizes annual maturities of our notes payable as of November 30, 2017:
| | | Amount | |
2018 | | | 330,023 | |
2019 | | | 1,352,893 | |
2020 | | | 1,176,404 | |
Total minimum payments | | $ | 2,859,320 | |
Less: current maturities | | | (1,340,010 | ) |
| | | | | |
Long-term obligations | | $ | 1,519,310 | |
Item 2.
| Management’sItem 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) includesinformation should be read in conjunction with the consolidated financial statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The nature of our operations and the environment in which we operate subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. The statements, other than statements of historical fact,notes included in Item 1 of Part I of this Quarterly Report are forward-looking statements. Many10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of the forward-looking statementsFinancial Condition and Results of Operations, contained in this Quarterly Report may be identified by the use of forward-looking words such as "will," "intend," "believe," "expect," "anticipate," "should," "plan," "estimate," "potential," or similar expressions. Factors which could cause results to differ include, but are not limited to: changes in10-K filed with the confectionery business environment, seasonality, consumer interest in our products, general economic conditions, the ability to attract and retain qualified franchisees, the success of our franchised stores, the success of our frozen yogurt business, receptiveness of our products internationally, consumer and retail trends, costs and availability of raw materials, competition, the success of our co-branding strategy, the success of international expansion efforts and the effect of government regulations. Government regulations which we and our franchisees either are or may be subject to and which could cause results to differ from forward-looking statements include, but are not limited to: local, state and federal laws regarding health, sanitation, safety, building and fire codes, franchising, employment, manufacturing, packaging and distribution of food products and motor carriers. For a detailed discussion of the risks and uncertainties that may cause our actual results to differ from the forward-looking statements contained herein, please see the “Risk Factors” contained in Item 1A. of our Annual ReportSEC on Form 10-KMay 27, 2022, for the fiscal year ended February 28, 2017. These28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022. In addition to historical information, the following discussion contains certain forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied uponinformation. See “Cautionary Note Regarding Forward Looking Statements” above for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to thesecertain information concerning forward-looking statements that might reflect events or circumstances occurring after the date of this Quarterly Report or those that might reflect the occurrence of unanticipated events.statements.
Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, and its consolidated subsidiaries(including its operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”)).
Overview
We are an international franchisor, confectionery manufacturer and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufacture an extensive line of premium chocolate candies and other confectionery products. Our subsidiary, U-Swirl International, Inc. (“U-Swirl”), franchises and operates self-servesoft-serve frozen yogurt cafés. Our revenues and profitability are derived principally from our franchised/license system of retail stores that feature chocolate, frozen yogurt and other confectioneryconfectionary products. We also sell our candy in selected locations outside of our system of retail stores and license the use of our brand with certain consumer products. As of November 30, 2017,August 31, 2022, there were 5two Company-owned, 86 Cold Stone Creamery co-branded100 licensee-owned and 272162 franchised Rocky Mountain Chocolate Factory stores operating in 3937 states, Canada, South Korea, Panama, and the Philippines. As of November 30, 2017,August 31, 2022, U-Swirl operated 5three Company-owned cafés and 12057 franchised cafés located in 29 states and Canada.22 states. U-Swirl operates and franchises self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!,” and “Aspen Leaf Yogurt”.
In January 2013, through our wholly-owned subsidiaries, including Aspen Leaf Yogurt, LLC (“ALY”),Labor and Supply Chain
As a result of macro-economic inflationary trends and disruptions to the global supply chain, we entered into two agreementshave experienced and expect to sell all of the assetscontinue experiencing higher raw material, labor, and freight costs. We have begun to see labor and logistics challenges, which we believe have contributed to lower factory, retail and e-commerce sales of our ALY frozen yogurt stores, alongproducts due to the availability of material, labor and freight. In addition, we could experience additional lost sale opportunities if our products are not available for purchase as a result of continued disruptions in our supply chain relating to an inability to obtain ingredients or packaging, labor challenges at our logistics providers or our manufacturing facility, or if we or our franchisees experience delays in stocking our products. For additional information, see Item 1A. “Rick Factors - The Availability and Price of Principal Ingredients Used in Our Products Are Subject to Factors Beyond Our Control” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022.
Contested Solicitation of Proxies
During the three and six months ended August 31, 2022, the Company incurred substantial costs associated with a stockholder’s contested solicitation of proxies in connection with our interest in2022 annual meeting of stockholders. During the self-serve frozen yogurt franchisesthree and retail units branded as “Yogurtini” which we also acquired in January 2013, to U-Swirl, Inc., a publicly traded company (OTCQB: SWRL) (“SWRL”), in exchange for a 60% controlling equity interest in SWRL (46% interest as of November 30, 2017). At that time, U-Swirl was a wholly-owned subsidiary of SWRL, and was the operating subsidiary for all of SWRL’s operations. Upon completion of these transactions, we ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which was being supported by SWRL.
In fiscal year (“FY”) 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions,six months ended August 31, 2022, the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitionsincurred approximately $1.8 million and $2.1 million, respectively, of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowingscontested solicitation of proxies, compared with $907,000 and $917,000 of costs associated with a contested solicitation of proxies incurred in the three and six months ended August 31, 2021. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations. Future costs associated with the stockholder’s contested solicitation of proxies and the related legal proceedings described under the SWRL Loan Agreement were secured by allcaption “PART II. OTHER INFORMATION - Item 1. Legal Proceedings” in this Form 10-Q may have a material impact on the result of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. Asfuture periods. Additionally, as a result of certain defaults, we issued a demand for paymentthe contested solicitation of all obligations underproxies in the SWRL Loan Agreement. SWRL was unableprior year and the resulting changes to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on allcomposition of the outstanding stockCompany’s Board of U-Swirl on February 29, 2016 in full satisfactionDirectors, the Company incurred $859,000 of accrued severance costs during the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiarythree months ended August 31, 2022. As previously announced, Edward L. Dudley announced his retirement as Senior Vice President – Sales and Marketing of the Company as of February 29, 2016.effective in September 2022.
Results of Operations
Three Months Ended November 30, 2017August 31, 2022, Compared to the Three Months Ended August 31, 2021
Results SummaryNovember 30, 2016
Basic earnings per share decreased 23.5% from $.17$0.03 per share in the three months ended November 30, 2016August 31, 2021 to $.13a loss of $0.59 per share in the three months ended November 30, 2017.August 31, 2022. Revenues were unchanged at approximately $10.0decreased 5.1% from $7.9 million in the three months ended November 30, 2016 and 2017. Operating income decreased 25.7% from $1.6August 31, 2021 to $7.5 million in the three months ended November 30, 2016August 31, 2022. Income from operations decreased from $258,000 in the three months ended August 31, 2021 to $1.2a loss from operations of $2.2 million in the three months ended November 30, 2017.August 31, 2022. Net income decreased 25.8% from $1.0$197,000 in the three months ended August 31, 2021 to a net loss of $3.6 million in the three months ended November 30, 2016 to $751,000 in the three months ended November 30, 2017. The decrease in operating income and net income was primarily the result of higher cost of sales partially offset by lower operating costs.August 31, 2022.
Revenues | | Three Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
Factory sales | | $ | 7,511.3 | | | $ | 7,424.4 | | | $ | 86.9 | | | | 1.2 | % |
Retail sales | | | 840.2 | | | | 826.2 | | | | 14.0 | | | | 1.7 | % |
Franchise fees | | | 150.9 | | | | 86.4 | | | | 64.5 | | | | 74.7 | % |
Royalty and Marketing fees | | | 1,459.1 | | | | 1,618.2 | | | | ( 159.1 | ) | | | (9.8 | %) |
Total | | $ | 9,961.5 | | | $ | 9,955.2 | | | $ | 6.3 | | | | 0.1 | % |
Revenues
| | | Three Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
Factory sales | | $ | 4,808.2 | | | $ | 5,161.4 | | | $ | (353.2 | ) | | | (6.8 | )% |
Retail sales | | | 796.7 | | | | 782.6 | | | | 14.1 | | | | 1.8 | % |
Franchise fees | | | 54.3 | | | | 47.1 | | | | 7.2 | | | | 15.3 | % |
Royalty and marketing fees | | | 1,866.5 | | | | 1,935.0 | | | | (68.5 | ) | | | (3.5 | )% |
Total | | $ | 7,525.7 | | | $ | 7,926.1 | | | $ | (400.4 | ) | | | (5.1 | )% |
Factory Sales
The increasedecrease in factory sales for the three months ended November 30, 2017 versusAugust 31, 2022, compared to the three months ended November 30, 2016August 31, 2021 was primarily due to a 15.5% increase36.2%, $181,000, decrease in shipments of product to customers outside our network of franchisefranchised retail locations. This increase was mostly offset bystores and a 5.3%3.7%, $172,000, decrease in purchases bysales of product to our network of franchised and licensed retail locations.stores. The decrease in sales of product to our network of franchised and licensed retail stores was primarily the result of lower same store pounds purchased. Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and licenselicensed locations decreased 8.7% in15.4% during the three months ended November 30, 2017,August 31, 2022, when compared withto the three months ended November 30, 2016.August 31, 2021.
Retail Sales
Retail Sales
The sales at Company-owned stores increased 1.8% during the three months ended August 31, 2022, compared to the three months ended August 31, 2021, as a result of an increase in retail sales was primarily due to changes in retail units in operation resulting from the acquisition of a franchise location from a franchisee partially offset by the closure of an underperforming location.Company-owned same store sales. Same store sales at all Company-owned stores and cafés decreased 0.8% inlocations increased 1.8% during the three months ended November 30, 2017August 31, 2022 when compared to the three months ended November 30, 2016.August 31, 2021.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees from the three months ended November 30, 2016August 31, 2021 to the three months ended November 30, 2017 resulted fromAugust 31, 2022 was primarily due to a 14.5% decrease in same store sales at domestic Rocky Mountain Chocolate Factory locations mostly offset by an increase in same store sales at U-Swirl Frozen Yogurt cafés. Same store sales at domestic franchise units in operationRocky Mountain Chocolate Factory locations decreased 3.1% and lower same store sales. The average number of total domestic franchise stores in operation decreased from 365 in the three months ended November 30, 2016 to 312sales at U-Swirl Frozen Yogurt cafés increased 16.2% during the three months ended November 30, 2017. This decrease is the result of domestic store closures exceeding domestic store openings. Same store sales at total franchise stores and cafés in operation decreased 4.3% during the three months ended November 30, 2017August 31, 2022 when compared to the three months ended November 30 2016. Franchise fees increased primarily as a result of anAugust 31, 2021.
The increase in domestic franchise openings duringfee revenue for the three months ended November 30, 2017August 31, 2022, compared to the three months ended November 30, 2016.August 31, 2021 was the result of more franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses | | Three Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Cost of sales – factory | | $ | 5,703.4 | | | $ | 5,221.7 | | | $ | 481.7 | | | | 9.2 | % |
Cost of sales - retail | | | 336.6 | | | | 322.5 | | | | 14.1 | | | | 4.4 | % |
Franchise costs | | | 515.1 | | | | 520.6 | | | | (5.5 | ) | | | (1.1 | %) |
Sales and marketing | | | 593.0 | | | | 642.0 | | | | ( 49.0 | ) | | | (7.6 | %) |
General and administrative | | | 827.2 | | | | 880.5 | | | | ( 53.3 | ) | | | (6.1 | %) |
Retail operating | | | 584.8 | | | | 551.2 | | | | 33.6 | | | | 6.1 | % |
Total | | $ | 8,560.1 | | | $ | 8,138.5 | | | $ | 421.6 | | | | 5.2 | % |
Gross Margin | | Three Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,807.9 | | | $ | 2,202.7 | | | $ | ( 394.8 | ) | | | (17.9 | %) |
Retail gross margin | | | 503.6 | | | | 503.7 | | | | (.1 | ) | | | (0.0 | %) |
Total | | $ | 2,311.5 | | | $ | 2,706.4 | | | $ | ( 394.9 | ) | | | (14.6 | %) |
Gross Margin | | Three Months Ended | | | | | | | | | |
| | | November 30, | | | % | | | % | |
| | | 2017 | | | 2016 | | | Change | | | Change | |
(Percent) | | | | | | | | | | | | | | | | |
Factory gross margin | | | 24.1 | % | | | 29.7 | % | | | (5.6 | %) | | | (18.9 | %) |
Retail gross margin | | | 59.9 | % | | | 61.0 | % | | | (1.1 | %) | | | (1.8 | %) |
Total | | | 27.7 | % | | | 32.8 | % | | | (5.1 | %) | | | (15.5 | %) |
Costs and Expenses
Adjusted Gross Margin | | Three Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,807.9 | | | $ | 2,202.7 | | | $ | ( 394.8 | ) | | | (17.9 | %) |
Plus: depreciation and amortization | | | 134.3 | | | | 118.2 | | | | 16.1 | | | | 13.6 | % |
Factory adjusted gross margin | | | 1,942.2 | | | | 2,320.9 | | | | ( 378.7 | ) | | | (16.3 | %) |
Retail gross margin | | | 503.6 | | | | 503.7 | | | | ( .1 | ) | | | (0.0 | %) |
Total Adjusted Gross Margin | | $ | 2,445.8 | | | $ | 2,824.6 | | | $ | ( 378.8 | ) | | | (13.4 | %) |
| | | | | | | | | | | | | | | | | |
Factory adjusted gross margin | | | 25.9 | % | | | 31.3 | % | | | (5.4 | %) | | | (17.3 | %) |
Retail gross margin | | | 59.9 | % | | | 61.0 | % | | | (1.1 | %) | | | (1.8 | %) |
Total Adjusted Gross Margin | | | 29.3 | % | | | 34.2 | % | | | (4.9 | %) | | | (14.3 | %) |
Cost of Sales
| | | Three Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Cost of sales - factory | | $ | 3,781.8 | | | $ | 3,814.3 | | | $ | (32.5 | ) | | | (0.9 | )% |
Cost of sales - retail | | | 297.2 | | | | 257.8 | | | | 39.4 | | | | 15.3 | % |
Franchise costs | | | 524.0 | | | | 737.2 | | | | (213.2 | ) | | | (28.9 | )% |
Sales and marketing | | | 481.9 | | | | 405.9 | | | | 76.0 | | | | 18.7 | % |
General and administrative | | | 4,067.6 | | | | 1,864.3 | | | | 2,203.3 | | | | 118.2 | % |
Retail operating | | | 470.7 | | | | 440.2 | | | | 30.5 | | | | 6.9 | % |
Total | | $ | 9,623.2 | | | $ | 7,519.7 | | | $ | 2,103.5 | | | | 28.0 | % |
Gross Margin
| | | Three Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,026.4 | | | $ | 1,347.1 | | | $ | (320.7 | ) | | | (23.8 | )% |
Retail gross margin | | | 499.5 | | | | 524.8 | | | | (25.3 | ) | | | (4.8 | )% |
Total | | $ | 1,525.9 | | | $ | 1,871.9 | | | $ | (346.0 | ) | | | (18.5 | )% |
| | | Three Months Ended | | | | | | | | | |
| | | August 31, | | | % | | | % | |
| | | 2022 | | | 2021 | | | Change | | | Change | |
(Percent) | | | | | | | | | | | | | | | | |
Factory gross margin | | | 21.3 | % | | | 26.1 | % | | | (4.8 | )% | | | (18.4 | )% |
Retail gross margin | | | 62.7 | % | | | 67.1 | % | | | (4.4 | )% | | | (6.6 | )% |
Total | | | 27.2 | % | | | 31.5 | % | | | (4.3 | )% | | | (13.7 | )% |
Adjusted Gross Margin
| | | Three Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,026.4 | | | $ | 1,347.1 | | | $ | (320.7 | ) | | | (23.8 | )% |
Plus: depreciation and amortization | | | 160.8 | | | | 157.7 | | | | 3.1 | | | | 2.0 | % |
Factory adjusted gross margin | | | 1,187.2 | | | | 1,504.8 | | | | (317.6 | ) | | | (21.1 | )% |
Retail gross margin | | | 499.5 | | | | 524.8 | | | | (25.3 | ) | | | (4.8 | )% |
Total Adjusted Gross Margin | | $ | 1,686.7 | | | $ | 2,029.6 | | | $ | (342.9 | ) | | | (16.9 | )% |
| | | | | | | | | | | | | | | | | |
Factory adjusted gross margin | | | 24.7 | % | | | 29.2 | % | | | (4.5 | )% | | | (15.4 | )% |
Retail gross margin | | | 62.7 | % | | | 67.1 | % | | | (4.4 | )% | | | (6.6 | )% |
Total Adjusted Gross Margin | | | 30.1 | % | | | 34.1 | % | | | (4.0 | )% | | | (11.7 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minusplus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Cost of Sales and Gross Margin
Factory gross margins decreased 560 basis pointsto 21.3% in the three months ended November 30, 2017August 31, 2022 compared to 26.1% the three months ended November 30, 2016.August 31, 2021. This decrease was due primarily to increased productionthe impacts of Employee Retention Credits recognized in the three months ended August 31, 2021 with no comparable credits in the three months ended August 31, 2022 and an increase in costs andmostly offset by an increase in product mix shiftprices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the three months ended August 31, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 67.1% during the three months ended November 30, 2017 comparedAugust 31, 2021 to the three months ended November 30, 2016. The decrease in Company-owned store margin is due primarily to a decrease in Company-owned café revenue resulting from the sale of yogurt and the associated higher margins. This change is the result of a decrease in units in operation62.7% during the three months ended November 30, 2017 compared toAugust 31, 2022. The decrease in retail gross margins was primarily the prior year.result of an increase in costs of raw materials.
Franchise Costs
The decrease in franchise costs in the three months ended November 30, 2017 versusAugust 31, 2022 compared to the three months ended November 30, 2016 isAugust 31, 2021 was due primarily to lower franchise support costs, primarilya decrease in professional fees, the result of fewer unitslitigation with our licensee in operation. This decrease was mostly offset by increased professional feesCanada incurred during the three months ended November 30, 2017 comparedAugust 31, 2021 with no comparable legal expenses in the three months ended November 30, 2016.August 31, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increaseddecreased to 32.0%27.3% in the three months ended November 30, 2017August 31, 2022 from 30.5%37.2% in the three months ended November 30, 2016.August 31, 2021. This decrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower professional fees partially offset by a decrease in royalty revenues.
Sales and Marketing
The decreaseincrease in sales and marketing costs for the three months ended November 30, 2017August 31, 2022 compared to the three months ended November 30, 2016 isAugust 31, 2021 was primarily due to lower marketing-related compensation and lower marketing-related costs associated with U-Swirl franchise locations, the result of fewer unitsan increase in operation. advertising costs.
General and Administrative
The decreaseincrease in general and administrative costs for the three months ended November 30, 2017August 31, 2022 compared to the three months ended November 30, 2016August 31, 2021 is primarily due primarily to lower professional fees, the resultcosts associated with a stockholder’s contested solicitation of resolving legal proceedings, and lower compensation costs. Forproxies in connection with our 2022 annual meeting of stockholders. During the three months ended November 30, 2017,August 31, 2022, the Company incurred approximately $66,000$1.8 million of U-Swirl general and administrative costs were consolidated within our results,associated with the contested solicitation of proxies, compared with $86,000 in$907,000 of costs associated with a contested solicitation of proxies during the three months ended November 30, 2016.August 31, 2021. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders the Company had become contingently liable for certain change in control severance payments to Mr. Dudley if a triggering termination was to occur. As a result of Mr. Dudley’s announced retirement in August 2022, Company management concluded that it is probable that the severance liability is paid. As of August 31, 2022, the Company had recorded $859,000 of associated severance liability. As a percentage of total revenues, general and administrative expenses decreasedincreased to 8.3%54.0% in the three months ended November 30, 2017August 31, 2022 compared to 8.8%23.5% in the three months ended November 30, 2016.August 31, 2021.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2017August 31, 2022 compared to the three months ended November 30, 2016August 31, 2021 was due primarily to changesan increase in retail unitssalaries and wages and utilities in operation resulting from the acquisition of a franchise location partially offset by the closure of an underperforming location.our Company-owned stores and cafés. Retail operating expenses, as a percentage of retail sales, increased from 66.7%56.2% in the three months ended November 30, 2016August 31, 2021 to 69.6%59.1% in the three months ended November 30, 2017.August 31, 2022. This increase is primarily the result of a change in units in operation from the prior year.higher retail costs.
Depreciation and Amortization
Depreciation and amortization,, exclusive of depreciation and amortization included in cost of sales, was $202,000$127,000 in the three months ended November 30, 2017, unchangedAugust 31, 2022, a decrease of 14.2% from $202,000 incurred$149,000 in the three months ended November 30, 2016.August 31, 2021. This decrease was the result of lower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the consolidated financial statements for a summary of annual amortization of intangible assets based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 13.7% from $118,0001.9% to $161,000 in the three months ended November 30, 2016August 31, 2022 compared to $134,000$158,000 in the three months ended November 30, 2017. This increase was the result of an increase in production assets in service.August 31, 2021.
Other Income (Expense)
Net interest expense income was $22,300$3,900 in the three months ended November 30, 2017August 31, 2022 compared to net interest expenseincome of $31,300$2,600 incurred in the three months ended November 30, 2016.August 31, 2021.
Income Tax Expense (Benefit)
During the three months ended August 31, 2022, we incurred income tax expense of $1.4 million on a loss before income taxes of $2.2 million. This changeexpense was the result of less interest expense incurredrecording a full reserve on lower average outstanding promissory note balances.
Income Tax Expense
our deferred income tax asset. Our effective income tax rate for the three months ended November 30, 2017August 31, 2021 was 36.2%, compared24.4%. See Note 14 to 36.1%the financial statements for the three months ended November 30, 2016. Beginning March 1, 2017 the Company adopted ASU No. 2019-09, which requires recognitiona description of excessincome taxes, deferred tax benefitsassets and tax deficiencies in the income statement.associated reserves.
Beginning on March 1, 2016, the results
Six Months Ended August 31, 2022 Compared to the net operating losses of U-Swirl when we acquired a 60% ownership interest of SWRL in January 2013 and when we foreclosed upon the stock of U-Swirl International, Inc. in February 2016.Six Months Ended August 31, 2021
Nine MonthsResults Summary Ended November 30, 2017Compared to the Nine Months Ended November 30, 2016
Basic earnings per share decreased 10.6% from $.47 ina net income of $0.13 per share for the ninesix months ended November 30, 2016 comparedAugust 31, 2021, to $.42 ina net loss of $0.60 per share for the ninesix months ended November 30, 2017.August 31, 2022. Revenues decreased 1.3% to $27.61.1% from $15.5 million for the ninesix months ended November 30, 2017 comparedAugust 31, 2021, to $27.9$15.4 million infor the ninesix months ended November 30, 2016. Operating incomeAugust 31, 2022. Income from operations decreased 8.2% from $4.4 million in$904,000 for the ninesix months ended November 30, 2016August 31, 2021, to $4.0a loss from operations of $2.4 million infor the ninesix months ended November 30, 2017.August 31, 2022. Net income decreased 8.3% from $2.7 million innet income of $777,000 for the ninesix months ended November 30, 2016August 31, 2021, to $2.5a net loss of $3.8 million infor the ninesix months ended November 30, 2017. The decrease in operating income and net income was due primarily to a decrease in revenue and an increase in operating expenses.August 31, 2022.
Revenues | | Nine Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
Factory sales | | $ | 18,576.8 | | | $ | 18,159.8 | | | $ | 417.0 | | | | 2.3 | % |
Retail sales | | | 3,045.1 | | | | 3,431.6 | | | | ( 386.5 | ) | | | (11.3 | %) |
Franchise fees | | | 563.0 | | | | 241.5 | | | | 321.5 | | | | 133.1 | % |
Royalty and marketing fees | | | 5,389.8 | | | | 6,100.5 | | | | ( 710.7 | ) | | | (11.6 | %) |
Total | | $ | 27,574.7 | | | $ | 27,933.4 | | | $ | ( 358.7 | ) | | | (1.3 | %) |
Revenues
| | | Six Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
Factory sales | | $ | 9,965.8 | | | $ | 10,202.2 | | | $ | (236.4 | ) | | | (2.3 | )% |
Retail sales | | | 1,589.3 | | | | 1,572.1 | | | | 17.2 | | | | 1.1 | % |
Franchise fees | | | 121.6 | | | | 103.2 | | | | 18.4 | | | | 17.8 | % |
Royalty and marketing fees | | | 3,675.6 | | | | 3,642.3 | | | | 33.3 | | | | 0.9 | % |
Total | | $ | 15,352.3 | | | $ | 15,519.8 | | | $ | (167.5 | ) | | | (1.1 | )% |
Factory Sales
The increasedecrease in factory sales for the ninesix months ended November 30, 2017 versusAugust 31, 2022, compared to the ninesix months ended November 30, 2016August 31, 2021 was primarily due to an 18.8% increasea 47.2%, $677,000, decrease in shipments of product to customers outside our network of franchised retail stores partially offset by a 3.4% decrease5.0%, $441,000, increase in shipmentssales of product to our network of franchised and licensed retail stores. Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and license locations decreased 4.0% in the nine months ended November 30, 2017, compared with the nine months ended November 30, 2016.
Retail Sales
Retail Sales
The decrease in retail sales was primarily dueat Company-owned stores were relatively flat during the six months ended August 31, 2022, compared to changes in retail units in operation resulting from the sale of certain Company-owned locations and the closure of a certain underperforming Company-owned location, partially offset by the acquisition of a franchised location.six months ended August 31, 2021. Same store sales at all Company-owned stores and cafés decreased 3.9% inlocations increased 1.1% during the ninesix months ended November 30, 2017August 31, 2022 when compared to the ninesix months ended November 30, 2016.August 31, 2021.
Royalties, Marketing Fees and Franchise Fees
The decreaseslight increase in royaltiesroyalty and marketing fees for the ninesix months ended November 30, 2017August 31, 2022, compared to the ninesix months ended November 30, 2016 resulted from a 15.3% decreaseAugust 31, 2021, was primarily due to an increase in same-store sales at domestic franchise units in operation and lower same store sales. The average number of total franchise stores in operation decreased from 380 in the nine months ended November 30, 2016 to 322 during the nine months ended November 30, 2017. This decrease is the result of domestic store closures exceeding domestic store openings, primarily the result of franchise and license closures of U-Swirl franchise locations.frozen yogurt cafés. Same store sales at totalall domestic franchise stores and cafés in operation decreased 3.2%locations increased 3.1% during the ninesix months ended November 30, 2017August 31, 2022, when compared to the ninesix months ended November 30, 2016. Franchise fee revenues increased as a result of an increase in international license fees recognizedAugust 31, 2021, with same-store sales at the Company’s domestic franchise frozen yogurt cafés increasing 18.2% during the ninesix months ended November 30, 2017August 31, 2022, compared to the ninesix months ended November 30, 2016.August 31, 2021.
Costs and Expenses | | Nine Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Cost of sales – factory | | $ | 13,823.2 | | | $ | 13,196.9 | | | $ | 626.3 | | | | 4.7 | % |
Cost of sales - retail | | | 1,084.2 | | | | 1,176.6 | | | | ( 92.4 | ) | | | (7.9 | %) |
Franchise costs | | | 1,588.3 | | | | 1,571.6 | | | | 16.7 | | | | 1.1 | % |
Sales and marketing | | | 1,785.4 | | | | 1,959.1 | | | | ( 173.7 | ) | | | (8.9 | %) |
General and administrative | | | 2,932.6 | | | | 3,101.7 | | | | ( 169.1 | ) | | | (5.5 | %) |
Retail operating | | | 1,774.5 | | | | 1,876.8 | | | | ( 102.3 | ) | | | (5.5 | %) |
Total | | $ | 22,988.2 | | | $ | 22,882.7 | | | $ | 105.5 | | | | 0.5 | % |
The increase in franchise fee revenue for the six months ended August 31, 2022, compared to the six months ended August 31, 2021, was the result of store closures and the acceleration of unrecognized franchise fee revenue and more franchise agreements outstanding and subject to revenue recognition.
Gross margin | | Nine Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 4,753.6 | | | $ | 4,962.9 | | | $ | ( 209.3 | ) | | | (4.2 | %) |
Retail gross margin | | | 1,960.9 | | | | 2,255.0 | | | | ( 294.1 | ) | | | (13.0 | %) |
Total | | $ | 6,714.5 | | | $ | 7,217.9 | | | $ | ( 503.4 | ) | | | (7.0 | %) |
Gross Margin | | Nine Months Ended | | | | | | | | | |
| | | November 30, | | | % | | | % | |
| | | 2017 | | | 2016 | | | Change | | | Change | |
(Percent) | | | | | | | | | | | | | | | | |
Factory gross margin | | | 25.6 | % | | | 27.3 | % | | | (1.7 | %) | | | (6.2 | %) |
Retail gross margin | | | 64.4 | % | | | 65.7 | % | | | (1.3 | %) | | | (2.0 | %) |
Total | | | 31.1 | % | | | 33.4 | % | | | (2.3 | %) | | | (6.9 | %) |
Adjusted Gross Margin | | Nine Months Ended | | | | | | | | | |
| | | November 30, | | | $ | | | % | |
($’s in thousands) | | 2017 | | | 2016 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 4,753.6 | | | $ | 4,962.9 | | | $ | ( 209.3 | ) | | | (4.2 | %) |
Plus: depreciation and amortization | | | 387.8 | | | | 324.4 | | | $ | 63.4 | | | | 19.5 | % |
Factory adjusted gross margin | | | 5,141.4 | | | | 5,287.3 | | | | ( 145.9 | ) | | | (2.8 | %) |
Retail gross margin | | | 1,960.9 | | | | 2,255.0 | | | | ( 294.1 | ) | | | (13.0 | %) |
Total Adjusted Gross Margin | | $ | 7,102.3 | | | $ | 7,542.3 | | | $ | ( 440.0 | ) | | | (5.8 | %) |
| | | | | | | | | | | | | | | | | |
Factory adjusted gross margin | | | 27.7 | % | | | 29.1 | % | | | (1.4 | %) | | | (4.8 | %) |
Retail gross margin | | | 64.4 | % | | | 65.7 | % | | | (1.3 | %) | | | (2.0 | %) |
Total Adjusted Gross Margin | | | 32.8 | % | | | 34.9 | % | | | (2.1 | %) | | | (6.0 | %) |
Costs and Expenses
Cost of Sales
| | | Six Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Cost of sales - factory | | $ | 8,209.5 | | | $ | 8,104.3 | | | $ | 105.2 | | | | 1.3 | % |
Cost of sales - retail | | | 593.0 | | | | 514.3 | | | | 78.7 | | | | 15.3 | % |
Franchise costs | | | 1,018.2 | | | | 1,288.8 | | | | (270.6 | ) | | | (21.0 | )% |
Sales and marketing | | | 1,009.9 | | | | 818.6 | | | | 191.3 | | | | 23.4 | % |
General and administrative | | | 5,698.8 | | | | 2,709.1 | | | | 2,989.7 | | | | 110.4 | % |
Retail operating | | | 942.2 | | | | 884.3 | | | | 57.9 | | | | 6.5 | % |
Total | | $ | 17,471.6 | | | $ | 14,319.4 | | | $ | 3,152.2 | | | | 22.0 | % |
Gross Margin
| | | Six Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
| | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,756.3 | | | $ | 2,097.9 | | | $ | (341.6 | ) | | | (16.3 | )% |
Retail gross margin | | | 996.3 | | | | 1,057.8 | | | | (61.5 | ) | | | (5.8 | )% |
Total | | $ | 2,752.6 | | | $ | 3,155.7 | | | $ | (403.1 | ) | | | (12.8 | )% |
| | | Six Months Ended | | | | | | | | | |
| | | August 31, | | | % | | | % | |
| | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | | 17.6 | % | | | 20.6 | % | | | (2.9 | )% | | | (14.3 | )% |
Retail gross margin | | | 62.7 | % | | | 67.3 | % | | | (4.6 | )% | | | (6.8 | )% |
Total | | | 23.8 | % | | | 26.8 | % | | | (3.0 | )% | | | (11.1 | )% |
Adjusted Gross Margin
| | | Six Months Ended | | | | | | | | | |
| | | August 31, | | | $ | | | % | |
($'s in thousands) | | 2022 | | | 2021 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | | |
Factory gross margin | | $ | 1,756.3 | | | $ | 2,097.9 | | | $ | (341.6 | ) | | | (16.3 | )% |
Plus: depreciation and amortization | | | 320.5 | | | | 309.6 | | | | 10.9 | | | | 3.5 | % |
Factory adjusted gross margin | | | 2,076.8 | | | | 2,407.5 | | | | (330.7 | ) | | | (13.7 | )% |
Retail gross margin | | | 996.3 | | | | 1,057.8 | | | | (61.5 | ) | | | (5.8 | )% |
Total Adjusted Gross Margin | | $ | 3,073.1 | | | $ | 3,465.3 | | | $ | (392.2 | ) | | | (11.3 | )% |
| | | | | | | | | | | | | | | | | |
Factory adjusted gross margin | | | 20.8 | % | | | 23.6 | % | | | (2.8 | )% | | | (11.7 | )% |
Retail gross margin | | | 62.7 | % | | | 67.3 | % | | | (4.6 | )% | | | (6.8 | )% |
Total Adjusted Gross Margin | | | 26.6 | % | | | 29.4 | % | | | (2.8 | )% | | | (9.6 | )% |
Adjusted gross margin and factory adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factory adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. Factory adjusted gross margin is equal to factory gross margin minusplus depreciation and amortization expense. We believe adjusted gross margin and factory adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factory gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factory adjusted gross margin are useful to investors because they provide a measure of operating performance and our ability to generate cash that is unaffected by non-cash accounting measures. Additionally, we use adjusted gross margin and factory adjusted gross margin rather than gross margin and factory gross margin to make incremental pricing decisions. Adjusted gross margin and factory adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider itthem in isolation or as a substitute for any measure reported under GAAP. Our use of capital assets makes depreciation and amortization expense a necessary element of our costs and our ability to generate income. Due to these limitations, we use adjusted gross margin and factory adjusted gross margin as measures of performance only in conjunction with GAAP measures of performance such as gross margin and factory gross margin.
Costs and Expenses
Cost of Sales and Gross Margin
Factory gross margins decreased 170 basis points. This decrease wasto 17.6% in the six months ended August 31, 2022, compared to a gross margin of 20.6% during the six months ended August 31, 2021, due primarily to increased productionan increase in costs from wage and material inflation and the impacts of Employee Retention Credits recognized in the six months ended August 31, 2021 with no comparable credits in the six months ended August 31, 2022. These cost increases were partially offset by an increase in product mix shiftprices. The Company recognized approximately $155,000 of payroll tax benefit associated with Employee Retention Credits (“ERC”) in the six months ended August 31, 2021. ERCs were enacted by the CARES Act in March 2020. In December 2020 the Consolidated Appropriations Act extended eligibility for the credits allowing the Company to retroactively benefit from ERCs.
Retail gross margins decreased from 67.3% during the ninesix months ended November 30, 2017August 31, 2021, to 62.7% during the six months ended August 31, 2022. The decrease in retail gross margins was primarily the result of an increase in costs of raw material.
Franchise Costs
The decrease in franchise costs in the six months ended August 31, 2022, compared to the ninesix months ended November 30, 2016. The decrease in Company-owned store margin isAugust 31, 2021, was due primarily to a decrease in Company-owned café revenue resulting from the sale of yogurt and the associated higher margins. This change isprofessional fees, the result of a changelitigation with our licensee in units in operationCanada incurred during the ninesix months ended November 30, 2017 compared to the prior year.
Franchise Costs
The increase in franchise costsAugust 31, 2021, with no comparable legal expense in the ninesix months ended November 30, 2017 versus the nine months ended November 30, 2016 is due primarily to an increase in legal and professional expenses.August 31, 2022. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increaseddecreased to 26.7%26.8% in the ninesix months ended November 30, 2017August 31, 2022, from 24.8%34.4% in the ninesix months ended November 30, 2016.August 31, 2021. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily athe result of lower royalty and marketing revenues.franchise costs.
Sales and Marketing
The decreaseincrease in sales and marketing costs for the ninesix months ended November 30, 2017August 31, 2022, compared to the Ninesix months ended November 30, 2016 is dueAugust 31, 2021 was primarily due to lower marketing related compensation and lower marketing-related costs associated with U-Swirl franchise locations.an increase in advertising costs.
General and Administrative
The decreaseincrease in general and administrative costs for the ninesix months ended November 30, 2017August 31, 2022, compared to the ninesix months ended November 30, 2016 isAugust 31, 2021 was due primarily to lowercosts associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the six months ended August 31, 2022, the Company incurred approximately $2.1 million of costs associated with the contested solicitation of proxies, compared with $917,000 of costs associated with a contested solicitation of proxies during the six months ended August 31, 2021. The Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation arrangements for our former Chief Executive Officer and Chief Financial Officer and legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer. Additionally, due to a stockholder’s contested solicitation of proxies in connection with our 2021 annual meeting of stockholders the Company had become contingently liable for certain change in control severance payments to Mr. Dudley if a triggering termination was to occur. As a result of resolving legal proceedings, and lower compensation costs. ForMr. Dudley’s announced retirement in August 2022, Company management concluded that it is probable that the nine months ended November 30, 2017, approximately $259,000severance liability is paid. As of U-Swirl general and administrative costs were consolidated within our results, compared with $347,000 inAugust 31, 2022, the nine months ended November 30, 2016.Company had recorded $859,000 of associated severance liability. As a percentage of total revenues, general and administrative expenses decreasedincreased to 10.6%37.1% in the ninesix months ended November 30, 2017August 31, 2022, compared to 11.1%17.5% in the ninesix months ended November 30, 2016.August 31, 2021.
Retail Operating Expenses
The decreaseThe increase in retail operating expenses for the ninesix months ended November 30, 2017August 31, 2022, compared to the ninesix months ended November 30, 2016August 31, 2021, was due primarily to changesan increase in unitssalaries and wages and utilities in operation, resulting from the sale of certainour Company-owned unitsstores and the closure of certain underperforming Company-owned units.cafés. Retail operating expenses, as a percentage of retail sales, increased from 54.7%56.2% in the ninesix months ended November 30, 2016August 31, 2021, to 58.3%59.3% in the ninesix months ended November 30, 2017.August 31, 2022. This increasedecrease is primarily the result of a change in units in operation from the prior year.higher retail sales.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $592,000$255,000 in the ninesix months ended November 30, 2017,August 31, 2022, a decrease of 7.3%14.0% from $638,000 incurred$297,000 in the ninesix months ended November 30, 2016.August 31, 2021. This decrease was the result of fewer Company-owned storelower amortization of franchise rights, the result of a decrease in frozen yogurt cafés in operation. See Note 7 to the financial statements for a summary of annual amortization of intangible assets in service.based upon existing intangible assets and current useful lives. Depreciation and amortization included in cost of sales increased 19.6%3.5% from $324,000$310,000 in the ninesix months ended November 30, 2016August 31, 2021 to $388,000$320,000 in the ninesix months ended November 30, 2017.August 31, 2022. This increase was the result of an increaseinvestment in production assets in service.equipment.
Restructuring and acquisition related charges
There were no restructuring and acquisition related charges during the nine months ended November 30, 2017 a decrease from $60,000 during the nine months ended November 30, 2016. The decrease is primarily the result of lease settlement costs related to the closure of an ALY company-owned location incurred during the nine months ended November 30, 2016 with no comparable expense incurred during the nine months ended November 30, 2017.Other Income
Other Income (Expense) income was $6,500 in the six months ended August 31, 2022, compared to other income of $174,300 during the six months ended August 31, 2021. Interest income was $6,500 in the six months ended August 31, 2022, compared to interest income of $7,100 during the six months ended August 31, 2021.
Net interest expense was $76,100 inThe Company recognized a gain on insurance recovery of $167,100 during the ninesix months ended November 30, 2017, a decrease of 24.1%August 31, 2021, compared to net interestwith no similar amounts recognized during the six months ended August 31, 2022.
Income Tax Expense (Benefit)
During the six months ended August 31, 2022, we incurred income tax expense of $100,300 in the nine months ended November 30, 2016.$1.4 million on a loss before income taxes of $2.4 million. This changeexpense was the result of less interest expense incurredrecording a full reserve on lower average outstanding promissory note balances.
Income Tax Expense
our deferred income tax asset. Our effective income tax rate for the ninesix months ended November 30, 2017August 31, 2021 was 36.4%, compared27.9%. See Note 14 to 36.1%the financial statements for the nine months ended November 30, 2016. The increasea description of 0.3% was primarily due to an increase in income taxes, deferred tax expenseassets and associated with the vesting of restricted stock units. Beginning March 1, 2017 the Company adopted ASU No. 2019-09, which requires recognition of excess tax benefits and tax deficiencies in the income statement.reserves.
Beginning on March 1, 2016, the results
Liquidity and Capital Resources
As of November 30, 2017,August 31, 2022, working capital was $7.0$7.3 million, compared with $7.1to $9.7 million as of February 28, 2017,2022, a decrease of $100,000.$2.4 million. The decrease in working capital was primarily due to the paymentcosts associated with a stockholder’s contested solicitation of dividends and payments on long-term debt partially offset by positive operating results.proxies in connection with our 2022 annual meeting of stockholders.
Cash and cash equivalent balances decreased $1.7approximately $2.2 million from $5.8to $5.4 million as of August 31, 2022 compared to $7.6 million as of February 28, 20172022. This decrease in cash and cash equivalents was primarily due to $4.1funding of a rabbi trust established for severance payments to our former Chief Executive Officer and the resulting $1.3 million asdecrease in cash balances and an increase in inventory of November 30, 2017 as a result of cash flow used by financing activities, including repayment of indebtedness and payment of dividends.$2.1 million. Our current ratio was 1.92.0 to 1 at November 30, 2017 andAugust 31, 2022 compared to 2.8 to 1 at February 28, 2017.2022. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
ForDuring the ninesix months ended November 30, 2017,August 31, 2022, we had a net incomeloss of $2,493,012.$3.8 million. Operating activities providedused cash of $1,647,658,$1,584,693, with the principal adjustment to reconcile the net income to net cash providedused by operating activities being deferred income taxes of $1,388,271, depreciation and amortization of $979,712, stock-based compensation expense of $458,275 and$575,429, an increase in accrued liabilitiesaccounts payable of $362,718 more than$2,213,952 and refunded income taxes of $304,779, partially offset by an increase toin inventory of $990,398, an increase in deferred income taxes of $444,747 and an increase in accounts receivable of $1,307,149.$2,068,878. During the comparable 20162021 period, we had net income of $2,718,446,$776,738, and operating activities provided cash of $2,997,051.$1,427,456. The principal adjustment to reconcile the net income to net cash providedused by operating activities wasbeing depreciation and amortization of $962,632, stock-based compensation expense of $447,581, and$606,190, an increase in accounts payable of $156,150 mostly$1,201,485 and expense related to stock-based compensation of $269,624, partially offset by an increase toin inventory of $771,281 and an increase in accounts receivable of $650,708.$1,199,304
ForDuring the ninesix months ended November 30, 2017,August 31, 2022, investing activities used cash of $274,052,$598,878, primarily due to the purchases of property and equipment of $446,935 partially offset by proceeds on notes receivable of $194,646.$586,879. In comparison, investing activities used cash of $1,171,779$329,405 during the ninesix months ended November 30, 2016August 31, 2021 primarily due to the purchases of property and equipment of $1,048,667.
Financing activities used cash of $3,085,883 for the nine months ended November 30, 2017 and used cash of $3,423,767 during the prior year period. This change was primarily due to a decrease in cash used to repurchase common stock during the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016.$206,336.
We have a $5.0 million ($5.0 million available as of November 30, 2017) working capital line of credit collateralized by substantially all of our assets withThere were no cash flows from financing activities during the exception of our retail store assets. Additionally, the line of credit is subject to various financial ratio and leverage covenants. As of November 30, 2017, we were in compliance with all such covenants. The line is subject to renewal in September 2019. As of November 30, 2017, no amount was outstanding under this line of credit.six months ended August 31, 2022 or 2021.
The Company’s long-term debt is comprised of a promissory note, the proceeds of which were loaned to SWRL and used to finance business acquisitions by SWRL (unpaid balance as of November 30, 2017, $2.9 million). The promissory note allowed the Company to borrow up to a maximum of $7.0 million to finance business acquisitions and bears interest at a fixed annual rate of 3.75%. The promissory note matures on January 15, 2020, with amortized principal and accrued interest due monthly on the promissory note. Additionally, the promissory note is subject to various financial ratio and leverage covenants. As of November 30, 2017, we were in compliance with all such covenants.
As discussed above, in FY 2014, SWRL acquired the franchise rights and certain other assets of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” In connection with these acquisitions, the Company entered into a credit facility with Wells Fargo Bank, N.A. used to finance the acquisitions of SWRL, and in turn, the Company entered into the SWRL Loan Agreement with SWRL. Borrowings under the SWRL Loan Agreement were secured by all of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults under the SWRL Loan Agreement, we issued a demand for payment of all obligations under the SWRL Loan Agreement. SWRL was unable to repay the obligations under the SWRL Loan Agreement, and as a result, we foreclosed on all of the outstanding stock of U-Swirl as of February 29, 2016 in full satisfaction of the amounts owed under the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary of the Company as of February 29, 2016, and concurrently the Company ceased to have financial control of SWRL as of February 29, 2016. As of February 29, 2016 and November 30, 2017, SWRL had no operating assets.
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and nine months ended November 30, 2017. As of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
We believe believes that cash flows generated by operating activities and available financingflow from operations will be sufficient to fund our operations capital expenditures and working capital requirements for at least the next twelve months.FY 2023. If necessary, the Company has an available bank line of credit to help meet these requirements.
Off-Balance Sheet Arrangements
As of November 30, 2017,August 31, 2022, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
Purchase obligations: As of August 31, 2022, we had purchase obligations of approximately $53,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our manufacturing.
Impact of Inflation
Inflationary factors such as increases in the costs of ingredients and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay taxes, insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease costs for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.
Depreciation expense is based on the historical cost to us of our fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Historically, the strongest sales of our confectionary products have occurred during the Christmas holiday through Mother’s Day. We believe the strongest sales of frozen yogurt products will occur duringkey holidays and the summer months.vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We do not engage in commodity futures trading or hedging activities and do not enter into derivative financial instrument transactions for trading or other speculative purposes. We also do not engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk. However,As a smaller reporting company, we are exposednot required to some commodity price and interest rate risks.provide the information required by this Item.
We frequently enter into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit us to purchase the specified commodity at a fixed price on an as-needed basis during the term of the contract. Because prices for these products may fluctuate, we may benefit if prices rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall and we are unable to renegotiate the terms of the contract. As of November 30, 2017, based on future contractual obligations for ingredients, we estimate that a 10.0% change in the prices of contracted ingredients would result in a $100,000 favorable or unfavorable price benefit or cost, respectively, resulting from our contracts.
We have a $5.0 million bank line of credit that bears interest at a variable rate. As of November 30, 2017, no amount was outstanding under the line of credit. We do not believe that we are exposed to any material interest rate risk related to this credit facility.
The Company also entered into a $7.0 million promissory note with interest at a fixed rate of 3.75% annually to finance the previous acquisitions by SWRL. As of November 30, 2017, $2.9 million was outstanding under this promissory note. We do not believe that we are exposed to any material interest rate risk related to this promissory note.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Company management,Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures wereare effective as of November 30, 2017.August 31, 2022.
Changes in Internal Control over Financial Reporting
ThereThere were no changes in our internal control over financial reporting that occurred during the quarter ended November 30, 2017August 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 2014, SWRL entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC (collectively, the “CherryBerry Entities”), and their respective owners, pursuant to which SWRL acquired the franchise rights of frozen yogurt stores branded as “CherryBerry”. As previously disclosed, among other actions, on January 13, 2016, the CherryBerry Entities filed a lawsuit in the United States District Court for the Northern District of Oklahoma (the “Oklahoma Court”) asserting certain claims for alleged wrongful actions against SWRL and RMCF under the CherryBerry Purchase Agreement. On July 11, 2017, the Oklahoma Court granted summary judgement in favor of SWRL and RMCF on all of the claims made by the CherryBerry Entities, and in connection therewith, on September 26, 2017, the Oklahoma Court dismissed all counterclaims made by SWRL. The Company does not expect any further proceedings with respect to this matter. See Item 3. “Legal Proceedings” of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017 and Item 1. “Legal Proceedings” of our Quarterly Report on Form 10-Q for the quarter ended August 31, 2017 for additional information concerning this matter.
The Company is party to various other legal proceedings arising in the ordinary course of business from time to time. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
On September 28, 2022, the Company initiated a lawsuit in the Delaware Court of Chancery that seeks declaratory relief and monetary damages against Bradley L. Radoff, Andrew T. Berger, AB Value Partners LP, AB Value Management LLC (collectively, the “AB Value/Radoff Group) and Mary Bradley. The Company’s complaint alleges that the AB Value/Radoff Group and Ms. Bradley conspired to fraudulently induce the Company into entering a cooperation agreement on August 13, 2022 (the “Cooperation Agreement”), which was intended to settle the contested election at the upcoming 2022 Annual Meeting of Stockholders of the Company (the “2022 Annual Meeting”). The Cooperation Agreement specified that the Company would expand its Board of Directors to seven members by appointing the AB Value/Radoff Group’s nominee, Ms. Bradley, to the Board immediately following the 2022 Annual Meeting of Stockholders. The complaint alleges that the AB Value/Radoff Group and Ms. Bradley knew before signing the Cooperation Agreement there was no contested election to resolve, because Ms. Bradley had notified the AB Value/Radoff Group that she would not serve as a director for even one day and was therefore ineligible for election at the 2022 Annual Meeting—but withheld this information from the Company and the public. The complaint seeks (i) a declaration that the Cooperation Agreement is rescinded, null, and void, and that Company has no obligations under the Cooperation Agreement including, but not limited, to the payment of $600,000 to the AB Value/Radoff Group, (ii) an award of damages for the Company’s costs and expenses, including attorneys’ fees, that the Company incurred to negotiate and execute the Cooperation Agreement after the AB Value/Radoff Group knew or should have known that Ms. Bradley was unwilling to serve as a Director of the Company, in an amount in excess of $500,000, (iii) an award of damages for the Company’s costs and expenses incurred in the contested election that was based on misrepresentations concerning Ms. Bradley’s qualifications in numerous filings with the Securities and Exchange Commission, in an amount in excess of $1,000,000.
Item 1A.Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part 1, Item“Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017. There2022, as amended by Amendment No. 1 on Form 10-K/A filed on June 28, 2022, which could materially and adversely affect our business, financial condition and results of operations. Other than as set forth below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017.2022, as amended by Amendment No. 1 on Form 10-K/A.
We Are Subject to Periodic Litigation, Which Could Result in Unexpected Expense of Time and Resources.
We are a party to lawsuits from time to time. In addition, on September 28, 2022, we commenced litigation against Bradley L. Radoff, Andrew T. Berger, AB Value Partners LP, AB Value Management LLC and Mary Bradley in the Delaware Court of Chancery as described under the caption “PART II. OTHER INFORMATION - Item 1. Legal Proceedings” in this Form 10-Q. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome in any current or future legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and result in substantial legal fees. Any litigation could result in substantial costs and a diversion of management's attention and resources that are needed to successfully run our business.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase any shares during the three and nine months ended November 30, 2017. As of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.
The Company plans to continue the repurchase plan until it has been completed. The number, price, structure and timing of the repurchases, if any, will be at the Company’s sole discretion and future repurchases will be evaluated by the Company depending on market conditions, liquidity needs and other factors. The repurchase authorization does not have an expiration date and does not oblige the Company to acquire any particular amount of its common stock. The Board of Directors may suspend, modify or terminate the repurchase program at any time without prior notice.None.
Item 3.Defaults Upon Senior Securities
None.None.
Item 4.Mine Safety Disclosures
Not Applicable.Applicable.
Item 5.Other Information
None.None.
Item 6.Exhibits
| | 101.INS | * Inline XBRL Instance Document.Document (the Instance Document does not appear in the Interactive Data File because it’s XBRL (1)) |
| | 101.SCH | * Inline XBRL Taxonomy Extension Schema Document.Document (1) |
| | 101.CAL | * Inline XBRL Taxonomy Extension Calculation Linkbase Document.Document (1) |
| | 101.DEF | * Inline XBRL Taxonomy Extension Definition Linkbase Document.Document (1) |
| | 101.LAB | * Inline XBRL Taxonomy Extension Label Linkbase Document.Document (1) |
| | 101.PRE | * Inline XBRL Taxonomy Extension Presentation Linkbase Document.Document (1) |
| | 104 | * Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101.1) |
| | (1) | ____________________________These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1937, as amended, or otherwise subject to liability under those sections. |
| | |
| | * Filed herewith. |
| | ** Furnished herewith. |
____________________________
* Filed herewith.
** Furnished herewith.
+ Management contract or compensatory plan
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.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
(Registrant)
Date: January 12, 2018October 14, 2022 | | /s/ Bryan J. MerrymanAllen Arroyo | |
| | Bryan J. Merryman, Chief Operating Officer,
| Allen Arroyo, Chief Financial Officer Treasurer and Director |
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