UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2017May 31, 2023
| ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to________
Commission file number: 001-36865
Rocky Mountain Chocolate Factory, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 47-1535633 |
(State or other jurisdiction of
| (I.R.S. Employer Identification No.) |
265 Turner Drive, Durango, CO 81303
(Address of principal executive offices, including zip code)
(970) 259-0554
(Registrant’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | RMCF | Nasdaq Global Market |
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☒ 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 (§ 232.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Act
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On December 31, 2017,July 10, 2023, the registrant had outstanding 5,903,4366,293,110 shares of its common stock, $.001$0.001 par value per share.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
FORM 10-Q
|
| ||
|
| ||
| |||
| |||
| |||
|
| ||
|
|
| |
|
| ||
|
| ||
| 4 | ||
5 | |||
6 | |||
7 | |||
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS | 8 | ||
|
| ||
|
| ||
|
| ||
|
|
| |
|
| ||
|
| ||
|
| ||
Item 1. | 24 | ||
Item 1A. | 24 | ||
Item 2. | 24 | ||
Item 3. | 24 | ||
Item 4. | 24 | ||
Item 5. | 24 | ||
Item 6. | 25 | ||
26 |
PART I. FINANCIAL INFORMATIONCautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements involve various risks and uncertainties. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “will,” “intend,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “potential,” or similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future – including statements expressing general views about future operating results – are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to: inflationary impacts, the outcome of legal proceedings, changes in the confectionery business environment, seasonality, consumer interest in our products, consumer and retail trends, costs and availability of raw materials, competition, and the success of our co-branding strategy and the effect of government regulations. 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 Part II, Item 1. Financial Statements1A. “Risk Factors” and the risks described elsewhere in this Quarterly Report and the section entitled “Risk Factors” contained in Part I, Item 1A. of our Annual Report on Form 10-K for the fiscal year ended February 28, 2023 filed on May 30, 2023, as updated by this report.
FINANCIAL INFORMATION |
Financial Statements |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Sales | $ | 8,351,583 | $ | 8,250,611 | $ | 21,621,903 | $ | 21,591,420 | ||||||||
Franchise and royalty fees | 1,609,989 | 1,704,628 | 5,952,807 | 6,341,980 | ||||||||||||
Total revenues | 9,961,572 | 9,955,239 | 27,574,710 | 27,933,400 | ||||||||||||
Costs and Expenses | ||||||||||||||||
Cost of sales | 6,040,004 | 5,544,155 | 14,907,440 | 14,373,548 | ||||||||||||
Franchise costs | 515,149 | 520,619 | 1,588,348 | 1,571,619 | ||||||||||||
Sales and marketing | 593,033 | 641,976 | 1,785,416 | 1,959,115 | ||||||||||||
General and administrative | 827,215 | 880,455 | 2,932,568 | 3,101,662 | ||||||||||||
Retail operating | 584,771 | 551,168 | 1,774,522 | 1,876,783 | ||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $134,350, $118,213, $387,849 and $324,412, respectively, included in cost of sales | 201,939 | 201,512 | 591,863 | 638,220 | ||||||||||||
Restructuring and acquisition-related charges | - | - | - | 60,000 | ||||||||||||
Total costs and expenses | 8,762,111 | 8,339,885 | 23,580,157 | 23,580,947 | ||||||||||||
Income from Operations | 1,199,461 | 1,615,354 | 3,994,553 | 4,352,453 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (28,661 | ) | (40,842 | ) | (95,938 | ) | (132,884 | ) | ||||||||
Interest income | 6,396 | 9,543 | 19,827 | 32,540 | ||||||||||||
Other income (expense), net | (22,265 | ) | (31,299 | ) | (76,111 | ) | (100,344 | ) | ||||||||
Income Before Income Taxes | 1,177,196 | 1,584,055 | 3,918,442 | 4,252,109 | ||||||||||||
Income Tax Provision | 426,140 | 572,256 | 1,425,430 | 1,533,663 | ||||||||||||
Consolidated Net Income | $ | 751,056 | $ | 1,011,799 | $ | 2,493,012 | $ | 2,718,446 | ||||||||
Basic Earnings per Common Share | $ | .13 | $ | .17 | $ | .42 | $ | .47 | ||||||||
Diluted Earnings per Common Share | $ | .13 | $ | .17 | $ | .42 | $ | .45 | ||||||||
Weighted Average Common Shares Outstanding - Basic | 5,903,436 | 5,874,366 | 5,878,086 | 5,839,603 | ||||||||||||
Dilutive Effect of Restricted Stock Units | 78,029 | 133,658 | 102,145 | 159,215 | ||||||||||||
Weighted Average Common Shares Outstanding - Diluted | 5,981,465 | 6,008,024 | 5,980,231 | 5,998,818 |
Three Months Ended May 31, | ||||||||
2023 | 2022 | |||||||
Revenues | ||||||||
Sales | $ | 5,016,047 | $ | 5,408,020 | ||||
Franchise and royalty fees | 1,419,938 | 1,494,178 | ||||||
Total Revenue | 6,435,985 | 6,902,198 | ||||||
Costs and Expenses | ||||||||
Cost of sales | 4,758,494 | 4,526,321 | ||||||
Franchise costs | 679,573 | 419,084 | ||||||
Sales and marketing | 472,891 | 481,059 | ||||||
General and administrative | 1,931,903 | 1,605,867 | ||||||
Retail operating | 102,981 | 158,274 | ||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $170,856, $159,706, respectively, included in cost of sales | 31,229 | 29,187 | ||||||
Total costs and expenses | 7,977,071 | 7,219,792 | ||||||
Loss from Operations | (1,541,086 | ) | (317,594 | ) | ||||
Other Income | ||||||||
Interest Expense | (6,259 | ) | - | |||||
Interest Income | 20,078 | 2,641 | ||||||
Other income, net | 13,819 | 2,641 | ||||||
Income (Loss) Before Income Taxes | (1,527,267 | ) | (314,953 | ) | ||||
Income Tax Provision (Benefit) | - | (29,186 | ) | |||||
Net Income (Loss) from Continuing Operations | (1,527,267 | ) | (285,767 | ) | ||||
Discontinued Operations | ||||||||
Earnings from discontinued operations, net of tax | 69,044 | 170,826 | ||||||
Gain on disposal of discontinued operations, net of tax | 634,790 | - | ||||||
Earnings from discontinued operations, net of tax | 703,834 | 170,826 | ||||||
Consolidated Net Loss | $ | (823,433 | ) | $ | (114,941 | ) | ||
Basic Earnings (Loss) per Common Share | ||||||||
Loss from continuing operations | $ | (0.24 | ) | $ | (0.05 | ) | ||
Earnings from discontinued operations | 0.11 | 0.03 | ||||||
Net earnings (loss) | $ | (0.13 | ) | $ | (0.02 | ) | ||
Diluted Earnings (Loss) per Common Share | ||||||||
Loss from continuing operations | $ | (0.24 | ) | $ | (0.05 | ) | ||
Earnings from discontinued operations | 0.11 | 0.03 | ||||||
Net earnings (loss) | $ | (0.13 | ) | $ | (0.02 | ) | ||
Weighted Average Common Shares | ||||||||
Outstanding - Basic | 6,276,613 | 6,206,939 | ||||||
Dilutive Effect of Employee | ||||||||
Stock Awards | - | - | ||||||
Weighted Average Common Shares | ||||||||
Outstanding - Diluted | 6,276,613 | 6,206,939 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
November 30, | February 28, | May 31, | February 28, | |||||||||||||
2017 | 2017 | 2023 | 2023 | |||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,066,918 | $ | 5,779,195 | $ | 5,148,832 | $ | 4,717,068 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $565,339 and $487,446, respectively | 4,991,026 | 3,855,823 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $6,100 and $22,147, respectively | 133,642 | 235,612 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $577,234 and $666,315, respectively | 1,828,644 | 2,055,694 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $41,861 and $35,173, respectively | 47,654 | 23,698 | ||||||||||||||
Refundable income taxes | 5,055 | 47,863 | 309,322 | 344,885 | ||||||||||||
Inventories, less reserve for slow moving inventory of $261,377 and $249,051, respectively | 5,687,275 | 4,975,779 | ||||||||||||||
Inventories | 2,720,561 | 3,639,780 | ||||||||||||||
Other | 282,840 | 256,548 | 461,483 | 340,847 | ||||||||||||
Current assets held for sale | - | 83,004 | ||||||||||||||
Total current assets | 15,166,756 | 15,150,820 | 10,516,496 | 11,204,976 | ||||||||||||
Property and Equipment, Net | 6,314,812 | 6,457,931 | 6,059,374 | 5,710,739 | ||||||||||||
Other Assets | ||||||||||||||||
Notes receivable, less current portion and valuation allowance of $42,647 and $26,500, respectively | 301,097 | 370,769 | ||||||||||||||
Notes receivable, less current portion and valuation allowance of $32,090 and $38,778, respectively | 1,155,072 | 94,076 | ||||||||||||||
Goodwill, net | 1,046,944 | 1,046,944 | 575,608 | 575,608 | ||||||||||||
Franchise rights, net | 4,536,370 | 4,826,172 | ||||||||||||||
Intangible assets, net | 598,768 | 632,207 | 258,701 | 265,927 | ||||||||||||
Deferred income taxes | 1,303,621 | 858,874 | ||||||||||||||
Lease right of use asset | 2,210,242 | 2,355,601 | ||||||||||||||
Other | 64,849 | 74,639 | 23,469 | 14,054 | ||||||||||||
Long-term assets held for sale | - | 1,765,846 | ||||||||||||||
Total other assets | 7,851,649 | 7,809,605 | 4,223,092 | 5,071,112 | ||||||||||||
Total Assets | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Total Assets | $ | 20,798,962 | $ | 21,986,827 | ||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Current maturities of long term debt | $ | 1,340,010 | $ | 1,302,501 | ||||||||||||
Accounts payable | 1,492,837 | 1,820,470 | $ | 2,006,517 | $ | 2,189,760 | ||||||||||
Accrued salaries and wages | 870,328 | 608,510 | 1,069,628 | 978,606 | ||||||||||||
Gift card liabilities | 2,938,588 | 2,921,585 | 586,269 | 592,932 | ||||||||||||
Other accrued expenses | 337,394 | 253,497 | 217,369 | 162,346 | ||||||||||||
Dividend payable | 708,412 | 702,525 | ||||||||||||||
Deferred income | 465,543 | 451,171 | ||||||||||||||
Contract liabilities | 161,781 | 161,137 | ||||||||||||||
Lease liability | 753,026 | 746,506 | ||||||||||||||
Current liabilities held for sale | - | 178,939 | ||||||||||||||
Total current liabilities | 8,153,112 | 8,060,259 | 4,794,590 | 5,010,226 | ||||||||||||
Long-Term Debt, Less Current Maturities | 1,519,310 | 2,529,240 | ||||||||||||||
Lease Liability, Less Current Portion | 1,483,830 | 1,640,017 | ||||||||||||||
Contract Liabilities, Less Current Portion | 772,177 | 782,278 | ||||||||||||||
Long-term liabilities - held for sale | - | 184,142 | ||||||||||||||
Commitments and Contingencies | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | ||||||||||||||||
Series A Junior Participating Preferred Stock, authorized 50,000 shares | - | - | ||||||||||||||
Undesignated series, authorized 200,000 shares | - | - | ||||||||||||||
Common stock, $.001 par value per share, 46,000,000 shares authorized, 5,903,436 and 5,854,372 shares issued and outstanding, respectively | 5,903 | 5,854 | ||||||||||||||
Stockholders' Equity | ||||||||||||||||
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding | - | - | ||||||||||||||
Common stock, $.001 par value, 46,000,000 shares authorized, 6,290,164 shares and 6,257,137 shares issued and outstanding, respectively | 6,290 | 6,257 | ||||||||||||||
Additional paid-in capital | 5,997,583 | 5,539,357 | 9,659,476 | 9,457,875 | ||||||||||||
Retained earnings | 13,657,309 | 13,283,646 | 4,082,599 | 4,906,032 | ||||||||||||
Total stockholders’ equity | 19,660,795 | 18,828,857 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Total stockholders' equity | 13,748,365 | 14,370,164 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 20,798,962 | $ | 21,986,827 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
November 30, | May 31, | |||||||||||||||
2017 | 2016 | 2023 | 2022 | |||||||||||||
Cash Flows From Operating activities | ||||||||||||||||
Net income | $ | 2,493,012 | $ | 2,718,446 | ||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net income (loss) | $ | (823,433 | ) | $ | (114,941 | ) | ||||||||||
Less: Net Income from discontinued operations, net of tax | 703,834 | 170,826 | ||||||||||||||
Net Loss from continuing operations | (1,527,267 | ) | (285,767 | ) | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 979,712 | 962,632 | 202,085 | 188,893 | ||||||||||||
Provision for slow moving inventory | 82,738 | 61,061 | ||||||||||||||
Provision for obsolete inventory | 27,957 | 59,796 | ||||||||||||||
Provision for loss on accounts and notes receivable | 88,200 | 109,200 | - | (100,000 | ) | |||||||||||
Loss on sale or disposal of property and equipment | 20,630 | 18,783 | ||||||||||||||
Loss (gain) on sale or disposal of property and equipment | (22,392 | ) | 1,950 | |||||||||||||
Expense recorded for stock compensation | 458,275 | 447,581 | 201,634 | 131,597 | ||||||||||||
Deferred income | 23,769 | 14,710 | ||||||||||||||
Deferred income taxes | (444,747 | ) | 237,131 | - | 100,925 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,307,149 | ) | (650,708 | ) | 197,117 | 190,420 | ||||||||||
Refundable income taxes | 42,808 | (284,927 | ) | 35,563 | 170,875 | |||||||||||
Inventories | (990,398 | ) | (771,281 | ) | 676,174 | (762,523 | ) | |||||||||
Contract Liabilities | (9,457 | ) | (26,352 | ) | ||||||||||||
Other current assets | (26,641 | ) | (39,008 | ) | (119,613 | ) | (197,389 | ) | ||||||||
Accounts payable | (135,269 | ) | 156,150 | (184,882 | ) | 475,858 | ||||||||||
Accrued liabilities | 362,718 | 17,281 | 140,769 | (193,960 | ) | |||||||||||
Net cash provided by operating activities | 1,647,658 | 2,997,051 | ||||||||||||||
Net cash used in operating activities of continuing operations | (382,312 | ) | (245,677 | ) | ||||||||||||
Net cash (used in) provided by operating activities of discontinued operations | (39,242 | ) | 256,975 | |||||||||||||
Net cash (used in) provided by operating activities | (421,554 | ) | 11,298 | |||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Addition to notes receivable | (14,292 | ) | (131,243 | ) | (49,476 | ) | - | |||||||||
Proceeds received on notes receivable | 194,646 | 255,907 | 15,396 | 15,411 | ||||||||||||
Purchase of intangible assets | (8,508 | ) | (307,023 | ) | ||||||||||||
(Cost of) proceeds from sale or distribution of assets | (7,926 | ) | 33,845 | |||||||||||||
Proceeds from sale or distribution of assets | 28,432 | 600 | ||||||||||||||
Purchases of property and equipment | (446,935 | ) | (1,048,667 | ) | (549,534 | ) | (260,885 | ) | ||||||||
Decrease in other assets | 8,963 | 25,402 | - | 10,000 | ||||||||||||
Net cash used in investing activities | (274,052 | ) | (1,171,779 | ) | ||||||||||||
Net cash used in by investing activities of continuing operations | (555,182 | ) | (234,874 | ) | ||||||||||||
Net cash provided by (used in) investing activities of discontinued operations | 1,408,500 | (29,475 | ) | |||||||||||||
Net cash provided by (used in) investing activities | 853,318 | (264,349 | ) | |||||||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Payments on long-term debt | (972,421 | ) | (935,794 | ) | ||||||||||||
Repurchase of common stock | - | (351,584 | ) | |||||||||||||
Tax (expense) benefit of stock awards | - | (34,128 | ) | |||||||||||||
Dividends paid | (2,113,462 | ) | (2,102,261 | ) | ||||||||||||
Net cash used in financing activities | (3,085,883 | ) | (3,423,767 | ) | ||||||||||||
Net Decrease in Cash and Cash Equivalents | (1,712,277 | ) | (1,598,495 | ) | ||||||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 431,764 | (253,051 | ) | |||||||||||||
Cash and Cash Equivalents, Beginning of Period | 5,779,195 | 6,194,948 | 4,717,068 | 7,587,374 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 4,066,918 | $ | 4,596,453 | $ | 5,148,832 | $ | 7,334,323 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Three Months Ended | ||||||||
May 31, | ||||||||
2023 | 2022 | |||||||
Common Stock | ||||||||
Balance at February 28: | $ | 6,257 | $ | 6,186 | ||||
Equity compensation, restricted stock units and stock options | 33 | 28 | ||||||
Balance at May 31: | 6,290 | 6,214 | ||||||
Additional Paid-in Capital | ||||||||
Balance at February 28: | 9,457,875 | 8,806,930 | ||||||
Equity compensation, restricted stock units and stock options | 201,601 | 131,569 | ||||||
Balance at May 31: | 9,659,476 | 8,938,499 | ||||||
Retained Earnings | ||||||||
Balance at February 28: | 4,906,032 | 10,586,810 | ||||||
Consolidated net income (loss) | (823,433 | ) | (114,941 | ) | ||||
Balance at May 31: | 4,082,599 | 10,471,869 | ||||||
Total Stockholders' Equity | $ | 13,748,365 | $ | 19,416,582 | ||||
Common Shares Outstanding | ||||||||
Balance at February 28: | 6,257,137 | 6,186,356 | ||||||
Equity compensation, restricted stock units and stock options | 33,027 | 27,325 | ||||||
Balance at May 31: | 6,290,164 | 6,213,681 |
The accompanying notes are an integral part of these consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1– NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc.Inc., a Delaware corporation, its wholly-ownedwholly owned subsidiaries, Rocky Mountain Chocolate Factory, Inc., a (a Colorado corporation (“RMCF”)corporation), Aspen Leaf Yogurt, LLC a Colorado limited liability company (“ALY”), U-Swirl International, Inc. (“U-Swirl”), a Nevada corporation, and its 46%-owned subsidiary, U-Swirl, Inc., a Nevada corporation (“SWRL”) of which, RMCF had financial control until February 29, 2016 (collectively, the “Company”“Company,” “we,” “us” or “our”). All intercompany balances and transactions have been eliminated in consolidation.
The Company is an international franchisor, confectionery manufacturerproducer and retail operator. Founded in 1981, the Company is headquartered in Durango, Colorado and manufacturesproduces an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates self-serve frozen yogurt cafés.products ("Durango Products"). The Company also sells its candy in selectedselect locations outside of its systemfranchised/licensed network of retail stores and licenses the use of its brand with certain consumer products.stores.
In January 2013, through our wholly-owned subsidiaries, including ALY, On February 24, 2023 the Company entered into two agreementsan agreement to sell all ofits three Company-owned U-Swirl locations. Separately, on May 1, 2023, subsequent to the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to 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 were being supported by SWRL. The SWRL Board of Directors is composed solely of Board members also serving on the Company’s Board of Directors.
In2023 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,end, the Company entered into a credit facility with Wells Fargo, N.A. usedan agreement to finance the acquisitions by SWRL,sell its franchise rights and in turn, the Company entered into a loanintangible assets related to U-Swirl and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). 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.brands. As a result, of certain defaults under the SWRL Loan Agreement, the Company 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, the Company foreclosed on allactivities of the outstanding stock ofCompany’s U-Swirl on February 29, 2016subsidiary that have historically been reported in full satisfaction of the amounts owed underU-Swirl segment have been reported as discontinued operations. See Note 16 –Discontinued Operations in the SWRL Loan Agreement. This resulted in U-Swirl becoming a wholly-owned subsidiary ofNotes to Consolidated Financial Statements for additional information regarding the Company as of February 29, 2016Company's discontinued operations, including net sales, operating earnings and concurrently the Company ceased to havetotal assets by segment. The Company’s financial control of SWRL as of February 29, 2016. As of February 29, 2016 and November 30, 2017, SWRL had no operating assets.
U-Swirl operates 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”.statements reflect continuing operations only, unless otherwise noted.
The Company’sCompany’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees’ sales of both confectionery products and frozen yogurt;sales; and sales at Company-owned stores of chocolates frozen yogurt, and other confectionery products.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the number of stores operatedoperating under the Rocky Mountain Chocolate Factory brand and frozen yogurt cafés as of November 30, 2017:at May 31, 2023:
Sold, Not Yet Open |
Open |
Total | ||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||
Company-owned stores | - | 5 | 5 | |||||||||
Franchise stores – Domestic stores and kiosks | 9 | 188 | 197 | |||||||||
International license stores | - | 84 | 84 | |||||||||
Cold Stone Creamery – co-branded | 5 | 86 | 91 | |||||||||
U-Swirl (Including all associated brands) | ||||||||||||
Company-owned stores | - | 2 | 2 | |||||||||
Company-owned stores – co-branded | - | 3 | 3 | |||||||||
Franchise stores – Domestic stores | * | 104 | 104 | |||||||||
Franchise stores – Domestic – co-branded | * | 15 | 15 | |||||||||
International License Stores | 1 | 1 | 2 | |||||||||
Total | 15 | 488 | 503 |
*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development, and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.
Stores Open at 2/28/2023 | Opened | Closed | Stores Open at 5/31/2023 | Sold, Not Yet Open | Total | |||||||||||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||||||||||||||
Company-owned stores | 1 | - | - | 1 | - | 1 | ||||||||||||||||||
Franchise stores - Domestic stores and kiosks | 153 | 2 | (3 | ) | 152 | 5 | 157 | |||||||||||||||||
International license stores | 4 | - | - | 4 | - | 4 | ||||||||||||||||||
Cold Stone Creamery - co-branded | 101 | 1 | - | 102 | - | 102 | ||||||||||||||||||
U-Swirl - co-branded | 10 | 1 | - | 11 | - | 11 | ||||||||||||||||||
Total | 269 | 270 | 5 | 275 |
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 (“SEC”) 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. 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 ninethree months ended November 30, 2017 May 31, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year.
Theseunaudited consolidated 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-K10-K for the fiscal year ended February 28, 2017.2023, filed with the SEC on May 30, 2023. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.
Subsequent Events
On December 22, 2017, H.R.1 - An Act to provide for reconciliation pursuant to titles II and VManagement evaluated all activity of the concurrent resolution onCompany through the budget for fiscal year 2018, known as the Tax Cuts and Jobs Act, (“TCJA”) was enacted into law. The Company is currently reviewing the componentsissue date of the TCJA and evaluating its impact, which could be material on the Company’s fiscal year 2018these consolidated financial statements and related disclosures, including a one-time, non-cash expense related to a decreaseconcluded that no subsequent events have occurred that would require recognition or disclosure in the value of the Company’s net deferred tax assets.financial statements.
Recent Accounting Pronouncements
Except for the recent accounting pronouncements described below, other recent accounting pronouncements are not expected to have a material impact on our condensed consolidated financial statements.
In January 2017, June 2016, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In June Accounting Standards Update (“ASU”) 2016 the FASB issued ASU 2016-13,-13, Financial Instruments - Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments. ASU 2016-132016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-132016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. The Company adopted ASU 2016-13 is2016-13 effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. 2023. The Company is currently evaluating the impact the adoption of ASU 2016-13 will2016-13 did not have a material impact on the Company's consolidated financial statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTSAccounts and Notes Receivable, Net
In February 2016,Accounts receivable represent amounts due from customers in the FASB issued ASU 2016-02, Leases (Topic 842),ordinary course of business and are recorded at the invoiced amount and do not bear interest. Notes receivable generally reflect the sale of assets. Accounts and notes receivables are stated at the net amount expected to be collected, using an estimate of current expected credit losses to determine the allowance for expected credit losses. The Company evaluates the collectability of its accounts and notes receivable and determines the appropriate allowance for expected credit losses based on a combination of factors, including the aging of the receivables and historical collection trends. When the Company is aware of a customer’s inability to meet its financial obligation, the Company may individually evaluate the related receivable to determine the allowance for expected credit losses. The Company uses specific criteria to determine uncollectible receivables to be written off, including bankruptcy filings, the referral of customer accounts to outside parties for collection, and the length that accounts remain past due.
NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended | ||||||||
May 31, | ||||||||
| 2023 | 2022 | ||||||
Cash paid (received) for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | (35,563 | ) | (316,937 | ) | ||||
Supplemental disclosure of non‑cash investing activities | ||||||||
Sale of assets in exchange for note receivable | $ | 1,000,000 | $ | - |
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which requiresprovides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the recognition of lease assets and lease liabilities on the balance sheet by lesseesconsideration expected to be received for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures alonggoods or services. The Company generally receives a fee associated with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendmentsits Franchise Agreement or License Agreement (collectively, “Customer Contracts”) at the beginning of the earliest period presented usingtime that a modified retrospective approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company anticipates ASU 2016-02 willCustomer Contract becomes effective. These Customer Contracts have a material impact onterm of up to 20 years, however the consolidated balance sheet. The impactmajority of ASU 2016-02 is non-cash in nature, as such, it will not affect the Company’s cash flows. The Company is currently evaluating the impactCustomer Contracts have a term of ASU 2016-02 on the consolidated statements of income.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance, as amended by subsequent ASUs on the topic, supersedes current guidance on revenue recognition in Topic 605, Revenue Recognition. This guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early application of the guidance is permitted for annual reporting periods beginning after December 31, 2016. This guidance is applicable to the Company's fiscal year beginning March 1, 2018. The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees, including master license and territory fees for our international business, and renewal fees. Currently, these fees are generally recognized upfront upon either opening of the respective franchise store or entry into a license agreement. The new guidance will generally require these fees to be recognized over10 years. During the term of the related agreement, which we expect will result in a material impact to revenue recognized for franchise fees, license fees and renewal fees; we are still inCustomer Contract, the process of quantifying the material impact. The Company does not expect this new guidance to materially impact the recognition of royalty income or sales of products. The Company is continuingobligated to evaluateseveral performance obligations that the impactCompany has not determined are distinct. The resulting treatment of revenue from Customer Contracts is that the adoptionrevenue is recognized proportionately over the life of this new guidance will have on thesethe Customer Contract.
Initial Franchise Fees, License Fees, Transfer Fees and other revenue transactions, as well as the presentation of marketing and advertising fee revenues and expenses, in addition to the impact on accounting policies and related disclosures. The Company anticipates that contract fulfillment costs under ASC Topic 606 will have no material impact to the Company's consolidated statements of income and statements of cash flows. The Company's current policy is to recognize initial franchise fees when a franchise location opens or at the start of a new agreement term. In accordance with the new guidance, the initialRenewal Fees
Initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement,a Customer Contract, and will beare treated as a single performance obligation. As a result, initialInitial franchise fees received will most likely beare recognized as the Company satisfies performance obligations over the franchise term. term of a Customer Contract, which is generally 10 years.
The cumulative adjustment to be recorded asfollowing table summarizes contract liabilities upon adoption, isas of May 31, 2023 and May 31, 2022:
Three Months Ended | ||||||||
May 31: | ||||||||
2023 | 2022 | |||||||
Contract liabilities at the beginning of the year: | $ | 943,415 | $ | 962,572 | ||||
Revenue recognized | (44,956 | ) | (53,853 | ) | ||||
Contract fees received | 35,499 | 27,500 | ||||||
Contract liabilities at the end of the period: | $ | 933,958 | $ | 936,219 |
At May 31, 2023, annual revenue expected to be approximately 15%recognized in the future, related to performance obligations that are not yet fully satisfied, were estimated to be the following:
FYE 24 | $ | 139,045 | ||
FYE 25 | 148,744 | |||
FYE 26 | 136,026 | |||
FYE 27 | 122,907 | |||
FYE 28 | 95,390 | |||
Thereafter | 291,846 | |||
Total | $ | 933,958 |
Gift Cards
The Company’s franchisees sell gift cards, which do not have expiration dates or non-usage fees. The proceeds from the sale of gift cards by the franchisees are accumulated by the Company and paid out to the franchisees upon customer redemption. ASC 606 requires the use of the Company's consolidated total liabilities. No impact“proportionate” method for recognizing breakage. The Company recognizes breakage from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns.
Durango Product Sales of Confectionary Items, Retail Sales and Royalty and Marketing Fees
Confectionary items sold to the Company's consolidated statements of cash flows is expected asCompany’s franchisees, others and its Company-owned stores sales are recognized at the initial fees will continue to be collected upon the signingtime of the franchise agreementunderlying sale, based on the terms of the sale and when ownership of the inventory is transferred, and are presented net of sales taxes and discounts. Royalties and marketing fees from franchised or licensed locations, which are based on a percentage of sales, are recognized at the beginning of a new franchise term.
time such sales occur.
NOTE 2 - EARNINGS PER SHARE4 – DISAGGREGATION OF REVENUE
Basic earnings per share is calculated using the weighted-average numberThe following table presents disaggregated revenue by method of shares of common stock outstanding. Diluted earnings per share reflects the potential dilution that could occur from common stock issuable through stock optionsrecognition and restricted stock units. For the three months ended November 30, 2017 and 2016, there were no stock options excluded from the computation of earnings per share, because their effect would have been anti-dilutive. For the nine months ended November 30, 2017 and 2016, no stock options were excluded from the computation of earnings per share, because their effect would have been anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the restricted stock units vest and are issued as common stock.segment:
Three Months Ended May 31, 2023 | ||||||||||||||||
Revenues recognized over time under ASC 606: |
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 44,956 | $ | - | $ | - | $ | 44,956 |
Revenues recognized at a point in time: |
Franchising | Production | Retail | Total | |||||||||||||
Durango Product Sales | - | 4,824,075 | - | 4,824,075 | ||||||||||||
Retail sales | - | - | 191,972 | 191,972 | ||||||||||||
Royalty and marketing fees | 1,374,982 | - | - | 1,374,982 | ||||||||||||
Total | $ | 1,419,938 | $ | 4,824,075 | $ | 191,972 | $ | 6,435,985 |
Three Months Ended May 31, 2022 | ||||
Revenues recognized over time under ASC 606: |
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 53,853 | $ | - | $ | - | $ | 53,853 |
Revenues recognized at a point in time: |
Franchising | Production | Retail | Total | |||||||||||||
Durango Product Sales | - | 5,157,610 | - | 5,157,610 | ||||||||||||
Retail sales | - | - | 250,410 | 250,410 | ||||||||||||
Royalty and marketing fees | 1,440,325 | - | - | 1,440,325 | ||||||||||||
Total | $ | 1,494,178 | $ | 5,157,610 | $ | 250,410 | $ | 6,902,198 |
NOTE 3 5– INVENTORIES
Inventories consist of the following:following inventory at May 31, 2023 and February 28, 2023:
November 30, 2017 | February 28, 2017 | |||||||
Ingredients and supplies | $ | 2,998,169 | $ | 3,021,220 | ||||
Finished candy | 2,880,531 | 2,137,609 | ||||||
U-Swirl food and packaging | 69,952 | 66,001 | ||||||
Reserve for slow moving inventory | (261,377 | ) | (249,051 | ) | ||||
Total inventories | $ | 5,687,275 | $ | 4,975,779 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2023 | February 28, 2023 | |||||||
Ingredients and supplies | $ | 1,939,525 | $ | 2,481,510 | ||||
Finished candy | 1,080,050 | 1,567,887 | ||||||
Reserve for slow moving inventory | (299,014 | ) | (409,617 | ) | ||||
Total inventories | $ | 2,720,561 | $ | 3,639,780 |
NOTE 46 - PROPERTY AND EQUIPMENT, NET
Property and equipment consistsat May 31, 2023 and February 28, 2023 consisted of the following:
November 30, 2017 | February 28, 2017 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 4,905,103 | 4,787,855 | ||||||
Machinery and equipment | 10,594,111 | 10,598,355 | ||||||
Furniture and fixtures | 1,067,788 | 1,047,319 | ||||||
Leasehold improvements | 1,568,759 | 1,531,112 | ||||||
Transportation equipment | 434,091 | 418,402 | ||||||
Asset Impairment | (47,891 | ) | (47,891 | ) | ||||
19,035,579 | 18,848,770 | |||||||
Less accumulated depreciation | (12,720,767 | ) | (12,390,839 | ) | ||||
Property and equipment, net | $ | 6,314,812 | $ | 6,457,931 |
May 31, 2023 | February 28, 2023 | |||||
Land | $ | 513,618 | $ | 513,618 | ||
Building | 5,105,086 | 5,151,886 | ||||
Machinery and equipment | 10,640,450 | 10,152,211 | ||||
Furniture and fixtures | 514,764 | 512,172 | ||||
Leasehold improvements | 134,010 | 134,010 | ||||
Transportation equipment | 392,066 | 476,376 | ||||
17,299,994 | 16,940,273 | |||||
Less accumulated depreciation | (11,240,620 | ) | (11,229,534 | ) | ||
Property and equipment, net | $ | 6,059,374 | $ | 5,710,739 |
Depreciation expense related to property and equipment totaled $194,859 and $181,667 during the three months ended May 31, 2023 and 2022, respectively.
NOTE 5 - STOCKHOLDERS’ EQUITY7 – GOODWILL AND INTANGIBLE ASSETS
Cash DividendIntangible assets at May 31, 2023 and February 28, 2023 consist of the following:
May 31, 2023 | February 28, 2023 | ||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 394,826 | $ | 264,040 | $ | 394,826 | $ | 259,314 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 259,339 | 131,424 | 259,339 | 128,924 | ||||||||||||||
Total | 1,205,968 | 947,267 | 1,205,968 | 940,041 | |||||||||||||||||
Goodwill and intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment- | |||||||||||||||||||||
Company stores goodwill | $ | 360,972 | $ | 360,972 | |||||||||||||||||
Franchising goodwill | 97,318 | 97,318 | |||||||||||||||||||
Production segment-goodwill | 97,318 | 97,318 | |||||||||||||||||||
Trademark | 20,000 | 20,000 | |||||||||||||||||||
Total | 575,608 | 575,608 | |||||||||||||||||||
Total Goodwill and Intangible Assets | $ | 1,781,576 | $ | 947,267 | $ | 1,781,576 | $ | 940,041 |
Amortization expense related to intangible assets totaled $7,226 and $7,226 during the three months ended May 31, 2023 and 2022, respectively.
At May 31, 2023, annual amortization of placed in service intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
FYE 24 | $ | 20,804 | ||
FYE 25 | 27,405 | |||
FYE 26 | 27,405 | |||
FYE 27 | 27,405 | |||
FYE 28 | 27,405 | |||
Thereafter | 128,277 | |||
Total | $ | 258,701 |
NOTE 8 – LINE OF CREDIT
Revolving Credit Line
The Company paidhas a quarterly cash dividend$5.0 million credit line for general corporate and working capital purposes, of $0.12 per sharewhich $5.0 million was available for borrowing (subject to certain borrowing-based limitations) as of per shareMay 31, 2023 (the “Credit Line”). The Credit Line is secured by substantially all of common stockthe Company’s assets, except retail store assets. Interest on March 10, 2017borrowings is at the Secured Overnight Financing Rate plus 2.37% (7.45% at May 31, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to stockholders of recordvarious financial ratio and leverage covenants. At May 31, 2023, the Company was in compliance with all such covenants. The Credit Line is subject to renewal in September 2023 and the Company believes it is likely to be renewed on February 24, 2017. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 16, 2017terms similar to stockholders of record on June 6, 2017. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 15, 2017 to stockholders of record on September 5, 2017. The Company declared a quarterly cash dividend of $0.12 per share of common stock on November 14, 2017, which was paid on December 8, 2017 to stockholders of record on November 24, 2017.the current terms.
NOTE 9 - STOCKHOLDERS’ EQUITY
Future declaration of dividends will depend on, among other things, the Company's results of operations, capital requirements, financial condition and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long term interestWarrants
In connection with a terminated supplier agreement with a former customer of the Company,’s stockholders.
Stock Repurchases
On July 15, 2014, the Company publicly announcedissued 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 planwarrant (the “Warrant”) to purchase up to an additional $2,058,000960,677 shares of itsthe Company’s common stock (the “Warrant Shares”) at an exercise price of $8.76 per share. The Warrant Shares vest in annual tranches in varying amounts following each contract year under the repurchase plan,terminated supplier agreement, and was subject to, and only upon, achievement of certain revenue thresholds on May 21, 2015, an annual or cumulative five-year basis in connection with its performance under the terminated supplier agreement. The Warrant expires six months after the final and conclusive determination of revenue thresholds for the fifth contract year and the cumulative revenue determination in accordance with the terms of the Warrant.
On November 1, 2022, the Company announcedsent a further increaseformal notice to the repurchase plan by authorizingcustomer terminating the purchaseagreement. As of up to an additional $2,090,000 of its common stock under the repurchase plan. The Company did not repurchase anyMay 31, 2023, no shares of common stock underlying the Warrant had vested and subsequent to the termination by the Company of supplier agreement, the Company has no remaining material obligations under the repurchase plan 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.
Stock-Based Compensation
At November 30, 2017, the Company had stock-based compensation plans for employees and non-employee directors that authorized the granting of stock awards, including stock options and restricted stock units.Warrant.
The Company determined that the grant date fair value of the Warrant was de minimis and did not record any amount in consideration of the warrants. The Company utilized a Monte Carlo model for purposes of determining the grant date fair value.
Stock-Based Compensation
Under the Company’s 2007 Equity Incentive Plan (as amended and restated) (the “2007 Plan”), the Company may authorize and grant stock awards to employees, non-employee directors and certain other eligible participants, including stock options, restricted stock and restricted stock units.
The Company recognized $133,795 and $458,275$201,634 of stock-based compensation expense during the three and nine month periods months ended November 30, 2017, respectively, May 31, 2023 compared to $132,453 and $447,581with $131,597 during the three and nine month periods months ended November 30, 2016, respectively. May 31, 2022. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
As
The following table summarizes non-vested restricted stock unit transactions for common stock during the Company does not have any stock options outstanding. three months ended May 31, 2023 and 2022:
Three Months Ended | ||||||||
May 31, | ||||||||
2023 | 2022 | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 154,131 | 105,978 | ||||||
Granted | 6,338 | 55,336 | ||||||
Vested | (33,027 | ) | (27,326 | ) | ||||
Cancelled/forfeited | (1,000 | ) | - | |||||
Outstanding non-vested restricted stock units as of May 31: | 126,442 | 133,988 | ||||||
Weighted average grant date fair value | $ | 4.35 | $ | 6.65 | ||||
Weighted average remaining vesting period (in years) | 1.53 | 2.36 |
The following table summarizes stock option activity during the ninethree months ended November 30, 2017 May 31, 2023 and 2016:2022:
Nine Months Ended | ||||||||
November 30, | ||||||||
2017 | 2016 | |||||||
Outstanding stock options as of February 28 or 29: | - | 12,936 | ||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Cancelled/forfeited | - | (12,936 | ) | |||||
Outstanding stock options as of November 30: | - | - | ||||||
Weighted average exercise price | n/a | n/a | ||||||
Weighted average remaining contractual term (in years) | n/a | n/a |
Three Months Ended | ||||||||
May 31, | ||||||||
2023 | 2022 | |||||||
Outstanding stock options as of February 28: | 36,144 | - | ||||||
Granted | - | 27,668 | ||||||
Exercised | - | - | ||||||
Cancelled/forfeited | - | - | ||||||
Outstanding stock options as of May 31: | 36,144 | 27,668 | ||||||
Weighted average exercise price | 6.49 | 6.38 | ||||||
Weighted average remaining contractual term (in years) | 9.01 | 9.95 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizesDuring the three months ended May 31, 2023, the Company issued 6,338 restricted stock units to Starlette Johnson, a non-employee director, with a grant date fair value of $32,070. This restricted stock unit activity duringaward vests 25% on the nine months ended grant date and 25% each quarter thereafter until November 30, 2017 and 2016:
Nine Months Ended | ||||||||
November 30, | ||||||||
2017 | 2016 | |||||||
Outstanding non-vested restricted stock units as of February 28 or 29: | 123,658 | 181,742 | ||||||
Granted | - | - | ||||||
Vested | (44,064 | ) | (48,084 | ) | ||||
Cancelled/forfeited | (1,700 | ) | (10,000 | ) | ||||
Outstanding non-vested restricted stock units as of November 30: | 77,894 | 123,658 | ||||||
Weighted average grant date fair value | $ | 12.17 | $ | 12.22 | ||||
Weighted average remaining vesting period (in years) | 1.52 | 2.47 |
The Company did not issue any fully vested, unrestricted shares of stock to non-employee directors during the nine months ended November 30, 2017 compared to 2,000 shares issued during the nine months ended November 30, 2016. In connection with these non-employee director stock issuances, the Company recognized $0 and $20,420 of stock-based compensation expense during the nine months ended November 30, 2017 and 2016, respectively.2023.
During the ninethree months ended November 30, 2017, May 31, 2022, the Company issued 5,000 shares27,668 stock options and 55,336 performance-based restricted stock units, subject to vesting based on the achievement of common stock underperformance goals. These issuances were made to Robert J. Sarlls, the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issuedCompany’s Chief Executive Officer, as a part of his incentive compensation package. The stock options were issued with an aggregate grant date fair value of $58,213, or $2.10 per share. The performance-based restricted stock units were issued with an aggregate grant date fair value of $168,304, or $6.08 per share. The stock options vested with respect to one-third of the compensation for services renderedshares on the last day of the Company’s fiscal year ending February 28, 2023, and will vest as to remaining shares in equal quarterly increments on the last day of each quarter thereafter. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 28, 2025 if the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expenseachieves an annualized total shareholder return of 12.5% during the nine months ended November 30, 2017.performance period, subject to continued service through the end of the performance period. The Compensation Committee of the Company’s Board of Directors has discretion to determine the number of performance-based restricted stock units that will vest based on performance below or above the target performance goal (0-200%).
During the three and nine month periods months ended November 30, 2017, May 31, 2023, the Company recognized $133,795 and $399,175, respectively,$201,634 of stock-based compensation expense related to non-vested, non-forfeitedoutstanding restricted stock unit grants. Theunits and stock options, compared to $131,597 during the three months ended May 31, 2022. Except as noted above, restricted stock unit grantsunits generally vest between 17% and 20% annuallyin equal annual installments over a period of five to six years. During the nine-month periods ended November 30, 2017 and 2016, 44,064 and 48,084 restricted stock units vested and were issued as common stock, respectively. Total unrecognized stock-based compensation expense of non-vested, non-forfeited restricted stock units, granted as of November 30, 2017 May 31, 2023, was $758,217,$450,173, which is expected to be recognized over the weighted-averageweighted average period of 1.51.53 years.
NOTE 6 – SUPPLEMENTAL CASH FLOW INFORMATION10 - EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through the settlement of restricted stock units. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
The weighted-average number of shares outstanding used in the computation of diluted earnings per share does not include outstanding common shares issuable if their effect would be anti-dilutive. During the three months ended May 31, 2023, 960,677 shares of common stock reserved for issuance under warrants and 137,232 shares underlying unvested restricted stock units and stock options were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. During the three months ended May 31, 2022, 960,677 shares of common stock reserved for issuance under warrants and 137,082 shares underlying unvested restricted stock units and stock options were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.
Nine Months Ended | ||||||||
November 30, | ||||||||
| 2017 | 2016 | ||||||
Cash paid for: | ||||||||
Interest, net | $ | 76,291 | $ | 100,275 | ||||
Income taxes | 1,827,369 | 1,655,774 | ||||||
Non-Cash Operating Activities | ||||||||
Accrued Inventory | 334,853 | 202,669 | ||||||
Non-Cash Financing Activities | ||||||||
Dividend Payable | 708,412 | 702,525 | ||||||
Sale of assets and inventory to buyers for notes receivable: | ||||||||
Long-lived assets | $ | - | $ | 20,989 |
SUBSIDIARIES
NOTE 11 – LEASING ARRANGEMENTS
The Company conducts its retail operations in facilities leased under non-cancelable operating leases of up to ten years. Certain leases contain renewal options for between five and ten additional years at increased monthly rentals. Some of the leases provide for contingent rentals based on sales in excess of predetermined base levels.
The Company acts as primary lessee of some franchised store premises, which the Company then subleases to franchisees, but the majority of existing franchised locations are leased by the franchisee directly.
In some instances, the Company has leased space for its Company-owned locations that are now occupied by franchisees. When the Company-owned location was sold or transferred, the store was subleased to the franchisee who is responsible for the monthly rent and other obligations under the lease.
The Company also leases trucking equipment in support of its production operations. Expense associated with trucking and warehouse leases is included in cost of sales on the consolidated statements of operations.
The Company accounts for payments related to lease liabilities on a straight-line basis over the lease term. As of May 31, 2023 and 2022, lease expense recognized in the Consolidated Statements of Operations was $155,422 and $190,108, respectively.
The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the life of its leases. This includes known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the sales performance of the location remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation. The Company has separated non-lease components from lease components in the recognition of the Asset and Liability except in instances where such costs were not practical to separate. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial. For franchised locations, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement. In addition, the Company is the lessee under non-store related leases for trucking equipment. For leases where the implicit rate is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease. The weighted average discount rate used for operating leases was 3.4% as of May 31, 2023. The total estimated future minimum lease payments is $2.4 million.
As of May 31, 2023, maturities of lease liabilities for our operating leases were as follows:
FYE 24 | $ | 592,956 | ||
FYE 25 | 611,988 | |||
FYE 26 | 514,346 | |||
FYE 27 | 242,558 | |||
FYE 28 | 71,671 | |||
Thereafter | 390,451 | |||
Total | $ | 2,423,970 | ||
Less: imputed interest | (187,114 | ) | ||
Present value of lease liabilities: | $ | 2,236,856 | ||
Weighted average lease term | 5.4 |
During the three months ended May 31, 2023 and 2022 the Company entered into new representing a future lease liability of $46,250 and $502,894, respectively.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreement Payments upon a Change in Control
The Company has entered into employment agreements with certain of our current executives which contain, among other things, "change in control" severance provisions.
Robert J. Sarlls
The employment agreement of Robert J. Sarlls, the Company’s Chief Executive Officer, provides for the following upon “change in control:” if Mr. Sarlls’ employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (15 months of base salary) which would otherwise be payable on the regular payroll schedule over a 15-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Sarlls’ agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
A. Allen Arroyo
The employment agreement of A. Allen Arroyo, the Company’s Chief Financial Officer, provides for the following upon “change in control:” If Mr. Arroyo’s employment is involuntarily terminated without cause or if he resigns for good reason on or within 2 years following consummation of a change in control, the cash severance amount (9 months of base salary) which would otherwise be payable on the regular payroll schedule over a 9-month period following separation (if severance were due outside the change in control context) will be accelerated and paid in a lump sum promptly following separation. Mr. Arroyo’s agreement incorporates by reference the change in control definition set forth in Treasury Regulation Section 1.409A-3(i)(5).
Retirement agreement
Gregory L. Pope, Sr.
On May 8, 2023, the Company announced that Gregory L. Pope, Sr., Senior Vice President – Franchise Development, retired effective as of May 3, 2023 (the “Retirement Date”). In connection with his retirement, the Company and Mr. Pope entered into a retirement agreement and general release (the “Retirement Agreement”) that provides (i) Mr. Pope will provide consulting services to the Company, as an independent contractor, until December 31, 2023, for a monthly consulting fee of $22,000, (ii) a retirement bonus of twenty-six equal bi-weekly payments of $12,500 (less tax withholding) payable beginning November 2023, (iii) for accelerated vesting of 8,332 non-vested restricted stock units as of the Retirement Date, (iv) payment of the cost of Mr. Pope’s COBRA premiums for up to 18 months, and (v) reimbursement of Mr. Pope’s legal fees incurred in connection with the Retirement Agreement (not to exceed $7,500). In addition, the Retirement Agreement includes covenants related to cooperation, solicitation and employment, as well as customary release of claims and non-disparagement provisions in favor of the Company, and a non-disparagement provision in favor of Mr. Pope. As of May 31, 2023, the Company had accrued $345,124 of expense associated with the Retirement Agreement.
Purchase contracts
The Company frequently enters into purchase contracts of between six to eighteen months for chocolate and certain nuts. These contracts permit the Company 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, the Company may benefit if prices rise during the terms of these contracts, but it may be required to pay above-market prices if prices fall and it is unable to renegotiate the terms of the contract. As of May 31, 2023, the Company contracted for approximately $548,000 of raw materials under such agreements. The Company has designated these contracts as normal under the normal purchase and sale exception under the accounting standards for derivatives. These contracts are not entered into for speculative purposes.
Litigation
From time to time, the Company is involved in litigation relating to claims arising out of its operations. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. At May 31, 2023, the Company was not a party to any legal proceedings that were expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or operating results.
NOTE 713 - OPERATING SEGMENTS
The Company classifies its business interests into fivefour reportable segments: Franchising, Manufacturing,Production, Retail Stores, U-Swirl operations and Other.Other, which is the basis upon which the Company’s chief operating decision maker evaluates the Company’s performance. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements and Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2017.statements. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocatedcorporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution, and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the differencedifferences in products and services:
Three Months Ended November 30, 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 1,242,855 | $ | 7,948,925 | $ | 366,049 | $ | 842,554 | $ | - | $ | 10,400,383 | ||||||||||||
Intersegment revenues | (1,228 | ) | (437,583 | ) | - | - | - | (438,811 | ) | |||||||||||||||
Revenue from external customers | 1,241,627 | 7,511,342 | 366,049 | 842,554 | - | 9,961,572 | ||||||||||||||||||
Segment profit (loss) | 423,213 | 1,664,643 | (86,741 | ) | (14,587 | ) | (809,332 | ) | 1,177,196 | |||||||||||||||
Total assets | 1,106,155 | 14,748,965 | 1,236,501 | 8,202,628 | 4,038,968 | 29,333,217 | ||||||||||||||||||
Capital expenditures | 881 | 124,312 | 15,182 | 4,967 | 17,605 | 162,947 | ||||||||||||||||||
Total depreciation & amortization | $ | 11,644 | $ | 138,618 | $ | 10,543 | $ | 143,304 | $ | 32,180 | $ | 336,289 |
Three Months Ended November 30, 2016 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 1,202,655 | $ | 7,783,888 | $ | 320,011 | $ | 1,009,360 | $ | - | $ | 10,315,914 | ||||||||||||
Intersegment revenues | (1,248 | ) | (359,427 | ) | - | - | - | (360,675 | ) | |||||||||||||||
Revenue from external customers | 1,201,407 | 7,424,461 | 320,011 | 1,009,360 | - | 9,955,239 | ||||||||||||||||||
Segment profit (loss) | 328,866 | 2,049,231 | (46,253 | ) | 102,906 | (850,695 | ) | 1,584,055 | ||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | ||||||||||||||||||
Capital expenditures | 4,414 | 78,725 | 13,677 | 5,246 | 14,615 | 116,677 | ||||||||||||||||||
Total depreciation & amortization | $ | 13,441 | $ | 122,381 | $ | 3,357 | $ | 147,284 | $ | 33,262 | $ | 319,725 |
Nine Months Ended November 30, 2017 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||
Total revenues | $ | 4,342,013 | $ | 19,659,108 | $ | 1,213,039 | $ | 3,446,543 | $ | - | $ | 28,660,703 | ||||||||||||
Intersegment revenues | (3,643 | ) | (1,082,350 | ) | - | - | - | (1,085,993 | ) | |||||||||||||||
Revenue from external customers | 4,338,370 | 18,576,758 | 1,213,039 | 3,446,543 | - | 27,574,710 | ||||||||||||||||||
Segment profit (loss) | 1,853,604 | 4,361,150 | (90,674 | ) | 639,251 | (2,844,889 | ) | 3,918,442 | ||||||||||||||||
Total assets | 1,106,155 | 14,748,965 | 1,236,501 | 8,202,628 | 4,038,968 | 29,333,217 | ||||||||||||||||||
Capital expenditures | 6,517 | 342,910 | 31,518 | 10,791 | 55,199 | 446,935 | ||||||||||||||||||
Total depreciation & amortization | $ | 34,590 | $ | 400,624 | $ | 18,202 | $ | 429,582 | $ | 96,714 | $ | 979,712 |
Nine Months Ended November 30, 2016 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||
Three Months Ended May 31, 2023 | Franchising | Production | Retail | Other | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 4,257,842 | $ | 19,070,069 | $ | 1,081,103 | $ | 4,438,630 | $ | - | $ | 28,847,644 | $ | 1,420,432 | $ | 5,017,053 | $ | 191,972 | $ | - | $ | 6,629,457 | ||||||||||||||||||||||
Intersegment revenues | (4,000 | ) | (910,244 | ) | - | - | - | (914,244 | ) | (494 | ) | (192,978 | ) | - | - | (193,472 | ) | |||||||||||||||||||||||||||
Revenue from external customers | 4,253,842 | 18,159,825 | 1,081,103 | 4,438,630 | - | 27,933,400 | 1,419,938 | 4,824,075 | 191,972 | - | 6,435,985 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 1,680,304 | 4,511,527 | 16,743 | 1,053,529 | (3,009,994 | ) | 4,252,109 | 380,851 | 47,346 | 5,606 | (1,961,070 | ) | (1,527,267 | ) | ||||||||||||||||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | 992,672 | 9,153,027 | 434,067 | 10,219,196 | 20,798,962 | |||||||||||||||||||||||||||||||||
Capital expenditures | 13,540 | 785,889 | 16,997 | 35,722 | 196,519 | 1,048,667 | - | 510,752 | 2,350 | 36,432 | 549,534 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 41,266 | $ | 336,541 | $ | 10,061 | $ | 473,730 | $ | 101,034 | $ | 962,632 | $ | 7,942 | $ | 172,060 | $ | 1,490 | $ | 20,593 | $ | 202,085 |
Revenue from one customer
Three Months Ended May 31, 2022 | Franchising | Production | Retail | Other | Total | |||||||||||||||
Total revenues | $ | 1,495,454 | $ | 5,404,278 | $ | 250,410 | $ | - | $ | 7,150,142 | ||||||||||
Intersegment revenues | (1,276 | ) | (246,668 | ) | - | - | (247,944 | ) | ||||||||||||
Revenue from external customers | 1,494,178 | 5,157,610 | 250,410 | - | 6,902,198 | |||||||||||||||
Segment profit (loss) | 707,096 | 608,232 | (12,232 | ) | (1,618,049 | ) | (314,953 | ) | ||||||||||||
Total assets | 1,201,855 | 10,751,227 | 637,637 | 14,900,872 | 27,491,591 | |||||||||||||||
Capital expenditures | 1,182 | 249,315 | 317 | 10,071 | 260,885 | |||||||||||||||
Total depreciation & amortization | $ | 8,919 | $ | 161,188 | $ | 1,412 | $ | 17,374 | $ | 188,893 |
NOTE 14 – CONTESTED SOLICITATION OF PROXIES
Contested Solicitation of Proxies
During the three months ended May 31, 2022, the Company incurred costs associated with a stockholder’s contested solicitation of proxies in connection with its 2022 annual meeting of stockholders. During the three months ended May 31, 2022, the Company incurred approximately $305,000 of costs associated with the contested solicitation of proxies, compared with no comparable costs incurred in the three months ended May 31, 2023. These costs are recognized as general and administrative expense in the Consolidated Statement of Operations.
NOTE 15 – INCOME TAXES
The Company provides 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 Company’s Manufacturing segment represented approximately $2.8 million,asset or 10.3 percent,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 revenuesCompany's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the appropriate tax jurisdictions, in future years, to obtain benefit from external customers during the nine months ended November 30, 2017, comparedreversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to $2.1 million,adjustment in future periods if estimates of future taxable income are changed. A 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 7.5 percentall of the Company’s revenues from external customers duringtax 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 expectations 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 nine monthsfiscal year ended November 30, 2016.February 28, 2023, 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 its 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 approximately $2.0 million of deferred tax assets. As of May 31, 2023, the Company has a full valuation allowance against its deferred tax assets.
SUBSIDIARIES
NOTE 8 16– GOODWILL AND INTANGIBLE ASSETSDISCONTINUED OPERATIONS
IntangibleOn February 24, 2023 and May 1, 2023, the Company entered into agreements to sell: 1) all operating assets consist ofand inventory associated with the following:
November 30, 2017 | February 28, 2017 | ||||||||||||||||||||
Amortization Period (in years) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | |||||||||||||||||
Intangible assets subject to amortization | |||||||||||||||||||||
Store design | 10 | $ | 220,778 | $ | 212,277 | $ | 220,778 | $ | 211,152 | ||||||||||||
Packaging licenses | 3 | - | 5 | 120,830 | 120,830 | 120,830 | 120,830 | ||||||||||||||
Packaging design | 10 | 430,973 | 430,973 | 430,973 | 430,973 | ||||||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 715,339 | 125,072 | 715,339 | 92,758 | ||||||||||||||
Franchise Rights | 20 | 5,979,637 | 1,443,267 | 5,971,129 | 1,144,957 | ||||||||||||||||
Total | 7,467,557 | 2,332,419 | 7,459,049 | 2,000,670 | |||||||||||||||||
Intangible assets not subject to amortization | |||||||||||||||||||||
Franchising segment | |||||||||||||||||||||
Company stores goodwill | 1,099,328 | 267,020 | 1,099,328 | 267,020 | |||||||||||||||||
Franchising goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Manufacturing segment-Goodwill | 295,000 | 197,682 | 295,000 | 197,682 | |||||||||||||||||
Trademark | 20,000 | - | 20,000 | - | |||||||||||||||||
Total Goodwill | 1,709,328 | 662,384 | 1,709,328 | 662,384 | |||||||||||||||||
Total Intangible Assets | $ | 9,176,885 | $ | 2,994,803 | $ | 9,168,377 | $ | 2,663,054 |
Effective March 1, 2002, under Accounting Standards Codification Topic 350,Company’s three U-Swirl Company-owned locations, and 2) all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related tofranchise rights and intangible assets not subjectassociated with the franchise operations of U-Swirl, respectively. The May 1, 2023 sale was completed pursuant to amortization isan Asset Purchase Agreement (the “Asset Purchase Agreement”), dated May 1, 2023, by and among the Company, as guarantor, Seller and U Swirl, LLC (“Purchaser”), a related company of Fosters Freeze, Inc., a California corporation. Pursuant to the Asset Purchase Agreement, on the Closing Date, Purchaser paid to Seller $2,757,738, consisting of approximately (i) $1.75 million in cash and (ii) $1.0 million evidenced by a three-year secured promissory note in the aggregate original principal amount of $1.0 million. As a result of amortization expense relatedthese asset sales, the activities of the Company’s subsidiary, U-Swirl, which were previously recorded to indefinite life goodwill incurred prior to March 1, 2002.
Amortization expense related to intangible assets totaled $332,100the U-Swirl operating segment are reported as discontinued operations in the Consolidated Statement of Operations, Consolidated Balance Sheet and $316,529 duringConsolidated Statement of Cash flows for all periods presented. The majority of the nine months ended November 30, 2017 and 2016, respectively.
At November 30, 2017, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimatedliabilities of U-Swirl met the accounting criteria to be classified as held for sale and were aggregated and reported on separate lines of the following:
2018 | $ | 113,833 | ||
2019 | 452,069 | |||
2020 | 438,912 | |||
2021 | 427,203 | |||
2022 | 404,022 | |||
Thereafter | 3,299,099 | |||
Total | $ | 5,135,138 |
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.respective statements.
The Company did not record any restructuring charges infollowing table discloses the results of operations of the businesses reported as discontinued operations for the three and nine months ended November 30, 2017.May 31, 2023 and 2022:
FOR THE THREE MONTHS ENDED MAY 31, | ||||||||
2023 | 2022 | |||||||
Total Revenue | $ | 212,242 | $ | 924,374 | ||||
Cost of sales | - | 197,134 | ||||||
Operating Expenses | 143,198 | 558,983 | ||||||
Gain on disposal of assets | (634,790 | ) | - | |||||
Other income (expense), net | - | - | ||||||
Earnings (loss) from discontinued operations before income taxes | 703,834 | 168,257 | ||||||
Income tax provision (benefit) | - | (2,569 | ) | |||||
Earnings (loss) from discontinued operations, net of tax | $ | 703,834 | $ | 170,826 |
The following table reflects the summary of assets and liabilities held for sale for U-Swirl as of May 31, 2023 and February 28, 2023, respectively:
May 31, | February 28, | |||||||
2023 | 2023 | |||||||
Accounts and notes receivable, net | $ | - | $ | 75,914 | ||||
Inventory, net | - | 6,067 | ||||||
Other | - | 1,023 | ||||||
Current assets held for sale | - | 83,004 | ||||||
Franchise rights, net | - | 1,708,336 | ||||||
Intangible assets, net | - | 48,095 | ||||||
Other | - | 9,415 | ||||||
Long-term assets held for sale | - | 1,765,846 | ||||||
Total Assets Held for Sale | - | 1,848,850 | ||||||
Accounts payable | - | 125,802 | ||||||
Accrued compensation | - | 11,205 | ||||||
Accrued liabilities | - | 11,981 | ||||||
Contract liabilities | - | 29,951 | ||||||
Current liabilities held for sale | - | 178,939 | ||||||
Contract liabilities, less current portion | - | 184,142 | ||||||
Long term liabilities held for sale | - | 184,142 | ||||||
Total Liabilities Held for Sale | $ | - | $ | 363,081 |
SUBSIDIARIES
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 maturitiesthe gain recognized during the three months ended May 31, 2023 related to the sale of our notes payable assets on May 1, 2023, as of November 30, 2017:described above:
Cash proceeds from the sale of assets | $ | 1,748,500 | ||
Accounts receivable | 9,238 | |||
Notes receivable | 1,000,000 | |||
Total consideration received | 2,757,738 | |||
Assets and liabilities transferred | ||||
Franchise rights | 1,703,325 | |||
Inventory | 6,067 | |||
Liabilities | (229,431 | ) | ||
Net assets transferred | 1,479,961 | |||
Costs associated with the sale of assets | 642,987 | |||
Gain on disposal of assets | $ | 634,790 |
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 |
|
The following discussion and analysis of financial condition and results of operations is qualified by reference and should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on 10-K, filed with the SEC on May 30, 2023, for the fiscal year ended February 28, 2023.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” withinIn addition to historical information, 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. Thesefollowing discussion contains certain 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, includedinformation. See “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report arefor certain information concerning forward-looking statements. Many of the forward-looking statements 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 in 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 Report on Form 10-K for the fiscal year ended February 28, 2017. These forward-looking statements apply only as of the date of this Quarterly Report. As such they should not be unduly relied upon for more current circumstances. Except as required by law, we undertake no obligation to release publicly any revisions to these 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.
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 manufacturerproducer, and retail operator. Founded in 1981, we are headquartered in Durango, Colorado and manufactureproduce an extensive line of premium chocolate candies and other confectionery products. Our subsidiary, U-Swirl International, Inc. (“U-Swirl”products ("Durango Products"), franchises and operates self-serve frozen yogurt cafés.. Our revenues and profitability are derived principally from our franchised/license systemlicensed network 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.stores. As of November 30, 2017,May 31, 2023, there were 5was one Company-owned, 86 Cold Stone Creamery co-branded113 licensee-owned and 272156 franchised Rocky Mountain Chocolate Factory stores operating in 3937 U.S. states, Canada, South Korea,Panama, and the Philippines. As of November 30, 2017, U-Swirl operated 5 Company-owned cafés and 120 franchised cafés located in 29 states and Canada. 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”), we entered into two agreements to sell all of the assets of our ALY frozen yogurt stores, along with our interest in the self-serve frozen yogurt franchisesLabor 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.Supply Chain
InAs a result of macro-economic inflationary trends and disruptions to the global supply chain, we have experienced and expect to continue to experience higher raw material, labor, and freight costs. For additional information, see Part I, Item 1A. “Risk Factors”in our Annual Report on Form 10-K for the fiscal year (“FY”) 2014, SWRL acquiredended February 28, 2023.
Contested Solicitation of Proxies
During the franchise rights and certain other assetsthree months ended May 31, 2022, we incurred costs associated with a stockholder’s contested solicitation of self-serve frozen yogurt concepts under the names “CherryBerry,” “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt.” Inproxies in connection with these acquisitions,its 2022 annual meeting of stockholders. During the Company entered into a credit facility with Wells Fargo, N.A. used to finance the acquisitionsthree months ended May 31, 2022, we incurred approximately $305,000 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”). Borrowings undercontested solicitation of proxies, compared with no comparable costs incurred in the SWRL Loan Agreement were secured by allthree months ended May 31, 2023. These costs are recognized as general and administrative expense in the Consolidated Statement of the assets of SWRL, including all of the outstanding stock of its wholly-owned subsidiary, U-Swirl. As a result of certain defaults, 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 on 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.Operations.
Results of Operations
Three Months Ended November 30, 2017May 31, 2023 Compared to the Three Months Ended May 31, 2023
Results SummaryNovember 30, 2016
Basic earningsloss per share decreased 23.5% from $.17 incontinuing operations increased from $(0.05) per share for the three months ended November 30, 2016May 31, 2022 to $.13 ina loss of $(0.24) per share for the three months ended November 30, 2017.May 31, 2023. Revenues were unchanged at approximately $10.0decreased 6.8% from $6.9 million infor the three months ended November 30, 2016 and 2017. Operating income decreased 25.7% from $1.6May 31, 2022 to $6.4 million infor the three months ended November 30, 2016 to $1.2 million inMay 31, 2023. Loss from continuing operations increased from $318,000 for the three months ended November 30, 2017. Net income decreased 25.8%May 31, 2022 to a loss from $1.0continuing operations of $1.5 million infor the three months ended November 30, 2016 to $751,000 inMay 31, 2023. Net loss from continuing operations increased from $286,000 for the three months ended November 30, 2017. The decrease in operating income andMay 31, 2022 to a net income was primarilyloss of $1.5 million for the result of higher cost of sales partially offset by lower operating costs.three months ended May 31, 2023.
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 | ||||||||||||||||
May 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | $ | 4,824.1 | $ | 5,157.6 | $ | (333.5 | ) | (6.5 | )% | |||||||
Retail sales | 192.0 | 250.4 | (58.4 | ) | (23.3 | )% | ||||||||||
Franchise fees | 44.9 | 53.9 | (9.0 | ) | (16.7 | )% | ||||||||||
Royalty and marketing fees | 1,375.0 | 1,440.3 | (65.3 | ) | (4.5 | )% | ||||||||||
Total | $ | 6,436.0 | $ | 6,902.2 | $ | (466.2 | ) | (6.8 | )% |
FactoryDurango Product Sales
The increasedecrease in factoryDurango Product sales for the three months ended November 30, 2017 versusMay 31, 2023, compared to the three months ended November 30, 2016May 31, 2022, was primarily due to a 15.5% increase47.9%, or $210,000, net decrease in shipments of product to customers outside our network of franchisefranchised retail locations. This increase was mostly offset bystores due primarily to the planned termination of a 5.3%customer relationship and a 2.6%, or $124,000, decrease in purchases bysales of product to our network of franchised and licensed retail locations. Same storestores. The decrease in sales of product to our network of franchised and licensed retail stores was primarily the result of a higher sale price offset by lower same-store pounds purchased. Same-store pounds purchased by our domestic Rocky Mountain Chocolate Factory franchise and license locationslicensed network decreased 8.7% in10.8% during the three months ended November 30, 2017, compared with the three months ended November 30, 2016.
Retail Sales
The 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. Same store sales at all Company-owned stores and cafés decreased 0.8% in the three months ended November 30, 2017May 31, 2023, as compared to the three months ended November 30, 2016.May 31, 2022.
Royalties, Marketing Fees and Franchise FeesRetail Sales
The decrease in royalties and marketing fees from the three months ended November 30, 2016 to the three months ended November 30, 2017 resulted from a 14.5% decrease in domestic franchise units in operation and lower same store sales. The average number of total domestic franchiseRetail sales at Company-owned stores in operation decreased from 365 in the three months ended November 30, 2016 to 312declined 23.3% 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, 2017May 31, 2023 compared to the three months ended November 30 2016. Franchise fees increased primarily as aMay 31, 2022. This decrease was the result of an increasethe sale of a Company-owned store in domestic franchise openingsthe prior year (resulting in only one remaining Company-owned store). Retail sales at our remaining Company-owned store increased 15.7% during the three months ended November 30, 2017May 31, 2023 compared to the three months ended November 30, 2016.May 31, 2022.
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 | % |
Royalty, Marketing Fees and Franchise Fees
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 | %) |
The decrease in royalty and marketing fees for the three months ended May 31, 2023 compared to the three months ended May 31, 2022 was primarily due to a decrease in same-store sales. Same store sales through our domestic franchise network decreased 2.7% during the three months ended May 31, 2023 when compared to the three months ended May 31, 2022.
The decrease in franchise fees was primarily the result of a store closure and the acceleration of unrecognized franchise fee revenue during the three months ended May 31, 2022 compared to the three months ended May 31, 2023.
Costs and Expenses
Cost of Sales
Three Months Ended | ||||||||||||||||
May 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | $ | 4,679.4 | $ | 4,427.7 | $ | 251.7 | 5.7 | % | ||||||||
Cost of sales - retail | 79.1 | 98.6 | (19.5 | ) | (19.8 | )% | ||||||||||
Franchise costs | 679.5 | 419.1 | 260.4 | 62.1 | % | |||||||||||
Sales and marketing | 472.9 | 481.0 | (8.1 | ) | (1.7 | )% | ||||||||||
General and administrative | 1,931.9 | 1,605.9 | 326.0 | 20.3 | % | |||||||||||
Retail operating | 103.0 | 158.3 | (55.3 | ) | (34.9 | )% | ||||||||||
Total | $ | 7,945.8 | $ | 7,190.6 | $ | 755.2 | 10.5 | % |
Gross Margin
Three Months Ended | ||||||||||||||||
May 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | $ | 144.7 | $ | 729.9 | $ | (585.2 | ) | (80.2 | )% | |||||||
Retail gross margin | 112.9 | 151.8 | (38.9 | ) | (25.6 | )% | ||||||||||
Total | $ | 257.6 | $ | 881.7 | $ | (624.1 | ) | (70.8 | )% |
Three Months Ended | ||||||||||||||||
May 31, | % | % | ||||||||||||||
2023 | 2022 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Durango Productgross margin | 3.0 | % | 14.2 | % | (11.2 | )% | (78.9 | )% | ||||||||
Retail gross margin | 58.8 | % | 60.6 | % | (1.8 | )% | (3.0 | )% | ||||||||
Total | 5.1 | % | 16.3 | % | (11.2 | )% | (68.7 | )% |
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 | %) |
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 | %) |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
May 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Productgross margin | $ | 144.7 | $ | 729.9 | $ | (585.2 | ) | (80.2 | )% | |||||||
Plus: depreciation and amortization | 170.9 | 159.7 | 11.2 | 7.0 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 315.6 | 889.6 | (574.0 | ) | (64.5 | )% | ||||||||||
Retail gross margin | 112.9 | 151.8 | (38.9 | ) | (25.6 | )% | ||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | $ | 428.5 | $ | 1,041.4 | $ | (612.9 | ) | (58.9 | )% | |||||||
Durango Product adjusted gross margin (non-GAAP measure) | 6.5 | % | 17.2 | % | (10.7 | )% | (62.2 | )% | ||||||||
Retail gross margin | 58.8 | % | 60.6 | % | (1.8 | )% | (3.0 | )% | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 8.5 | % | 19.3 | % | (10.8 | )% | (56.0 | )% |
Non-GAAP Measures
In addition to the results provided in accordance with GAAP, we provide certain non-GAAP measures, which present results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP. Adjusted gross margin and factoryDurango Product adjusted gross margin are non-GAAP measures. Adjusted gross margin is equal to the sum of our factoryDurango Product adjusted gross margin plus our retail gross margin calculated in accordance with GAAP. FactoryDurango Product adjusted gross margin is equal to factoryDurango Product gross margin minusplus depreciation and amortization expense. We believe adjusted gross margin and factoryDurango Product adjusted gross margin are helpful in understanding our past performance as a supplement to gross margin, factoryDurango Product gross margin and other performance measures calculated in conformity with GAAP. We believe that adjusted gross margin and factoryDurango Product 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 factoryDurango Product adjusted gross margin rather than gross margin and factoryDurango Product gross margin to make incremental pricing decisions. Adjusted gross margin and factoryDurango Product adjusted gross margin have limitations as analytical tools because they exclude the impact of depreciation and amortization expense and you should not consider it 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 factoryDurango Product 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
FactoryDurango Product gross margins decreased 560 basis pointsto 3.0% in the three months ended November 30, 2017May 31, 2023 compared to 14.2% during the three months ended May 31, 2022, due primarily to a 37.2% decrease in production volume, a 25.4% increase in overhead costs and an increase in costs from wage and material inflation realized in the three months ended May 31, 2023 compared to the three months ended November 30, 2016. This decrease was due primarily to increased production costs andMay 31, 2022, partially offset by an increase in product mix shiftprices that became effective on May 1, 2022.
Retail gross margins decreased from 60.6% during the three months ended November 30, 2017 comparedMay 31, 2022 to 58.8% during the three months ended November 30, 2016.May 31, 2023. The decrease in Company-owned store margin is dueretail gross margins was primarily tothe result of an increase in costs of raw materials and a decreasechange in Company-owned café revenueproduct mix resulting from the sale of yogurt and the associated higher margins. This change is the result of a decreaseCompany-owned location in units in operation during the three months ended November 30, 2017 compared to the prior year.
Franchise Costs
The decreaseincrease in franchise costs in the three months ended November 30, 2017 versus the three months ended November 30, 2016 is due primarily to lower franchise support costs, primarily the result of fewer units in operation. This decrease was mostly offset by increased professional fees incurred during the three months ended November 30, 2017 compared with the three months ended November 30, 2016. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 32.0% in the three months ended November 30, 2017 from 30.5% in the three months ended November 30, 2016.
Sales and Marketing
The decrease in sales and marketing costs for the three months ended November 30, 2017May 31, 2023 compared to the three months ended November 30, 2016 is primarily due to lower marketing-related compensation and lower marketing-related costs associated with U-Swirl franchise locations, the result of fewer units in operation.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2017 compared to the three months ended November 30, 2016 is due primarily to lower professional fees, the result of resolving legal proceedings, and lower compensation costs. For the three months ended November 30, 2017, approximately $66,000 of U-Swirl general and administrative costs were consolidated within our results, compared with $86,000 in the three months ended November 30, 2016. As a percentage of total revenues, general and administrative expenses decreased to 8.3% in the three months ended November 30, 2017 compared to 8.8% in the three months ended November 30, 2016.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2017 compared to the three months ended November 30, 2016May 31, 2022 was due to changes in retail units in operation resulting from the acquisition of a franchise location partially offset by the closure of an underperforming location. Retail operating expenses, as a percentage of retail sales, increased from 66.7% in the three months ended November 30, 2016 to 69.6% in the three months ended November 30, 2017. This increase is primarily the result of a change in units in operation from the prior year.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $202,000 in the three months ended November 30, 2017, unchanged from $202,000 incurred in the three months ended November 30, 2016. Depreciation and amortization included in cost of sales increased 13.7% from $118,000 in the three months ended November 30, 2016 to $134,000 in the three months ended November 30, 2017. This increase was the result of an increase in production assets in service.
Other Income (Expense)
Net interest expense was $22,300 in the three months ended November 30, 2017 compared to net interest expense of $31,300 incurred in the three months ended November 30, 2016. This change was the result of less interest expense incurred on lower average outstanding promissory note balances.
Income Tax Expense
Our effective income tax rate for the three months ended November 30, 2017 was 36.2%, compared to 36.1% for the three months ended November 30, 2016. 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.
Beginning on March 1, 2016, the results of U-Swirl were included in our consolidated income tax return, and on the same date, were removed from SWRL’s consolidated tax return. This is a result of the foreclosure on the outstanding stock of U-Swirl in satisfaction of debt with SWRL as discussed previously. The consolidated tax return for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL. U-Swirl has significant net operating loss carryovers. In accordance with Section 382 of the Internal Revenue Code, deductibility of U-Swirl’s U.S. 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 were changes of control with respect 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.
Nine Months Ended November 30, 2017Compared to the Nine Months Ended November 30, 2016
Basic earnings per share decreased 10.6% from $.47 in the nine months ended November 30, 2016 compared to $.42 in the nine months ended November 30, 2017. Revenues decreased 1.3% to $27.6 million for the nine months ended November 30, 2017 compared to $27.9 million in the nine months ended November 30, 2016. Operating income decreased 8.2% from $4.4 million in the nine months ended November 30, 2016 to $4.0 million in the nine months ended November 30, 2017. Net income decreased 8.3% from $2.7 million in the nine months ended November 30, 2016 to $2.5 million in the nine 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.
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 | %) |
Factory Sales
The increase in factory sales for the nine months ended November 30, 2017 versus the nine months ended November 30, 2016 was primarily due to an 18.8% increase in shipments of product to customers outside our network of franchised retail stores, partially offset by a 3.4% decrease in shipments to our network of franchised and licensed 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
The decrease in retail sales was primarily due 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. Same store sales at all Company-owned stores and cafés decreased 3.9% in the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016.
Royalties, Marketing Fees and Franchise Fees
The decrease in royalties and marketing fees for the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016 resulted from a 15.3% decrease in 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. Same store sales at total franchise stores and cafés in operation decreased 3.2% during the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016. Franchise fee revenues increased as a result of an increase in international license fees recognized during the nine months ended November 30, 2017 compared to the nine months ended November 30, 2016.
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 | % |
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 | %) |
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 minus 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 it 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
Factory margins decreased 170 basis points. This decrease was due primarily to increased production costs and product mix shift during the nine months ended November 30, 2017 compared to the nine 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 change in units in operation during the nine months ended November 30, 2017 compared to the prior year.
Franchise Costs
The increase in franchise costs in the nine months ended November 30, 2017 versus the nine months ended November 30, 2016 is due primarily to an increase in legalprofessional fees, an increase in stock compensation expense and professionalan increase in travel expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 26.7%47.9% in the ninethree months ended November 30, 2017May 31, 2023 from 24.8%28.0% in the ninethree months ended November 30, 2016.May 31, 2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower royalty revenues and marketing revenues.higher franchise costs during the three months ended May 31, 2023.
Sales and Marketing
The decrease in sales and marketing costs for the ninethree months ended November 30, 2017May 31, 2023 compared to the Ninethree months ended November 30, 2016 is dueMay 31, 2022 was primarily due to lower marketing related compensation and lower marketing-related costs associated with U-Swirl franchise locations.expense, mostly offset by an increase in travel costs.
General and Administrative
The decreaseincrease in general and administrative costs for the ninethree months ended November 30, 2017May 31, 2023 compared to the ninethree months ended November 30, 2016 isMay 31, 2022 was due primarily to an increase in compensation expense partially offset by lower professional fees related primarily to costs associated with the resultcontested solicitation of resolving legal proceedings,proxies and lower compensation costs. Forcosts associated with the ninehiring of a new CEO in the three months ended November 30, 2017, approximately $259,000 of U-Swirl general and administrative costs were consolidated within our results, compared with $347,000 in the nine months ended November 30, 2016.May 31, 2022. As a percentage of total revenues, general and administrative expenses decreasedincreased to 10.6%30.0% in the ninethree months ended November 30, 2017May 31, 2023 compared to 11.1%23.3% in the ninethree months ended November 30, 2016.May 31, 2022.
Retail Operating Expenses
TheThe decrease in retail operating expenses for the ninethree months ended November 30, 2017May 31, 2023 compared to the ninethree months ended November 30, 2016May 31, 2022 was due primarily to changes in units in operation, resulting from the sale of certain Company-owned units and the closure of certain underperforming Company-owned units. Retail operating expenses, as a percentage of retail sales, increased from 54.7% in the nine months ended November 30, 2016 to 58.3% in the nine months ended November 30, 2017. This increase is primarily the result of the sale of a changeCompany-owned store in units in operation from the prior year.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $592,000$31,000 in the ninethree months ended November 30, 2017, a decreaseMay 31, 2023, an increase of 7.3%7.0% from $638,000$29,000 incurred in the ninethree months ended November 30, 2016.May 31, 2022. This decreaseincrease was the result of fewer Company-owned storethe placement of new assets in service. Depreciation and amortization included in cost of sales increased 19.6%7.0% from $324,000$160,000 in the ninethree months ended November 30, 2016May 31, 2022 to $388,000$171,000 in the ninethree months ended November 30, 2017.May 31, 2023. This increase was the result of an increaseinvestment in production assets in service.equipment.
Restructuring and acquisition related chargesOther Income
There were no restructuring and acquisition related chargesNet interest income was $20,000 in the three months ended May 31, 2023 compared to net interest income of $2,600 during the ninethree months ended November 30, 2017 a decrease from $60,000 during the nine months ended November 30, 2016. The decrease isMay 31, 2022. This increase was primarily the result of lease settlement costs related toan increase in interest income on cash balances.
Income Tax Expense
During the closure of an ALY company-owned location incurred during the ninethree months ended November 30, 2016 with no comparable expense incurred during the nine months ended November 30, 2017.
Other Income (Expense)
Net interest expense was $76,100 in the nine months ended November 30, 2017,May 31, 2023, we did not incur any income tax benefit on a decreaseloss before income taxes of 24.1% compared to net interest expense of $100,300 in the nine months ended November 30, 2016.$1.5 million. This change 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 ninethree months ended November 30, 2017May 31, 2022, was 36.4%, compared9.3%. See Note 15 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 of U-Swirl were included in our consolidated income tax return, and on the same date, were removed from SWRL’s consolidated tax return. This is a result of the foreclosure on the outstanding stock of U-Swirl in satisfaction of debt with SWRL as discussed previously. The consolidated tax return for future periods will include all operating results of U-Swirl. SWRL will file separate income tax returns in future periods. However, there are no remaining operating assets held by SWRL. U-Swirl has significant net operating loss carryovers. In accordance with Section 382 of the Internal Revenue Code, deductibility of U-Swirl’s U.S. 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 were changes of control with respect 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.
Liquidity and Capital Resources
As of November 30, 2017,May 31, 2023, working capital was $7.0$5.7 million, as compared with $7.1to $6.2 million as of February 28, 2017, a decrease of $100,000.2023. The decrease in working capital was primarily due to the payment of dividends and payments on long-term debt partially offset by positive operating results.activities.
Cash and cash equivalent balances decreased $1.7 millionincreased $400,000 from $5.8$4.7 million as of February 28, 20172023 to $4.1$5.1 million as of November 30, 2017 as a resultMay 31, 2023. This increase in cash and cash equivalents was primarily due to proceeds from the sale of cash flow usedU-Swirl assets mostly offset by financing activities, including repaymentoperating results and the purchase of indebtednessproperty and payment of dividends.equipment. Our current ratio was 1.92.2 to 1 at November 30, 2017May 31, 2023 and February 28, 2017.2023. We monitor current and anticipated future levels of cash and cash equivalents in relation to anticipated operating, financing and investing requirements.
ForDuring the ninethree months ended November 30, 2017, we had net income of $2,493,012. OperatingMay 31, 2023, operating activities providedused cash of $1,647,658, with$421,554, primarily the principal adjustment to reconcile the net income to net cash providedresult of operating results offset by operating activities beinga decrease in inventory of $676,174, depreciation and amortization of $979,712, stock-based$202,085 and stock compensation expense of $458,275 and an increase in accrued liabilities of $362,718 more than$201,634, partially offset by an increase to inventory of $990,398, an increase in deferred income taxes of $444,747 and an increasea decrease in accounts receivablepayable of $1,307,149.$184,882. During the comparable 2016 period, we had net income of $2,718,446, andthree months ended May 31, 2022, operating activities provided cash of $2,997,051. The principal adjustment to reconcile$11,298, primarily the net income to net cash provided byresult of operating activities was depreciation and amortization of $962,632, stock-based compensation expense of $447,581, andresults plus an increase in accounts payable of $156,150 mostly$475,858, a decrease in refundable income taxes of $170,875, and depreciation and amortization of $188,893, partially offset by an increase toof inventory of $771,281 and an increase in accounts receivable of $650,708.$762,523.
For the ninethree months ended November 30, 2017,May 31, 2023, investing activities provided cash of $853,315, primarily due to cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1,408,500 partially offset by the purchases of property and equipment of $549,534. In comparison, investing activities used cash of $274,052,$264,349 during the three months ended May 31, 2022, primarily due to the purchases of property and equipment of $446,935 partially offset by proceeds on notes receivable of $194,646. In comparison, investing activities used cash of $1,171,779 during the nine months ended November 30, 2016 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.$290,360.
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 with 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, weThere 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.
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 sharescash flows from financing activities 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 cash flows generated by operating activitiesMay 31, 2023 and available financing will be sufficient to fund our operations for at least the next twelve months. If necessary, the Company has an available bank line of credit to help meet these requirements.2022.
Off-Balance Sheet Arrangements
As of November 30, 2017,May 31, 2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.
As of May 31, 2023, we had purchase obligations of approximately $548,000. 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.
Quantitative and Qualitative Disclosures about Market Risk |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
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, we are exposed to some commodity price and interest rate risks.
Controls and Procedures |
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’sSEC’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 thison that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that ourthe Company’s disclosure controls and procedures were not effective as of November 30, 2017.May 31, 2023, due to the material weaknesses in our internal controls over financial reporting described below. Management concluded that the Company’s internal control over financial reporting was not effective as of May 31, 2023, due to a material weakness in our internal controls resulting from our finance department not being able to process and account for complex, non-routine transactions in accordance with GAAP. Management concluded that we lack a sufficient number of trained professionals with technical accounting expertise to process and account for complex and non-routine transactions. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Notwithstanding the material weakness identified above, management has concluded that our consolidated financial statements included in this Quarterly Report fairly present in all material respects the financial condition, results of operations and cash flows of the Company in accordance with GAAP for each of the periods presented therein.
In order to remediate this matter, we plan to retain the assistance of an accounting expert to assist in the accounting and reporting of complex, non-routine transactions. We will consider the material weakness to be fully remediated once the applicable controls operate for a sufficient period of time and our management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
ThereThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the quarterthree months ended November 30, 2017May 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
OTHER INFORMATION |
Legal Proceedings |
We are not aware of any pending legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
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”),We may, from time to time, become involved in disputes 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 timebusiness. In addition, as a public company, we are also potentially susceptible to time. Management believeslitigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that the resolution of these matters willan adverse result in any future proceeding would not have a potentially material adverse effect on the Company’s financial position,our business, results of operations, or cash flows.and financial condition.
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 1A. “Risk“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 28, 2017.2023, filed with the SEC on May 30, 2023. 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, 2017.2023.
Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Defaults Upon Senior Securities |
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.None.
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.
Mine Safety DisclosuresItem 3. Defaults Upon Senior SecuritiesNone.
Not Applicable.applicable.
Other Information |
None.None.
Exhibits |
|
10.1 |
|
|
10.4 |
10.5 |
31.1* |
31.2* |
32.1** |
|
101.INS | * Inline XBRL Instance |
101.SCH | * Inline XBRL Taxonomy Extension Schema |
101.CAL | * Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | * Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | * Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | * Inline XBRL Taxonomy Extension Presentation Linkbase |
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.
+ Management contract or compensatory plan
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: | /s/ | |||
| A. Allen Arroyo, Chief Financial Officer |