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, 2017August 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):
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,October 10, 2023, the registrant had outstanding 5,903,4366,302,185 shares of its common stock, $.001$0.001 par value per share.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. |
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NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS |
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PART II. |
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35 |
Cautionary 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 1A. “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 with the Securities and Exchange Commission (“SEC”) on May 30, 2023, as updated by this Quarterly Report.
PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
Item 1. Financial Statements
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(unaudited)
Three Months Ended November 30, | Nine Months Ended November 30, | Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Sales | $ | 8,351,583 | $ | 8,250,611 | $ | 21,621,903 | $ | 21,591,420 | $ | 5,015,993 | $ | 5,071,393 | $ | 10,032,040 | $ | 10,479,413 | ||||||||||||||||
Franchise and royalty fees | 1,609,989 | 1,704,628 | 5,952,807 | 6,341,980 | 1,541,886 | 1,485,963 | 2,961,824 | 2,980,141 | ||||||||||||||||||||||||
Total revenues | 9,961,572 | 9,955,239 | 27,574,710 | 27,933,400 | ||||||||||||||||||||||||||||
Total Revenue | 6,557,879 | 6,557,356 | 12,993,864 | 13,459,554 | ||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||
Cost of sales | 6,040,004 | 5,544,155 | 14,907,440 | 14,373,548 | 4,632,391 | 3,889,587 | 9,390,885 | 8,415,908 | ||||||||||||||||||||||||
Franchise costs | 515,149 | 520,619 | 1,588,348 | 1,571,619 | 613,409 | 448,732 | 1,292,982 | 867,816 | ||||||||||||||||||||||||
Sales and marketing | 593,033 | 641,976 | 1,785,416 | 1,959,115 | 442,245 | 427,850 | 915,136 | 908,909 | ||||||||||||||||||||||||
General and administrative | 827,215 | 880,455 | 2,932,568 | 3,101,662 | 1,687,142 | 4,036,788 | 3,619,045 | 5,642,655 | ||||||||||||||||||||||||
Retail operating | 584,771 | 551,168 | 1,774,522 | 1,876,783 | 161,783 | 151,145 | 264,764 | 309,419 | ||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
Depreciation and amortization, exclusive of depreciation and amortization expense of $182,731, $160,767, $353,587 and $320,472, respectively, included in cost of sales | 31,638 | 28,757 | 62,867 | 57,944 | ||||||||||||||||||||||||||||
Total costs and expenses | 7,568,608 | 8,982,859 | 15,545,679 | 16,202,651 | ||||||||||||||||||||||||||||
Loss from Operations | (1,010,729 | ) | (2,425,503 | ) | (2,551,815 | ) | (2,743,097 | ) | ||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||
Interest Expense | (6,258 | ) | - | (12,517 | ) | |||||||||||||||||||||||||||
Interest Income | 17,690 | 3,857 | 37,768 | 6,498 | ||||||||||||||||||||||||||||
Other income, net | 11,432 | 3,857 | 25,251 | 6,498 | ||||||||||||||||||||||||||||
Loss Before Income Taxes | (999,297 | ) | (2,421,646 | ) | (2,526,564 | ) | (2,736,599 | ) | ||||||||||||||||||||||||
Income Tax Provision | - | 730,845 | - | 701,659 | ||||||||||||||||||||||||||||
Net Income (Loss) from Continuing Operations | $ | (999,297 | ) | $ | (3,152,491 | ) | $ | (2,526,564 | ) | $ | (3,438,258 | ) | ||||||||||||||||||||
Discontinued Operations | ||||||||||||||||||||||||||||||||
Earnings (loss) from discontinued operations, net of tax | - | (488,695 | ) | 69,044 | (317,869 | ) | ||||||||||||||||||||||||||
Gain on disposal of discontinued operations, net of tax | - | - | 634,790 | - | ||||||||||||||||||||||||||||
Earnings (loss) from discontinued operations, net of tax | - | (488,695 | ) | 703,834 | (317,869 | ) | ||||||||||||||||||||||||||
Consolidated Net Loss | $ | (999,297 | ) | $ | (3,641,186 | ) | $ | (1,822,730 | ) | $ | (3,756,127 | ) | ||||||||||||||||||||
Total costs and expenses | 8,762,111 | 8,339,885 | 23,580,157 | 23,580,947 | ||||||||||||||||||||||||||||
Basic Earnings (Loss) per Common Share | ||||||||||||||||||||||||||||||||
Loss from continuing operations | $ | (0.16 | ) | $ | (0.51 | ) | $ | (0.40 | ) | $ | (0.55 | ) | ||||||||||||||||||||
Earnings (loss) from discontinued operations | - | (0.08 | ) | 0.11 | (0.05 | ) | ||||||||||||||||||||||||||
Net loss | $ | (0.16 | ) | $ | (0.59 | ) | $ | (0.29 | ) | $ | (0.60 | ) | ||||||||||||||||||||
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 | ||||||||||||||||||||||||
Diluted Earnings (Loss) per Common Share | ||||||||||||||||||||||||||||||||
Loss from continuing operations | $ | (0.16 | ) | $ | (0.51 | ) | $ | (0.40 | ) | $ | (0.55 | ) | ||||||||||||||||||||
Earnings (loss) from discontinued operations | - | (0.08 | ) | 0.11 | (0.05 | ) | ||||||||||||||||||||||||||
Net loss | $ | (0.16 | ) | $ | (0.59 | ) | $ | (0.29 | ) | $ | (0.60 | ) | ||||||||||||||||||||
Weighted Average Common Shares Outstanding - Basic | 5,903,436 | 5,874,366 | 5,878,086 | 5,839,603 | 6,293,078 | 6,215,186 | 6,284,846 | 6,211,815 | ||||||||||||||||||||||||
Dilutive Effect of Restricted Stock Units | 78,029 | 133,658 | 102,145 | 159,215 | ||||||||||||||||||||||||||||
Dilutive Effect of Employee Stock Awards | - | - | - | - | ||||||||||||||||||||||||||||
Weighted Average Common Shares Outstanding - Diluted | 5,981,465 | 6,008,024 | 5,980,231 | 5,998,818 | 6,293,078 | 6,215,186 | 6,284,846 | 6,211,815 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
November 30, | February 28, | August 31, | February 28, | |||||||||||||
2017 | 2017 | 2023 | 2023 | |||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,066,918 | $ | 5,779,195 | $ | 3,984,607 | $ | 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 $589,460 and $666,315, respectively | 1,962,317 | 2,055,694 | ||||||||||||||
Notes receivable, current portion, less current portion of the valuation allowance of $42,504 and $35,173, respectively | 173,086 | 23,698 | ||||||||||||||
Refundable income taxes | 5,055 | 47,863 | 314,987 | 344,885 | ||||||||||||
Inventories, less reserve for slow moving inventory of $261,377 and $249,051, respectively | 5,687,275 | 4,975,779 | ||||||||||||||
Inventories | 3,232,587 | 3,639,780 | ||||||||||||||
Other | 282,840 | 256,548 | 434,225 | 340,847 | ||||||||||||
Current assets held for sale | - | 83,004 | ||||||||||||||
Total current assets | 15,166,756 | 15,150,820 | 10,101,809 | 11,204,976 | ||||||||||||
Property and Equipment, Net | 6,314,812 | 6,457,931 | 6,488,430 | 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 $31,447 and $38,778, respectively | 1,009,087 | 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 | 251,600 | 265,927 | ||||||||||||
Deferred income taxes | 1,303,621 | 858,874 | ||||||||||||||
Lease right of use asset | 2,054,084 | 2,355,601 | ||||||||||||||
Other | 64,849 | 74,639 | 54,006 | 14,054 | ||||||||||||
Long-term assets held for sale | - | 1,765,846 | ||||||||||||||
Total other assets | 7,851,649 | 7,809,605 | 3,944,385 | 5,071,112 | ||||||||||||
Total Assets | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Total Assets | $ | 20,534,624 | $ | 21,986,827 | ||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
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 | $ | 2,405,746 | $ | 2,189,760 | ||||||||||
Accrued salaries and wages | 870,328 | 608,510 | 1,445,223 | 978,606 | ||||||||||||
Gift card liabilities | 2,938,588 | 2,921,585 | 570,276 | 592,932 | ||||||||||||
Other accrued expenses | 337,394 | 253,497 | 283,207 | 162,346 | ||||||||||||
Dividend payable | 708,412 | 702,525 | ||||||||||||||
Deferred income | 465,543 | 451,171 | ||||||||||||||
Contract liabilities | 159,209 | 161,137 | ||||||||||||||
Lease liability | 717,858 | 746,506 | ||||||||||||||
Current liabilities held for sale | - | 178,939 | ||||||||||||||
Total current liabilities | 8,153,112 | 8,060,259 | 5,581,519 | 5,010,226 | ||||||||||||
Long-Term Debt, Less Current Maturities | 1,519,310 | 2,529,240 | ||||||||||||||
Lease Liability, Less Current Portion | 1,339,798 | 1,640,017 | ||||||||||||||
Contract Liabilities, Less Current Portion | 741,290 | 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, 6,299,825 shares and 6,257,137 shares issued and outstanding, respectively | 6,300 | 6,257 | ||||||||||||||
Additional paid-in capital | 5,997,583 | 5,539,357 | 9,782,415 | 9,457,875 | ||||||||||||
Retained earnings | 13,657,309 | 13,283,646 | 3,083,302 | 4,906,032 | ||||||||||||
Total stockholders’ equity | 19,660,795 | 18,828,857 | ||||||||||||||
Total stockholders' equity | 12,872,017 | 14,370,164 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 29,333,217 | $ | 29,418,356 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 20,534,624 | $ | 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 | Six Months Ended | |||||||||||||||
November 30, | August 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) | $ | (1,822,730 | ) | $ | (3,756,127 | ) | ||||||||||
Less: Net Income (loss) from discontinued operations, net of tax | 703,834 | (317,869 | ) | |||||||||||||
Net Loss from continuing operations | (2,526,564 | ) | (3,438,258 | ) | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 979,712 | 962,632 | 416,454 | 378,416 | ||||||||||||
Provision for slow moving inventory | 82,738 | 61,061 | ||||||||||||||
Provision for obsolete inventory | 47,504 | 32,862 | ||||||||||||||
Provision for loss on accounts and notes receivable | 88,200 | 109,200 | - | (127,000 | ) | |||||||||||
Loss on sale or disposal of property and equipment | 20,630 | 18,783 | ||||||||||||||
Loss (gain) on sale or disposal of property and equipment | (40,221 | ) | 3,571 | |||||||||||||
Expense recorded for stock compensation | 458,275 | 447,581 | 324,583 | 280,637 | ||||||||||||
Deferred income | 23,769 | 14,710 | ||||||||||||||
Deferred income taxes | (444,747 | ) | 237,131 | - | 722,163 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (1,307,149 | ) | (650,708 | ) | 54,206 | 160,770 | ||||||||||
Refundable income taxes | 42,808 | (284,927 | ) | 29,898 | 304,779 | |||||||||||
Inventories | (990,398 | ) | (771,281 | ) | 375,045 | (2,078,673 | ) | |||||||||
Contract Liabilities | (42,916 | ) | 6,245 | |||||||||||||
Other current assets | (26,641 | ) | (39,008 | ) | (92,355 | ) | (148,661 | ) | ||||||||
Accounts payable | (135,269 | ) | 156,150 | (16,097 | ) | 2,165,022 | ||||||||||
Accrued liabilities | 362,718 | 17,281 | 543,167 | (389,800 | ) | |||||||||||
Net cash provided by operating activities | 1,647,658 | 2,997,051 | ||||||||||||||
Net cash used in operating activities of continuing operations | (927,296 | ) | (2,127,927 | ) | ||||||||||||
Net cash (used in) provided by operating activities of discontinued operations | (39,242 | ) | 543,234 | |||||||||||||
Net cash used in operating activities | (966,538 | ) | (1,584,693 | ) | ||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Addition to notes receivable | (14,292 | ) | (131,243 | ) | (49,476 | ) | (54,543 | ) | ||||||||
Proceeds received on notes receivable | 194,646 | 255,907 | 35,949 | 31,015 | ||||||||||||
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 | 112,131 | 1,529 | ||||||||||||||
Purchases of property and equipment | (446,935 | ) | (1,048,667 | ) | (1,251,728 | ) | (554,332 | ) | ||||||||
Decrease in other assets | 8,963 | 25,402 | ||||||||||||||
Net cash used in investing activities | (274,052 | ) | (1,171,779 | ) | ||||||||||||
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 | ) | ||||||||||||
Decrease (increase) in other assets | (30,537 | ) | 10,000 | |||||||||||||
Net cash used in by investing activities of continuing operations | (1,183,661 | ) | (566,331 | ) | ||||||||||||
Net cash provided by (used in) investing activities of discontinued operations | 1,417,738 | (32,547 | ) | |||||||||||||
Net cash provided by (used in) investing activities | 234,077 | (598,878 | ) | |||||||||||||
Net Decrease in Cash and Cash Equivalents | (1,712,277 | ) | (1,598,495 | ) | (732,461 | ) | (2,183,571 | ) | ||||||||
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 | $ | 3,984,607 | $ | 5,403,803 |
The accompanying notes are an integral part of these consolidated financial statements.statements.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIESSUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of May 31, 2022 | 6,213,681 | $ | 6,214 | $ | 8,938,499 | $ | 10,471,869 | $ | 19,416,582 | |||||||||||
Consolidated net loss | (3,641,186 | ) | (3,641,186 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 9,553 | 9 | (10 | ) | (1 | ) | ||||||||||||||
Equity compensation, restricted stock units and stock options | 149,041 | 149,041 | ||||||||||||||||||
Balance as of August 31, 2022 | 6,223,234 | $ | 6,223 | $ | 9,087,530 | $ | 6,830,683 | $ | 15,924,436 | |||||||||||
Balance as of February 28, 2022 | 6,186,356 | 6,186 | $ | 8,806,930 | $ | 10,586,810 | $ | 19,399,926 | ||||||||||||
Consolidated net loss | (3,756,127 | ) | (3,756,127 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 36,878 | 37 | (37 | ) | - | |||||||||||||||
Equity compensation, restricted stock units and stock options | 280,637 | 280,637 | ||||||||||||||||||
Balance as of August 31, 2022 | 6,223,234 | $ | 6,223 | $ | 9,087,530 | $ | 6,830,683 | $ | 15,924,436 | |||||||||||
Balance as of May 31, 2023 | 6,290,164 | $ | 6,290 | $ | 9,659,476 | $ | 4,082,599 | $ | 13,748,365 | |||||||||||
Consolidated net loss | (999,297 | ) | (999,297 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 9,661 | 10 | (10 | ) | - | |||||||||||||||
Equity compensation, restricted stock units and stock options | 122,949 | 122,949 | ||||||||||||||||||
Balance as of August 31, 2023 | 6,299,825 | $ | 6,300 | $ | 9,782,415 | $ | 3,083,302 | $ | 12,872,017 | |||||||||||
Balance as of February 28, 2023 | 6,257,137 | 6,257 | $ | 9,457,875 | $ | 4,906,032 | $ | 14,370,164 | ||||||||||||
Consolidated net loss | (1,822,730 | ) | (1,822,730 | ) | ||||||||||||||||
Issuance of common stock, vesting of restricted stock units and other | 42,688 | 43 | (43 | ) | - | |||||||||||||||
Equity compensation, restricted stock units and stock options | 324,583 | 324,583 | ||||||||||||||||||
Balance as of August 31, 2023 | 6,299,825 | $ | 6,300 | $ | 9,782,415 | $ | 3,083,302 | $ | 12,872,017 |
The accompanying notes are an integral part of these 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 candieschocolates 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, after 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 premium 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 premium chocolates frozen yogurt, and other confectionery products.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTSproducts including gourmet caramel apples.
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 August 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 | Sold | Stores Open at 8/31/2023 | Sold, Not Yet Open | Total | ||||||||||||||||||||||
Rocky Mountain Chocolate Factory | ||||||||||||||||||||||||||||
Company-owned stores | 1 | 1 | - | - | 2 | - | 2 | |||||||||||||||||||||
Franchise stores - Domestic stores and kiosks | 153 | 3 | (5 | ) | (1 | ) | 150 | 4 | 154 | |||||||||||||||||||
International license stores | 4 | - | - | - | 4 | - | 4 | |||||||||||||||||||||
Co-branded stores | 111 | 3 | (1 | ) | - | 113 | - | 113 | ||||||||||||||||||||
Total | 269 | 269 | 4 | 273 |
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 and six months ended November 30, 2017 August 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 ActSeptember 28, 2023, the Company renewed its Line of Credit with Wells Fargo Bank, NA under comparable terms to providethe Line of Credit that was set to expire on September 30, 2023, however, the maximum amount available for reconciliation pursuantborrowing under the credit line was reduced from $5 million to titles II and V$4 million. See Note 8 to these financial statements for a description of the concurrent resolution on 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 componentsLine of Credit.
Management evaluated all activity of the TCJA and evaluating its impact, which could be material onCompany through the Company’s fiscal year 2018issue date of these 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.
Accounts and Notes Receivable, Net
Accounts receivable represent amounts due from customers in the 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.
Related Party Transactions
On December 14, 2022 the Company entered into a Settlement Agreement and Release (the “Settlement Agreement”), by and among the Company, Bradley L. Radoff, an individual (“Radoff”), Andrew T. Berger, an individual, AB Value Partners, LP (“AB Value Partners”), AB Value Management LLC (“AB Value Management” and, together with AB Value Partners, “AB Value” and, together with Radoff, “ABV-Radoff”), and Mary Bradley, an individual, pertaining to, among other things, the dismissal of all pending lawsuits between the parties.
Pursuant to the Settlement Agreement, the Company and ABV-Radoff agreed to a “Standstill Period” commencing on the effective date of the agreement and ending on the date that is forty-five (45) days prior to the beginning of the Company’s advance notice period for the nomination of directors at the Company’s 2025 annual meeting of stockholders. During the Standstill Period, ABV-Radoff agreed, subject to certain exceptions, other than in Rule 144 open market broker sale transactions where the identity of the purchaser is not known and in underwritten widely dispersed public offerings, not to sell, offer, or agree to sell directly or indirectly, through swap or hedging transactions or otherwise, the securities of the Company or any rights decoupled from the underlying securities of the Company held by ABV-Radoff to any person or entity other than the Company or an affiliate of ABV-Radoff (a “Third Party”) that, to the ABV-Radoff’s knowledge would result in such Third Party, together with its Affiliates and Associates (as such terms are defined in the Settlement Agreement), owning, controlling, or otherwise having beneficial ownership or other ownership interest in the aggregate of more than 4.9% of the Company’s common stock outstanding at such time, or would increase the beneficial ownership or other ownership interest of any Third Party who, together with its Affiliates and Associates, has a beneficial ownership or other ownership interest in the aggregate of more than 4.9% of the shares Common Stock outstanding at such time (such restrictions collectively, the “Lock-Up Restriction”).
On August 3, 2023, the Board of Directors of the Company authorized and approved the Company to issue a limited waiver (the “Limited Waiver”) of the Lock-Up Restriction with regard to a sale by ABV-Radoff of up to 200,000 shares of Common Stock to Global Value Investment Corp. (“GVIC”) to be consummated by August 7, 2023. Jeffrey Geygan, the Company’s Chairman of the Board, is the chief executive officer and a principal of GVIC. Other than as waived by the Limited Waiver, the Settlement Agreement remains in full force and effect and the rights and obligations under the Settlement Agreement of each of the parties remain unchanged.
SUBSIDIARIES
NOTE 2 – SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended | ||||||||
August 31, | ||||||||
| 2023 | 2022 | ||||||
Cash paid (received) for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | (29,988 | ) | (304,779 | ) | ||||
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
In February 2016,The Company recognizes revenue from contracts with its customers in accordance with Accounting Standards Codification® (“ASC”) 606, which provides that revenues are recognized when control of promised goods or services is transferred to a customer in an amount that reflects the FASB issued ASU 2016-02, Leases (Topic 842), which requires 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 amendmentsFranchise Agreement or License Agreement (collectively “Customer Contracts”) at the beginning oftime that the earliest period presented using 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 is entered. 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 evaluatemany performance obligations that the impactCompany has determined are not 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.Renewal Fees
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 initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will beare treated as a single performance obligation. As a result, initialInitial franchise fees received will most likely beare being recognized as the Company satisfies the performance obligation over the franchise term. The cumulative adjustment to be recorded as contract liabilities, upon adoption, is expected to be approximately 15% of the Company's consolidated total liabilities. No impact to the Company's consolidated statements of cash flows is expected as the initial fees will continue to be collected upon the signingterm of the franchise agreement, which is generally 10 years.
The following table summarizes contract liabilities as of August 31, 2023 and August 31, 2022:
Six Months Ended | ||||||||
August 31: | ||||||||
2023 | 2022 | |||||||
Contract liabilities at the beginning of the year: | $ | 943,415 | $ | 962,572 | ||||
Revenue recognized | (85,915 | ) | (98,755 | ) | ||||
Contract fees received | 42,999 | 104,999 | ||||||
Contract liabilities at the end of the period: | $ | 900,499 | $ | 968,816 |
At August 31, 2023, annual revenue expected to be recognized in the future, related to performance obligations that are not yet fully satisfied, are estimated to be the following:
FYE 24 | $ | 81,642 | ||
FYE 25 | 149,494 | |||
FYE 26 | 136,776 | |||
FYE 27 | 123,657 | |||
FYE 28 | 96,139 | |||
Thereafter | 312,791 | |||
Total | $ | 900,499 |
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 “proportionate” method for recognizing breakage. Under the guidance of ASC 606 the Company recognizes breakage from gift cards when the gift card is redeemed by the customer, or the beginningCompany 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 franchisees, others and its Company-owned stores sales are recognized at the time of the underlying 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 new franchise term.percent of our franchisees’ sales, are recognized at the time the 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 sharesrecognition and segment:
Three Months Ended August 31, 2023
Revenues recognized over time under ASC 606:
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 40,959 | $ | - | $ | - | $ | 40,959 |
Revenues recognized at a point in time:
Franchising | Production | Retail | Total | |||||||||||||
Durango Product sales | - | 4,707,149 | - | 4,707,149 | ||||||||||||
Retail sales | - | - | 308,844 | 308,844 | ||||||||||||
Royalty and marketing fees | 1,500,927 | - | - | 1,500,927 | ||||||||||||
Total | $ | 1,541,886 | $ | 4,707,149 | $ | 308,844 | $ | 6,557,879 |
Three Months Ended August 31, 2022
Revenues recognized over time under ASC 606:
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 44,902 | $ | - | $ | - | $ | 44,902 |
Revenues recognized at a point in time:
Franchising | Production | Retail | Total | |||||||||||||
Factory sales | - | 4,808,200 | - | 4,808,200 | ||||||||||||
Retail sales | - | - | 263,193 | 263,193 | ||||||||||||
Royalty and marketing fees | 1,441,061 | - | - | 1,441,061 | ||||||||||||
Total | $ | 1,485,963 | $ | 4,808,200 | $ | 263,193 | $ | 6,557,356 |
Six Months Ended August 31, 2023
Revenues recognized over time under ASC 606:
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 85,915 | $ | - | $ | - | $ | 85,915 |
Revenues recognized at a point in time:
Franchising | Production | Retail | Total | |||||||||||||
Durango Product sales | - | 9,531,224 | - | 9,531,224 | ||||||||||||
Retail sales | - | - | 500,816 | 500,816 | ||||||||||||
Royalty and marketing fees | 2,875,909 | - | - | 2,875,909 | ||||||||||||
Total | $ | 2,961,824 | $ | 9,531,224 | $ | 500,816 | $ | 12,993,864 |
Six Months Ended August 31, 2022
Revenues recognized over time under ASC 606:
Franchising | Production | Retail | Total | |||||||||||||
Franchise fees | $ | 98,755 | $ | - | $ | - | $ | 98,755 |
Revenues recognized at a point in time:
Franchising | Production | Retail | Total | |||||||||||||
Factory sales | - | 9,965,810 | - | 9,965,810 | ||||||||||||
Retail sales | - | - | 513,603 | 513,603 | ||||||||||||
Royalty and marketing fees | 2,881,386 | - | - | 2,881,386 | ||||||||||||
Total | $ | 2,980,141 | $ | 9,965,810 | $ | 513,603 | $ | 13,459,554 |
NOTE 3 5– INVENTORIES
Inventories consist of the following:
November 30, 2017 | February 28, 2017 | August 31, 2023 | February 28, 2023 | |||||||||||||
Ingredients and supplies | $ | 2,998,169 | $ | 3,021,220 | $ | 2,151,108 | $ | 2,481,510 | ||||||||
Finished candy | 2,880,531 | 2,137,609 | 1,365,409 | 1,567,887 | ||||||||||||
U-Swirl food and packaging | 69,952 | 66,001 | ||||||||||||||
Reserve for slow moving inventory | (261,377 | ) | (249,051 | ) | (283,930 | ) | (409,617 | ) | ||||||||
Total inventories | $ | 5,687,275 | $ | 4,975,779 | $ | 3,232,587 | $ | 3,639,780 |
SUBSIDIARIES
NOTE 4 -6 – PROPERTY AND EQUIPMENT, NET
Property and equipment consists 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 |
August 31, 2023 | February 28, 2023 | |||||||
Land | $ | 513,618 | $ | 513,618 | ||||
Building | 5,108,950 | 5,151,886 | ||||||
Machinery and equipment | 10,884,260 | 10,152,211 | ||||||
Furniture and fixtures | 506,587 | 512,172 | ||||||
Leasehold improvements | 132,027 | 134,010 | ||||||
Transportation equipment | 319,145 | 476,376 | ||||||
17,464,587 | 16,940,273 | |||||||
Less accumulated depreciation | (10,976,157 | ) | (11,229,534 | ) | ||||
Property and equipment, net | $ | 6,488,430 | $ | 5,710,739 |
NOTE 5 - STOCKHOLDERS’ EQUITY
Depreciation expense related to property and equipment totaled $207,268 and $402,127 during the three and six months ended August 31, 2023 compared to $182,298 and $363,964 during the three and six months ended August 31, 2022, respectively.
Cash Dividend
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
August 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 | $ | 268,641 | $ | 394,826 | $ | 259,314 | |||||||||||||
Trademark/Non-competition agreements | 5 | - | 20 | 259,339 | 133,924 | 259,339 | 128,924 | |||||||||||||||
Total | 654,165 | 402,565 | 654,165 | 388,238 | ||||||||||||||||||
Goodwill and intangible assets not subject to amortization | ||||||||||||||||||||||
Franchising segment- | ||||||||||||||||||||||
Company stores goodwill | $ | 360,972 | $ | 360,972 | ||||||||||||||||||
Franchising goodwill | 97,318 | 97,318 | ||||||||||||||||||||
Manufacturing segment-goodwill | 97,318 | 97,318 | ||||||||||||||||||||
Trademark | 20,000 | 20,000 | ||||||||||||||||||||
Total | 575,608 | 575,608 | ||||||||||||||||||||
Total Goodwill and Intangible Assets | $ | 1,229,773 | $ | 402,565 | $ | 1,229,773 | $ | 388,238 |
Amortization expense related to intangible assets totaled $7,101 and $14,327 during the three and six months ended August 31, 2023 compared to $7,226 and $14,452 during the three and six months ended August 31, 2022, respectively.
At August 31, 2023, annual amortization of intangible assets, based upon the Company’s existing intangible assets and current useful lives, is estimated to be the following:
FYE 24 | $ | 13,702 | ||
FYE 25 | 27,405 | |||
FYE 26 | 27,405 | |||
FYE 27 | 27,405 | |||
FYE 28 | 27,405 | |||
Thereafter | 128,278 | |||
Total | $ | 251,600 |
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 shareAugust 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% (7.68% at August 31, 2023 and 6.92% at February 28, 2023). Additionally, the Credit Line is subject to stockholdersvarious financial ratio and leverage covenants. At August 31, 2023, the Company was in compliance with all such covenants. Subsequent to the date of recordthese financial statements, on February 24, 2017. TheSeptember 28, 2023, the Company paid a quarterly cash dividend of $0.12 per share of common stock on June 16, 2017renewed the Credit Line under comparable terms, however, the maximum amount available for borrowing under the credit line was reduced from $5 million 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.$4 million.
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 were to 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, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 ofannual or cumulative five-year basis in connection with its common stockperformance under the repurchase plan.terminated supplier agreement. The Company did not repurchase any sharesWarrant was to expire six months after the final and conclusive determination of common stock underrevenue thresholds for the repurchase plan duringfifth contract year and the three and nine months ended November 30, 2017. Ascumulative revenue determination in accordance with the terms of November 30, 2017, approximately $638,000 remains available under the repurchase plan for further stock repurchases.Warrant.
Stock-Based Compensation
At On November 30, 2017, 1, 2022, the Company sent a formal notice to the customer terminating the agreement. As of August 31, 2023, no Warrant Shares had stock-based compensation plans for employeesvested and, non-employee directors that authorizedsubsequent to the grantingtermination by the Company of stock awards, including stock options and restricted stock units.supplier agreement, the Company has no remaining material obligations under the 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$122,949 and $458,275$324,583 of stock-based compensation expense during the three and nine month periodssix months ended November 30, 2017, respectively, August 31, 2023 compared to $132,453with $149,040 and $447,581$280,637 during the three and nine month periodssix months ended November 30, 2016, August 31, 2022, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.
As of November 30, 2017, the Company does not have any stock options outstanding. The following table summarizes stock option activity during the nine months ended November 30, 2017 and 2016:
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 |
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES
NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes restricted stock unit activity during the ninesix months ended August 31, 2023 and 2022:
Six Months Ended | ||||||||
August 31, | ||||||||
2023 | 2022 | |||||||
Outstanding non-vested restricted stock units as of February 28: | 154,131 | 105,978 | ||||||
Granted | 137,554 | 94,892 | ||||||
Vested | (42,688 | ) | (36,879 | ) | ||||
Cancelled/forfeited | (1,558 | ) | (800 | ) | ||||
Outstanding non-vested restricted stock units as of August 31: | 247,439 | 163,191 | ||||||
Weighted average grant date fair value | $ | 4.98 | $ | 5.69 | ||||
Weighted average remaining vesting period (in years) | 2.06 | 2.30 |
The following table summarizes stock option activity during the six months ended August 31, 2023 and 2022:
Six Months Ended | ||||||||
August 31, | ||||||||
2023 | 2022 | |||||||
Outstanding stock options as of February 28: | 36,144 | - | ||||||
Granted | - | 36,144 | ||||||
Exercised | - | - | ||||||
Cancelled/forfeited | - | - | ||||||
Outstanding stock options as of August 31: | 36,144 | 36,144 | ||||||
Weighted average exercise price | 6.49 | 6.49 | ||||||
Weighted average remaining contractual term (in years) | 8.76 | 9.76 |
During the six months ended August 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 award vests 25% on the grant date and 25% each quarter thereafter until November 30, 2017 and 2016:2023.
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 |
During the six months ended August 31, 2023, the Company issued up to 82,953 restricted stock units subject to vesting based on the achievement of company performance goals and 48,263 restricted stock units that vest over time. These issuances were made to the Robert Sarlls, the Company’s Chief Executive Officer, Allen Arroyo, the Company’s Chief Financial Officer, and Andrew Ford, the Company’s Vice President – Sales and Marketing. These restricted stock units were issued with an aggregate grant date fair value of $750,556, or $5.72 per share, based upon a maximum issuance of 131,216 shares. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2026 with respect to the target number of performance-based restricted stock units if the Company achieves metrics related to return on equity, omni-channel gross margin, average unit volume, and social media engagement lifetime value during the performance period, subject to continued service through the end of the performance period. The performance-based restricted stock units may vest from 75% to 110% of target units based upon actual performance. The time-based restricted stock units vest 33% annually on the anniversary date of the award until August 11, 2026.
During the six months ended August 31, 2022, the Company issued 36,144 stock options and issued up to 94,892 performance-based restricted stock units subject to vesting based on the achievement of performance goals. These issuances were made to the Messrs. Sarlls and Arroyo as a part of each of their incentive compensation structure . The stock options were issued with an aggregate grant date fair value of $77,267 or $2.14 per share. The performance-based restricted stock units were issued with an aggregate grant date fair value of $298,582 or $6.29 per share, based upon a target issuance of 47,446 shares. The stock options granted vest with respect to one-third of the shares on the last day of the Company’s current fiscal year ending February 28, 2023, and vest as to remaining shares in equal quarterly increments on the last day of each quarter until the final vesting on February 28, 2025. The performance-based restricted stock units will vest following the end of the Company’s fiscal year ending February 2025 with respect to the target number of performance-based restricted stock units if the Company achieves an annualized total shareholder return of 12.5% during the performance period, subject to continued service through the end of the performance period. The Compensation Committee of the Board of Directors has discretion to determine the number of performance-based restricted stock units between 0-200% of the target number that will vest based on achievement of performance below or above the target performance goal.
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$122,949 and $20,420$324,583 of stock-based compensation expense during the nine monthsthree- and six-month periods ended November 30, 2017August 31, 2023, respectively, compared to $149,040 and 2016, respectively.
During the nine months ended November 30, 2017, the Company issued 5,000 shares of common stock under the Company’s equity incentive plan to an independent contractor providing information technology consulting services to the Company. These shares were issued as a part of the compensation for services rendered to the Company by the contractor. Associated with this unrestricted stock award, the Company recognized $59,100 in stock-based compensation expense$280,637 during the nine months ended November 30, 2017.
During the three and ninesix month periods ended November 30, 2017, the Company recognized $133,795 and $399,175, respectively, ofAugust 31, 2022, respectively. Compensation costs related to stock-based compensation expense related to non-vested, non-forfeitedare generally amortized over the vesting period of the stock awards.
Except as noted above, restricted stock unit grants. The 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-monthsix-month periods ended November 30, 2017 August 31, 2023 and 2016, 44,0642022, 42,688 and 48,08436,879, respectively, 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 and stock options granted as of November 30, 2017 August 31, 2023 was $758,217,$598,138, which is expected to be recognized over the weighted-average period of 1.51.83 years. Total unrecognized compensation expense of non-forfeited, performance vesting, restricted stock units as of August 31, 2023 was $431,357, which is expected to be recognized over the weighted-average period of 2.50 years.
NOTE 6 10– SUPPLEMENTAL CASH FLOW INFORMATIONEARNINGS 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.
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
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 six months ended August 31, 2023, 960,677 shares of common stock reserved for issuance under warrants and 151,466 shares of common stock reserved for issuance under 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 six months ended August 31, 2022, 960,677 shares of common stock reserved for issuance under warrants and 109,251 shares of common stock 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.
NOTE 7 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 and warehouse space 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. During the six months ended August 31, 2023 and 2022, lease expense recognized in the Consolidated Statements of Income was $310,861 and $276,722, 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 such as storage facilities and 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 August 31, 2023. The total estimated future minimum lease payments is $2.2 million.
As of August 31, 2023, maturities of lease liabilities for the Company’s operating leases were as follows:
FYE 24 | $ | 395,099 | ||
FYE 25 | 611,988 | |||
FYE 26 | 514,346 | |||
FYE 27 | 242,558 | |||
FYE 28 | 71,671 | |||
Thereafter | 390,450 | |||
Total | $ | 2,226,112 | ||
Less: imputed interest | (168,456 | ) | ||
Present value of lease liabilities: | $ | 2,057,656 | ||
Weighted average lease term | 5.4 |
During the six months ended August 31, 2023 and 2022, the Company entered into new lease agreements representing a future lease liability of $46,250 and $1,472,667, 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, a 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, a 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, non-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 August 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 August 31, 2023, the Company contracted for approximately $309,000 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 August 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 13 – OPERATING SEGMENTS
The Company classifies its business interests into fivefour reportable segments: Franchising, Manufacturing,Production, Retail Stores, U-Swirl operations and Other. 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 | ||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
August 31, 2023 | Franchising | Production | Retail | Other | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 1,242,855 | $ | 7,948,925 | $ | 366,049 | $ | 842,554 | $ | - | $ | 10,400,383 | $ | 1,541,886 | $ | 4,974,229 | $ | 308,844 | $ | - | $ | 6,824,959 | ||||||||||||||||||||||
Intersegment revenues | (1,228 | ) | (437,583 | ) | - | - | - | (438,811 | ) | - | (267,080 | ) | - | - | (267,080 | ) | ||||||||||||||||||||||||||||
Revenue from external customers | 1,241,627 | 7,511,342 | 366,049 | 842,554 | - | 9,961,572 | 1,541,886 | 4,707,149 | 308,844 | - | 6,557,879 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 423,213 | 1,664,643 | (86,741 | ) | (14,587 | ) | (809,332 | ) | 1,177,196 | 586,140 | 87,408 | 24,237 | (1,697,082 | ) | (999,297 | ) | ||||||||||||||||||||||||||||
Total assets | 1,106,155 | 14,748,965 | 1,236,501 | 8,202,628 | 4,038,968 | 29,333,217 | 1,061,420 | 10,116,842 | 489,840 | 8,866,522 | 20,534,624 | |||||||||||||||||||||||||||||||||
Capital expenditures | 881 | 124,312 | 15,182 | 4,967 | 17,605 | 162,947 | 32,097 | 521,014 | 17,162 | 131,920 | 702,193 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 11,644 | $ | 138,618 | $ | 10,543 | $ | 143,304 | $ | 32,180 | $ | 336,289 | $ | 7,633 | $ | 183,923 | $ | 1,496 | $ | 21,317 | $ | 214,369 |
Three Months Ended November 30, 2016 | Franchising | Manufacturing | Retail | U-Swirl | Other | Total | ||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
August 31, 2022 | Franchising | Production | Retail | Other | Total | |||||||||||||||||||||||||||||||||||||||
Total revenues | $ | 1,202,655 | $ | 7,783,888 | $ | 320,011 | $ | 1,009,360 | $ | - | $ | 10,315,914 | $ | 1,487,303 | $ | 5,110,439 | $ | 263,193 | $ | - | $ | 6,860,935 | ||||||||||||||||||||||
Intersegment revenues | (1,248 | ) | (359,427 | ) | - | - | - | (360,675 | ) | (1,340 | ) | (302,239 | ) | - | - | (303,579 | ) | |||||||||||||||||||||||||||
Revenue from external customers | 1,201,407 | 7,424,461 | 320,011 | 1,009,360 | - | 9,955,239 | 1,485,963 | 4,808,200 | 263,193 | - | 6,557,356 | |||||||||||||||||||||||||||||||||
Segment profit (loss) | 328,866 | 2,049,231 | (46,253 | ) | 102,906 | (850,695 | ) | 1,584,055 | 203,138 | 576,344 | (11,439 | ) | (3,189,689 | ) | (2,421,646 | ) | ||||||||||||||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | 1,217,381 | 12,288,137 | 628,462 | 12,116,246 | 26,250,226 | |||||||||||||||||||||||||||||||||
Capital expenditures | 4,414 | 78,725 | 13,677 | 5,246 | 14,615 | 116,677 | - | 285,370 | 258 | - | 285,628 | |||||||||||||||||||||||||||||||||
Total depreciation & amortization | $ | 13,441 | $ | 122,381 | $ | 3,357 | $ | 147,284 | $ | 33,262 | $ | 319,725 | $ | 8,520 | $ | 162,276 | $ | 1,412 | $ | 17,314 | $ | 189,522 |
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 | ||||||||||||||||||
Total revenues | $ | 4,257,842 | $ | 19,070,069 | $ | 1,081,103 | $ | 4,438,630 | $ | - | $ | 28,847,644 | ||||||||||||
Intersegment revenues | (4,000 | ) | (910,244 | ) | - | - | - | (914,244 | ) | |||||||||||||||
Revenue from external customers | 4,253,842 | 18,159,825 | 1,081,103 | 4,438,630 | - | 27,933,400 | ||||||||||||||||||
Segment profit (loss) | 1,680,304 | 4,511,527 | 16,743 | 1,053,529 | (3,009,994 | ) | 4,252,109 | |||||||||||||||||
Total assets | 1,151,783 | 13,761,091 | 1,132,268 | 9,138,026 | 4,939,480 | 30,122,648 | ||||||||||||||||||
Capital expenditures | 13,540 | 785,889 | 16,997 | 35,722 | 196,519 | 1,048,667 | ||||||||||||||||||
Total depreciation & amortization | $ | 41,266 | $ | 336,541 | $ | 10,061 | $ | 473,730 | $ | 101,034 | $ | 962,632 |
Revenue from one customer of the Company’s Manufacturing segment represented approximately $2.8 million, or 10.3 percent, of the Company’s revenues from external customers during the nine months ended November 30, 2017, compared to $2.1 million, or 7.5 percent of the Company’s revenues from external customers during the nine months ended November 30, 2016.
Six Months Ended | ||||||||||||||||||||
August 31, 2023 | Franchising | Production | Retail | Other | Total | |||||||||||||||
Total revenues | $ | 2,962,317 | $ | 9,991,281 | $ | 500,816 | $ | - | $ | 13,454,414 | ||||||||||
Intersegment revenues | (493 | ) | (460,057 | ) | - | - | (460,550 | ) | ||||||||||||
Revenue from external customers | 2,961,824 | 9,531,224 | 500,816 | - | 12,993,864 | |||||||||||||||
Segment profit (loss) | 966,991 | 134,754 | 29,843 | (3,658,152 | ) | (2,526,564 | ) | |||||||||||||
Total assets | 1,061,420 | 10,116,842 | 489,840 | 8,866,522 | 20,534,624 | |||||||||||||||
Capital expenditures | 32,097 | 1,031,767 | 19,512 | 168,352 | 1,251,728 | |||||||||||||||
Total depreciation & amortization | $ | 15,576 | $ | 355,983 | $ | 2,985 | $ | 41,910 | $ | 416,454 |
SUBSIDIARIES
Six Months Ended | ||||||||||||||||||||
August 31, 2022 | Franchising | Production | Retail | Other | Total | |||||||||||||||
Total revenues | $ | 2,982,756 | $ | 10,514,717 | $ | 513,603 | $ | - | $ | 14,011,076 | ||||||||||
Intersegment revenues | (2,615 | ) | (548,907 | ) | - | - | (551,522 | ) | ||||||||||||
Revenue from external customers | 2,980,141 | 9,965,810 | 513,603 | - | 13,459,554 | |||||||||||||||
Segment profit (loss) | 910,234 | 1,184,576 | (23,671 | ) | (4,807,738 | ) | (2,736,599 | ) | ||||||||||||
Total assets | 1,217,381 | 12,288,137 | 628,462 | 12,116,246 | 26,250,226 | |||||||||||||||
Capital expenditures | 1,182 | 534,685 | 575 | 17,890 | 554,332 | |||||||||||||||
Total depreciation & amortization | $ | 17,439 | $ | 323,465 | $ | 2,824 | $ | 34,688 | $ | 378,416 |
NOTE 8 14– GOODWILL AND INTANGIBLE ASSETSCONTESTED SOLICITATION OF PROXIES
Intangible assets consistContested Solicitation of 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, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.Proxies
Amortization expense related to intangible assets totaled $332,100During the three and $316,529 during the ninesix months ended November 30, 2017August 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 and 2016, respectively.
At November 30, 2017, annual amortizationsix months ended August 31, 2022, the Company incurred approximately $1.8 million and $2.1 million, respectively, of intangible assets, based upon our existing intangible assetscosts associated with the contested solicitation of proxies, compared with no comparable costs incurred in the three and current useful lives, is estimated to besix months ended August 31, 2023. These costs are recognized as general and administrative expense in the following:Consolidated Statement of Operations.
2018 | $ | 113,833 | ||
2019 | 452,069 | |||
2020 | 438,912 | |||
2021 | 427,203 | |||
2022 | 404,022 | |||
Thereafter | 3,299,099 | |||
Total | $ | 5,135,138 |
NOTE 915 – RESTRUCTURING AND ACQUISITION RELATED CHARGES
Restructuring and acquisition charges consisted of lease settlement costs of $60,000 during the nine months ended November 30, 2016, relating to the closure of an ALY Company-owned location.INCOME TAXES
The Company did not record any restructuring chargesprovides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax basis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not.
Realization of the Company's deferred tax assets is dependent upon the Company generating sufficient taxable income, in the threeappropriate tax jurisdictions, in future years, to obtain benefit from the reversal of net deductible temporary differences. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. 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 all of the tax benefit of our deferred income tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable based upon recent past financial performance, tax reporting positions, and nine monthsexpectations of future taxable income. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.
During the fiscal year ended November 30, 2017.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 August 31, 2023, the Company has a full valuation allowance against its deferred tax assets.
NOTE 16 – DISCONTINUED OPERATIONS
On February 24, 2023 and May 1, 2023, the Company entered into agreements to sell: 1) all operating assets and inventory associated with the Company’s three U-Swirl Company-owned locations, and 2) all franchise rights and intangible assets associated with the franchise operations of U-Swirl, respectively. The May 1, 2023 sale was completed pursuant to an 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 these asset sales, the activities of the Company’s subsidiary, U-Swirl, which were previously recorded to the U-Swirl operating segment are reported as discontinued operations in the Consolidated Statement of Operations, Consolidated Balance Sheet and Consolidated Statement of Cash flows for all periods presented. The majority of the assets and liabilities of U-Swirl met the accounting criteria to be classified as held for sale and were aggregated and reported on separate lines of the respective statements.
SUBSIDIARIES
NOTE 10 – SALE OR DISTRIBUTION OF ASSETSThe following table discloses the results of operations of the businesses reported as discontinued operations for the three and six months ended August 31, 2023 and 2022:
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 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Total Revenue | $ | - | $ | 968,329 | $ | 212,242 | $ | 1,892,703 | ||||||||
Cost of sales | - | 189,407 | - | 386,541 | ||||||||||||
Operating Expenses | - | 578,435 | 143,198 | 1,137,418 | ||||||||||||
Gain on disposal of assets | - | - | (634,790 | ) | - | |||||||||||
Other income (expense), net | - | - | - | - | ||||||||||||
Earnings (loss) from discontinued operations before income taxes | - | 200,487 | 703,834 | 368,744 | ||||||||||||
Income tax provision (benefit) | - | 689,182 | - | 686,613 | ||||||||||||
Earnings (loss) from discontinued operations, net of tax | $ | - | $ | (488,695 | ) | $ | 703,834 | $ | (317,869 | ) |
The following table summarizes annual maturitiesreflects the summary of our notes payableassets and liabilities held for sale for U-Swirl as of November 30, 2017:August 31, 2023 and February 28, 2023, respectively:
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 |
August 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 |
The following table summarizes the gain recognized during the three months ended August 31, 2023 related to the sale of assets on May 1, 2023, as described above:
Cash proceeds from the sale of assets | $ | 1,757,738 | ||
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 |
|
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 for the fiscal year ended February 28, 2023 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on May 30, 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 candieschocolates and other confectionery products. Our subsidiary, U-Swirl International, Inc.products (“U-Swirl”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 confectionery products.confectionary products including gourmet caramel apples. We also sell our candy in selected locations outside of our systemnetwork of retail stores and license the use of our brand with certain consumer products.stores. As of November 30, 2017,August 31, 2023, there were 5two Company-owned, 86 Cold Stone Creamery co-branded113 licensee-owned and 272154 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
In fiscal year (“FY”) 2014, SWRL acquiredAs a result of macro-economic inflationary trends and disruptions to the franchise rightsglobal supply chain, we have experienced and certain other assetsexpect 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.
Contested Solicitation of self-serve frozen yogurt concepts underProxies
During the names “CherryBerry,” “Yogli Mogli Frozen Yogurt”three months and “Fuzzy Peach Frozen Yogurt.” Insix month ended August 31, 2022, we incurred costs associated with a stockholder’s contested solicitation of proxies 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 and six months ended August 31, 2022, we incurred approximately $1.8 million and $2.1 million, respectively, of SWRL, and in turn, the Company entered into a loan and security agreement with SWRL to cover the purchase price and other costs associated with the acquisitions (the “SWRL Loan Agreement”). Borrowings undercontested solicitation of proxies, compared with no comparable costs incurred in the SWRL Loan Agreement were secured by allthree and six months ended August 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, 2017August 31, 2023, Compared to the Three Months Ended August 31, 2022
Results SummaryNovember 30, 2016
Basic earningsloss per share from continuing operations decreased 23.5% from $.17$(0.51) per share in the three months ended November 30, 2016August 31, 2022 to $.13a loss of $(0.16) per share in the three months ended November 30, 2017.August 31, 2023. Revenues from continuing operations were approximately unchanged at approximately $10.0$6.6 million in the three months ended November 30, 2016August 31, 2022 and 2017. Operating income2023. Loss from continuing operations decreased 25.7% from $1.6$2.4 million in the three months ended November 30, 2016August 31, 2022 to $1.2 million in the three months ended November 30, 2017. Net income decreased 25.8%a loss from continuing operations of $1.0 million in the three months ended November 30, 2016 to $751,000August 31, 2023. Net loss from continuing operations decreased from $3.2 million in the three months ended November 30, 2017. The decreaseAugust 31, 2022 to a loss of $999,000 in operating income and net income was primarily the result of higher cost of sales partially offset by lower operating costs.three months ended August 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 | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | $ | 4,707.1 | $ | 4,808.2 | $ | (101.1 | ) | (2.1 | )% | |||||||
Retail sales | 308.9 | 263.2 | 45.7 | 17.4 | % | |||||||||||
Franchise fees | 41.0 | 44.9 | (3.9 | ) | (8.7 | )% | ||||||||||
Royalty and marketing fees | 1,500.9 | 1,441.1 | 59.8 | 4.1 | % | |||||||||||
Total | $ | 6,557.9 | $ | 6,557.4 | $ | 0.5 | 0.0 | % |
FactoryDurango Product Sales
The increasedecrease in factoryDurango Product sales for the three months ended November 30, 2017 versusAugust 31, 2023, compared to the three months ended November 30, 2016August 31, 2022 was primarily due to a 15.5% increase34.0%, or $108,000, decrease in shipments of product to customers outside our network of franchisefranchised retail locations. This increase was mostlystores partially offset by a 5.3% decrease0.2%, or $7,000, increase in purchases bysales of product to our network of franchised and licensed retail locations.stores. Same store pounds purchased by domestic Rocky Mountain Chocolate Factory franchise and licenselicensed locations decreased 8.7% in0.2% 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, 2017August 31, 2023, when compared to the three months ended November 30, 2016.August 31, 2022.
Retail Sales
Retail sales at Company-owned stores increased 17.4% during the three months ended August 31, 2023 compared to the three months ended August 31, 2022. This increase was the result of the sale of a Company-owned store in the prior year (resulting in only one remaining Company-owned store), partially offset by the July 2023 opening of a second Company-owned store. Retail sales at our single Company-owned store in Durango, Colorado, open in both periods, increased 6.5% during the three months ended August 31, 2023 compared to the three months ended August 31, 2022.
Royalties, Marketing Fees, and Franchise Fees
The decreaseincrease in royalties and marketing fees from the three months ended November 30, 2016August 31, 2022 to the three months ended November 30, 2017 resulted fromAugust 31, 2023 was primarily due to an increase in royalty revenue as a 14.5% decreaseresult of the Company’s purchase based royalty structure and an increase in same store sales at domestic Rocky Mountain Chocolate locations. Same store sales at domestic franchise units in operation and lower same store sales. The average number of total domestic franchise stores in operation decreased from 365 in the three months ended November 30, 2016 to 312Rocky Mountain Chocolate locations increased 2.3% 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, 2017August 31, 2023 when compared to the three months ended November 30 2016. Franchise fees increased primarily as a result of an increaseAugust 31, 2022.
The decrease in domestic franchise openings duringfee revenue for the three months ended November 30, 2017August 31, 2023, compared to the three months ended November 30, 2016.August 31, 2022 was the result of fewer franchise agreements outstanding and subject to revenue recognition.
Costs and Expenses | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Cost of sales – factory | $ | 5,703.4 | $ | 5,221.7 | $ | 481.7 | 9.2 | % | ||||||||
Cost of sales - retail | 336.6 | 322.5 | 14.1 | 4.4 | % | |||||||||||
Franchise costs | 515.1 | 520.6 | (5.5 | ) | (1.1 | %) | ||||||||||
Sales and marketing | 593.0 | 642.0 | ( 49.0 | ) | (7.6 | %) | ||||||||||
General and administrative | 827.2 | 880.5 | ( 53.3 | ) | (6.1 | %) | ||||||||||
Retail operating | 584.8 | 551.2 | 33.6 | 6.1 | % | |||||||||||
Total | $ | 8,560.1 | $ | 8,138.5 | $ | 421.6 | 5.2 | % |
Gross Margin | Three Months Ended | |||||||||||||||
November 30, | $ | % | ||||||||||||||
($’s in thousands) | 2017 | 2016 | Change | Change | ||||||||||||
Factory gross margin | $ | 1,807.9 | $ | 2,202.7 | $ | ( 394.8 | ) | (17.9 | %) | |||||||
Retail gross margin | 503.6 | 503.7 | (.1 | ) | (0.0 | %) | ||||||||||
Total | $ | 2,311.5 | $ | 2,706.4 | $ | ( 394.9 | ) | (14.6 | %) |
Gross Margin | Three Months Ended | |||||||||||||||
November 30, | % | % | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Percent) | ||||||||||||||||
Factory gross margin | 24.1 | % | 29.7 | % | (5.6 | %) | (18.9 | %) | ||||||||
Retail gross margin | 59.9 | % | 61.0 | % | (1.1 | %) | (1.8 | %) | ||||||||
Total | 27.7 | % | 32.8 | % | (5.1 | %) | (15.5 | %) |
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 | %) |
Costs and Expenses
Cost of Sales
Three Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | $ | 4,533.8 | $ | 3,781.8 | $ | 752.0 | 19.9 | % | ||||||||
Cost of sales - retail | 98.6 | 107.8 | (9.2 | ) | (8.5 | )% | ||||||||||
Franchise costs | 613.4 | 448.7 | 164.7 | 36.7 | % | |||||||||||
Sales and marketing | 442.2 | 427.9 | 14.3 | 3.3 | % | |||||||||||
General and administrative | 1,687.1 | 4,036.8 | (2,349.7 | ) | (58.2 | )% | ||||||||||
Retail operating | 161.8 | 151.1 | 10.7 | 7.1 | % | |||||||||||
Total | $ | 7,536.9 | $ | 8,954.1 | $ | (1,417.2 | ) | (15.8 | )% |
Gross Margin
Three Months Ended | ||||||||||||||||
August 31, | % | |||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | $ | 173.3 | $ | 1,026.4 | $ | (853.1 | ) | (83.1 | )% | |||||||
Retail gross margin | 210.3 | 155.4 | 54.9 | 35.3 | % | |||||||||||
Total | $ | 383.6 | $ | 1,181.8 | $ | (798.2 | ) | (67.5 | )% |
Three Months Ended | ||||||||||||||||
August 31, | % | % | ||||||||||||||
(Percent) | 2023 | 2022 | Change | Change | ||||||||||||
| ||||||||||||||||
Durango Product gross margin | 3.7 | % | 21.3 | % | (17.6 | )% | (82.6 | )% | ||||||||
Retail gross margin | 68.1 | % | 59.0 | % | 9.1 | % | 15.4 | % | ||||||||
Total | 7.6 | % | 23.3 | % | (15.7 | )% | (67.4 | )% |
Adjusted Gross Margin
Three Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | $ | 173.3 | $ | 1,026.4 | $ | (853.1 | ) | (83.1 | )% | |||||||
Plus: depreciation and amortization | 182.7 | 160.8 | 21.9 | 13.6 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 356.0 | 1,187.2 | (831.2 | ) | (70.0 | )% | ||||||||||
Retail gross margin | 210.3 | 155.4 | 54.9 | 35.3 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | $ | 566.3 | $ | 1,342.6 | $ | (776.3 | ) | (57.8 | )% | |||||||
Durango Product adjusted gross margin (non-GAAP measure) | 7.6 | % | 24.7 | % | (17.1 | )% | (69.2 | )% | ||||||||
Retail gross margin | 68.1 | % | 59.0 | % | 9.1 | % | 15.4 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 11.3 | % | 26.5 | % | (15.2 | )% | (57.4 | )% |
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 factoryDurango Product gross margin.
Cost of Sales and Gross Margin
FactoryDurango Product gross margins decreased 560 basis pointsto 3.7% in the three months ended November 30, 2017August 31, 2023 compared to 21.3% during the three months ended August 31, 2022, due primarily to a 22.4% decrease in production volume, a 19.9% increase in overhead costs, and an increase in costs from wage and material inflation realized in the three months ended August 31, 2023 compared to the three months ended November 30, 2016. This decrease was due primarily toAugust 31, 2022.
Retail gross margins increased production costs and product mix shiftfrom 59.0% during the three months ended November 30, 2017 comparedAugust 31, 2022 to the three months ended November 30, 2016. The decrease in Company-owned store margin is due primarily to a decrease in Company-owned café revenue resulting from the sale of yogurt and the associated higher margins. This change is the result of a decrease in units in operation68.1% during the three months ended November 30, 2017 compared toAugust 31, 2023. The increase in retail gross margins was primarily the prior year.result of better cost management following the creation of the Flagship Operations Manager role in our Durango company-owned store.
Franchise Costs
The decreaseincrease in franchise costs in the three months ended November 30, 2017 versusAugust 31, 2023 compared to the three months ended November 30, 2016 isAugust 31, 2022 was due primarily to lower franchise support costs, primarily the result of fewer unitsan increase 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.an increase compensation expense and an increase in travel expenses. As a percentage of total royalty and marketing fees and franchise fee revenue, franchise costs increased to 32.0%39.8% in the three months ended November 30, 2017August 31, 2023 from 30.5%30.2% in the three months ended November 30, 2016.August 31, 2022. This increase as a percentage of royalty, marketing and franchise fees is primarily a result of unchanged royalty revenues and higher franchise costs during the three months ended August 31, 2023.
Sales and Marketing
Sales and Marketing
The decrease in sales and marketing costs were approximately unchanged for the three months ended November 30, 2017August 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. August 31, 2022.
General and Administrative
The decrease in general and administrative costs for the three months ended November 30, 2017August 31, 2023 compared to the three months ended November 30, 2016 isAugust 31, 2022 was due primarily to an increase in compensation expense more than 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 three months ended November 30, 2017, approximately $66,000hiring of U-Swirl general and administrative costs were consolidated within our results, compared with $86,000a new CEO in the three months ended November 30, 2016.August 31, 2022. As a percentage of total revenues, general and administrative expenses decreased to 8.3%25.7% in the three months ended November 30, 2017August 31, 2023 compared to 8.8%61.6% in the three months ended November 30, 2016.May 31, 2022.
Retail Operating Expenses
The increase in retail operating expenses for the three months ended November 30, 2017August 31, 2023 compared to the three months ended November 30, 2016August 31, 2022 was due to changes in retail units in operation resulting fromprimarily the acquisitionconversion of a franchise location partiallyunit into a Company-owned unit in July 2023, mostly offset by the closuresale of an underperforming location.a Company-owned store in the prior year. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 66.7%57.4% in the three months ended November 30, 2016August 31, 2022 to 69.6%52.4% in the three months ended November 30, 2017.August 31, 2023. This increasedecrease is primarily the result of a change in units in operation from the prior year.higher retail revenues.
Depreciation and Amortization
Depreciation and amortization,, exclusive of depreciation and amortization included in cost of sales, was $202,000$32,000 in the three months ended November 30, 2017, unchangedAugust 31, 2023, an increase of 10.3% from $202,000 incurred$29,000 in the three months ended November 30, 2016.August 31, 2022. Depreciation and amortization included in cost of sales increased 13.7% from $118,000to $183,000 in the three months ended November 30, 2016August 31, 2023 compared to $134,000$161,000 in the three months ended November 30, 2017.August 31, 2022. This increase was the result of anacquiring new equipment for production and the associated increase in production assets in service.to depreciation expense.
Other Income (Expense)
Net interest expense income was $22,300$11,400 in the three months ended November 30, 2017August 31, 2023 compared to net interest expenseincome of $31,300$3,900 incurred in the three months ended November 30, 2016.August 31, 2022. This changeincrease was primarily the result of an increase in interest income on cash balances.
Income Tax Expense
During the three months ended August 31, 2023, we did not incur any income tax benefit on a loss before income taxes of $999,000. During the three months ended August 31, 2022, we incurred income tax expense of $731,000 on a loss before income taxes of $2.4 million. This expense was the result of less interest expense incurredrecording a full reserve on lower average outstanding promissory note balances.
Income Tax Expense
Our effectiveour deferred 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 respectasset. See Note 15 to the net operating lossesfinancial statements for a description of U-Swirl when we acquired a 60% ownership interest of SWRL in January 2013income taxes, deferred tax assets and when we foreclosed upon the stock of U-Swirl International, Inc. in February 2016.associated reserves.
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 | %) |
FactorySix Months Ended August 31, 2023 Compared to the Six Months Ended August 31, 2022
Results Summary
Basic loss per share from continuing operations decreased from $(0.55) per share for the six months ended August 31, 2022, to a net loss of $(0.40) per share for the six months ended August 31, 2023. Revenues from continuing operations decreased 3.5% from $13.5 million for the six months ended August 31, 2022, to $13.0 million for the six months ended August 31, 2023. Loss from continuing operations decreased from $2.7 million for the six months ended August 31, 2022, to a loss from continuing operations of $2.6 million for the six months ended August 31, 2023. Net loss from continuing operations decreased from $3.4 million for the six months ended August 31, 2022, to a net loss of $2.5 million for the six months ended August 31, 2023.
Revenues
Six Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product sales | $ | 9,531.3 | $ | 9,965.8 | $ | (434.5 | ) | (4.4 | )% | |||||||
Retail sales | 500.8 | 513.6 | (12.8 | ) | (2.5 | )% | ||||||||||
Franchise fees | 85.9 | 98.8 | (12.9 | ) | (13.1 | )% | ||||||||||
Royalty and marketing fees | 2,875.9 | 2,881.4 | (5.5 | ) | (0.2 | )% | ||||||||||
Total | $ | 12,993.9 | $ | 13,459.6 | $ | (465.7 | ) | (3.5 | )% |
Durango Product Sales
The increasedecrease in factoryDurango product sales for the ninesix months ended November 30, 2017 versusAugust 31, 2023, compared to the ninesix months ended November 30, 2016August 31, 2022 was primarily due to an 18.8% increasea 42.1%, or $318,000, decrease in shipments of product to customers outside our network of franchised retail stores partially offset byand a 3.4%1.3%, or $117,000, decrease in shipmentssales of product to our network of franchised and licensed retail stores.
Retail Sales
Retail sales at Company-owned stores declined 2.5% during the six months ended August 31, 2023 compared to the six months ended August 31, 2022. This decrease was the result of the sale of a Company-owned store in the prior year (resulting in only one remaining Company-owned store), partially offset by the July 2023 opening of a second Company-owned store. Retail sales at our remaining Company-owned store increased 10.5% during the six months ended August 31, 2023 compared to the six months ended August 31, 2022.
Royalties, Marketing Fees and Franchise Fees
Royalty and marketing fees were approximately unchanged from the six months ended August 31, 2022 to the six months ended August 31, 2023. Same store pounds purchased bysales at domestic franchise Rocky Mountain Chocolate Factory franchise and license locations decreased 4.0% inwere approximately unchanged during the ninesix months ended November 30, 2017,August 31, 2023 when compared withto the ninesix months ended November 30, 2016.
Retail SalesAugust 31, 2022.
The decrease in retail sales was primarily due to changes in retail units in operation resulting fromfranchise fee revenue for 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 ninethree months ended November 30, 2017August 31, 2023, compared to the ninethree 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 isAugust 31, 2022 was the result of domestic store closures exceeding domestic store openings, primarily the result offewer franchise agreements outstanding 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 comparedsubject 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.revenue recognition.
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 | %) |
Costs and Expenses
Cost of Sales
Six Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Cost of sales - Durango Product | $ | 9,213.2 | $ | 8,209.5 | $ | 1,003.7 | 12.2 | % | ||||||||
Cost of sales - retail | 177.7 | 206.4 | (28.7 | ) | (13.9 | )% | ||||||||||
Franchise costs | 1,293.0 | 867.8 | 425.2 | 49.0 | % | |||||||||||
Sales and marketing | 915.1 | 908.9 | 6.2 | 0.7 | % | |||||||||||
General and administrative | 3,619.0 | 5,642.7 | (2,023.7 | ) | (35.9 | )% | ||||||||||
Retail operating | 264.8 | 309.4 | (44.6 | ) | (14.4 | )% | ||||||||||
Total | $ | 15,482.8 | $ | 16,144.7 | $ | (661.9 | ) | (4.1 | )% |
Gross Margin
Six Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | $ | 318.1 | $ | 1,756.3 | $ | (1,438.2 | ) | (81.9 | )% | |||||||
Retail gross margin | 323.1 | 307.2 | 15.9 | 5.2 | % | |||||||||||
Total | $ | 641.2 | $ | 2,063.5 | $ | (1,422.3 | ) | (68.9 | )% |
Six Months Ended | ||||||||||||||||
August 31, | % | % | ||||||||||||||
(Percent) | 2023 | 2022 | Change | Change | ||||||||||||
| ||||||||||||||||
Durango Product gross margin | 3.3 | % | 17.6 | % | (14.3 | )% | (81.1 | )% | ||||||||
Retail gross margin | 64.5 | % | 59.8 | % | 4.7 | % | 7.9 | % | ||||||||
Total | 6.4 | % | 19.7 | % | (13.3 | )% | (67.5 | )% |
Adjusted Gross Margin
Six Months Ended | ||||||||||||||||
August 31, | $ | % | ||||||||||||||
($'s in thousands) | 2023 | 2022 | Change | Change | ||||||||||||
Durango Product gross margin | $ | 318.1 | $ | 1,756.3 | $ | (1,438.2 | ) | (81.9 | )% | |||||||
Plus: depreciation and amortization | 353.6 | 320.5 | 33.1 | 10.3 | % | |||||||||||
Durango Product adjusted gross margin (non-GAAP measure) | 671.7 | 2,076.8 | (1,405.1 | ) | (67.7 | )% | ||||||||||
Retail gross margin | 323.1 | 307.2 | 15.9 | 5.2 | % | |||||||||||
Total Adjusted Gross Margin (non-GAAP measure) | $ | 994.8 | $ | 2,384.0 | $ | (1,389.2 | ) | (58.3 | )% | |||||||
Durango Product adjusted gross margin (non-GAAP measure) | 7.0 | % | 20.8 | % | (13.8 | )% | (66.2 | )% | ||||||||
Retail gross margin | 64.5 | % | 59.8 | % | 4.7 | % | 7.9 | % | ||||||||
Total Adjusted Gross Margin (non-GAAP measure) | 9.9 | % | 22.7 | % | (12.8 | )% | (56.4 | )% |
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 factoryDurango Product gross margin.
CostsCost of Sales and ExpensesGross Margin
Cost of Sales
FactoryDurango Product gross margins decreased 170 basis points. This decrease was due primarily to increased production costs and product mix shift3.3% in the six months ended August 31, 2023 compared to 17.6% during the ninesix months ended November 30, 2017 compared to the nine months ended November 30, 2016. The decrease in Company-owned store margin isAugust 31, 2022, due primarily to a 29.6% decrease in Company-owned café revenueproduction volume, a 22.6% increase in overhead costs and an increase in costs from wage and material inflation realized in the six months ended August 31, 2023 compared to the six months ended August 31, 2022, partially offset by an increase in product prices that became effective on May 1, 2022.
Retail gross margins increased from 59.8% during the six months ended August 31, 2022 to 64.5% during the six months ended August 31, 2023. The decrease in retail gross margins was primarily the result of improved management of costs and a change in product mix resulting from the sale of yogurt and the associated higher margins. This change is the result of a changeCompany-owned location in units in operation during the nine months ended November 30, 2017 compared to the prior year.
FranchiseFranchise Costs
The increase in franchise costs in the ninesix months ended November 30, 2017 versusAugust 31, 2023 compared to the ninesix months ended November 30, 2016 isAugust 31, 2022 was 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%43.7% in the ninesix months ended November 30, 2017August 31, 2023 from 24.8%29.1% in the ninesix months ended November 30, 2016.August 31, 2022. This increasedecrease as a percentage of royalty, marketing and franchise fees is primarily a result of lower royaltyhigher franchise costs during the six months ended August 31, 2023.
Sales and marketing revenues.Marketing
Sales and Marketingmarketing costs were approximately unchanged for the six months ended August 31, 2023, compared to the six months ended August 31, 2022.
General and Administrative
The decrease in sales and marketing costs for the nine months ended November 30, 2017 compared to the Nine months ended November 30, 2016 is due primarily due to lower marketing related compensation and lower marketing-related costs associated with U-Swirl franchise locations.
General and Administrative
The decrease in general and administrative costs for the ninesix months ended November 30, 2017August 31, 2023, compared to the ninesix months ended November 30, 2016 isAugust 31, 2022 was due primarily to lowercosts associated with a stockholder’s contested solicitation of proxies in connection with our 2022 annual meeting of stockholders. During the six months ended August 31, 2022, the Company incurred approximately $2.1 million of costs associated with the contested solicitation of proxies, compared with no costs associated with a contested solicitation of proxies during the six months ended August 31, 2023. During the six months ended August 31, 2022 the Company also incurred increased professional fees related to legal support for our Board of Directors and legal costs associated with compensation arrangements for our former Chief Executive Officer and Chief Financial Officer and legal and professional costs associated with the search for, and appointment of, a new Chief Executive Officer and a new Chief Financial Officer, with no comparable costs incurred during the six months ended August 31, 2023. Additionally, during the six months ended August 31, 2022, the Company had recorded $859,000 of severance compensation as a result of resolving legal proceedings, and loweran executive’s departure last year with no comparable compensation costs. Forcosts during the ninesix 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.August 31, 2023. As a percentage of total revenues, general and administrative expenses decreased to 10.6%27.9% in the ninesix months ended November 30, 2017August 31, 2023, compared to 11.1%41.9% in the ninesix months ended November 30, 2016.August 31, 2022.
Retail Operating Expenses
TheThe decrease in retail operating expenses for the ninesix months ended November 30, 2017August 31, 2023, compared to the ninesix months ended November 30, 2016August 31, 2022, was due primarily to changesa change in unitsCompany-owned stores in operation, resulting fromthe result of the sale of certaina Company-owned unitsstore in the prior year and the closureconversion of certain underperforming Company-owned units.a franchise store into a Company owned store in July 2023. Retail operating expenses, as a percentage of retail sales, increaseddecreased from 54.7%60.2% in the ninesix months ended November 30, 2016August 31, 2022, to 58.3%52.9% in the ninesix months ended November 30, 2017.August 31, 2023. This increasedecrease is primarily the result of a change in units in operation from the prior year.lower retail operating expenses.
Depreciation and Amortization
Depreciation and amortization, exclusive of depreciation and amortization included in cost of sales, was $592,000$63,000 in the ninesix months ended November 30, 2017, a decreaseAugust 31, 2023, an increase of 7.3%8.6% from $638,000 incurred$58,000 in the ninesix months ended November 30, 2016. This decrease was the result of fewer Company-owned store assets in service.August 31, 2022. Depreciation and amortization included in cost of sales increased 19.6%10.6% from $324,000$320,000 in the ninesix months ended November 30, 2016August 31, 2022 to $388,000$354,000 in the ninesix months ended November 30, 2017.August 31, 2023. This increase was the result of anacquiring new equipment for production and the associated increase in production assets in service.to depreciation expense.
Restructuring and acquisition related chargesOther Income
There were no restructuring and acquisition related chargesNet interest income was $25,000 in the six months ended August 31, 2023, compared to other income of $6,500 during the ninesix months ended November 30, 2017 a decrease from $60,000 during the nine months ended November 30, 2016. The decrease isAugust 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 ninesix months ended November 30, 2016 with no comparable expense incurred duringAugust 31, 2023, we did not incur any income tax benefit on a loss before income taxes of $2.5 million. During the ninesix months ended November 30, 2017.
Other Income (Expense)
Net interest expense was $76,100 in the nine months ended November 30, 2017, a decrease of 24.1% compared to net interestAugust 31, 2022, we incurred income tax expense of $100,300 in the nine months ended November 30, 2016.$702,000 on a loss before income taxes of $2.7 million. This changeexpense was the result of less interest expense incurredrecording a full reserve on lower average outstanding promissory note balances.our deferred income tax assets. See Note 15 to the financial statements for a description of income taxes, deferred tax assets and associated reserves.
Income Tax Expense
Liquidity and Capital Resources As of Cash and cash equivalent balances decreased Off-Balance Sheet Arrangements As of As of August 31, 2023, we had purchase obligations of approximately $309,000. These purchase obligations primarily consist of contractual obligations for future purchases of commodities for use in our production. 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 Quantitative and Qualitative Disclosures About Market Risk 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 During the period covered by this Quarterly Report, we implemented a remediation plan to address the material weakness described above by retaining the assistance of several accounting experts to assist us in the accounting and reporting of complex, non-routine transactions. Although management believes that it has taken the necessary steps to resolve the material weakness, it may not be considered completely remediated until the applicable controls operate for a sufficient period and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of the current fiscal year. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, and in light of the material weakness described above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of Changes in 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. Risk Factors In addition to the other information set forth in this Quarterly Report, Unregistered Sales of Equity Securities and Use of Proceeds None. Defaults Upon Senior Securities Mine Safety Disclosures Not Other Information Exhibits 32.1* 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE 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 1934, as amended, or otherwise subject to liability under those sections. 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. Date: Allen Arroyo, Chief Financial Officer Our effective income tax rate for the nine months ended November November 30, 2017,August 31, 2023, working capital was $7.0$4.5 million, compared with $7.1to $6.2 million as of February 28, 2017,2023, a decrease of $100,000.$1.8 million. 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.$1.7approximately $700,000 to $4.0 million from $5.8as of August 31, 2023 compared to $4.7 million as of February 28, 20172023. This decrease in cash and cash equivalents was primarily due to $4.1 million asproceeds from the sale of November 30, 2017 as a resultU-Swirl assets mostly offset by operating results and the purchase of cash flow used by financing activities, including repayment of indebtednessproperty and payment of dividends.equipment. Our current ratio was 1.91.8 to 1 at November 30, 2017 andAugust 31, 2023 compared to 2.2 to 1 at 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 ninesix months ended November 30, 2017,August 31, 2023, we had a net incomeloss of $2,493,012.$1.8 million. Operating activities providedused cash of $1,647,658, with$966,538, primarily the principal adjustment to reconcile the net income to net cash providedresult of operating results offset by operating activities being depreciation and amortization of $979,712, stock-based$416,454, a decrease in inventory of $375,045, and stock compensation expense of $458,275 and an increase in accrued liabilities of $362,718 more than offset by an increase to inventory of $990,398, an increase in deferred income taxes of $444,747 and an increase in accounts receivable of $1,307,149.$324,583. During the comparable 20162022 period, we had a net incomeloss of $2,718,446,$3.8 million, and operating activities providedused cash of $2,997,051.$1,584,693. The principal adjustment to reconcile the net income to net cash providedused by operating activities was depreciation and amortization of $962,632, stock-based compensation expense of $447,581, andbeing an increase in accounts payable of $156,150 mostly$2,165,022, deferred income taxes of $722,163, depreciation and amortization of $378,416, and refunded income taxes of $304,779, partially offset by an increase toin inventory of $771,281 and an increase in accounts receivable of $650,708.$2,078,673.ForDuring the ninesix months ended November 30, 2017,August 31, 2023, investing activities usedprovided cash of $274,052,$234,077, primarily due to cash provided by discontinued operation (the result of the sale of U-Swirl assets) of $1,417,768 partially offset by the purchases of property and equipment of $446,935 partially offset by proceeds on notes receivable of $194,646.$1,251,728. In comparison, investing activities used cash of $1,171,779$598,878 during the ninesix months ended November 30, 2016August 31, 2022, primarily due to the purchasespurchase 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.$554,332.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 ninesix 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 activitiesAugust 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.November 30, 2017,August 31, 2023, except for the purchase obligations as described below, we had no material off-balance sheet arrangements or obligations.confectionary products have occurred during the Christmas holiday through Mother’s Day. We believe the strongest sales of frozen yogurt products will occur duringkey holidays and the summer months.vacation season. In addition, quarterly results have been, and in the future are likely to be, affected by the timing of new store openings and sales of franchises. Because of the seasonality of our business and the impact of new store openings and sales of franchises, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.Item 3. Quantitative and Qualitative Disclosures About Market RiskWe 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.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 ProceduresAs a smaller reporting company, we are not required to provide the information required by this Item.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,As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended February 28, 2023 and Part I, Item 4 of our Quarterly Report on Form 10-Q for the three months ended May 31, 2023, management concluded that our internal control over financial reporting was not effective as of February 28, 2023 and 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.November 30, 2017.August 31, 2023.ThereExcept for the changes in connection with our implementation of the remediation plan discussed above, there were no other 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 theour most recent fiscal quarter ended November 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.Item 1. Legal ProceedingsIn 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.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 (our “Annual Report”), filed with the Securities and Exchange Commission 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.Report.Item 2. Unregistered Sales of Equity Securities and Use of ProceedsIssuer Purchases of Equity SecuritiesOn 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.Item 3. Defaults Upon Senior SecuritiesNone.Applicable.Applicable.None.None. 3.110.1 3.23.331.1*31.1 31.2*31.2 * 32.2** *Inline XBRL Instance Document.Document (the Instance Document does not appear in the Interactive Data File because it’s XBRL (1)) *Inline XBRL Taxonomy Extension Schema Document.Document (1) *Inline XBRL Taxonomy Extension Calculation Linkbase Document.Document (1) *Inline XBRL Taxonomy Extension Definition Linkbase Document.Document (1) *Inline XBRL Taxonomy Extension Label Linkbase Document.Document (1) *Inline XBRL Taxonomy Extension Presentation Linkbase Document.Document (1) ____________________________ * FiledFurnished herewith. ** Furnished herewith. + Management contract or compensatory planROCKY MOUNTAIN CHOCOLATE FACTORY, INC.(Registrant)January 12, 2018October 16, 2023/s/ Bryan J. Merryman /s/ Allen ArroyoBryan J. Merryman, Chief Operating Officer, Treasurer and Director26